HBS Internal: Brexit Strategy

This is our internal memo about Brexit, the effect it has had on our business and what we’re intending to do about it. It’s not intended for public consumption, but someone asked us to share it and there’s nothing highly sensitive in it, so I’ve posted it here.

A couple of you have expressed concerns about the political situation in the UK and how it effects us as a business. I’m writing this post quickly to address those concerns and make clear how our plans have changed (if at all) in light of the events.

In this memo we will cover:

• What happpened?
• How does this effect us now?
• How might this effect us in future?
• What are we going to do about it?
• What you can do to help

What happened?

• The UK government held a referendum where the British public voted to leave the EU. The result of the referendum is advisory. It is not legally binding. Parliament do not have to act on it.
• For the UK to actually leave the EU, it must express the intention to invoke Article 50 of the EU treaties. This would start a two-year negotiation period with member states on the fine details of how the UK would leave the EU.
• No one has, as yet, triggered Article 50.
• Since the results were reported, there has been a 425% increase in the rate of daily reported incidences of racial abuse to migrants and people “from migrant backgrounds”.
• The results being announced has triggered leadership struggles in all major UK political parties.
• On the day the referendum results were announced, GBP/USD dropped from around 1.5 to 1.3.

This chart illustrates the drop in currency:

This is what millions of people setting oceans of money on fire looks like

Based on commentary from experts and the fact that doing so will be political suicide, I don’t believe anyone will actually trigger Article 50.

How does this effect us now?

There are two immediate effects that Brexit has had on the business.

• Increase in monthly outgoings. Due to all of our income being in GBP and our outgoings being in USD (BRL is not much better), we’ve suffered an immediate increase in monthly payroll costs. This was magnified this week as USD/BRL isn’t doing well either and due to banking issues, we owed some back-pay that was only paid after Brexit.
• Detrimental effect on my mental health. I’ve spent a lot of this week feeling very anxious about what effect Brexit will have on me, my family, and this business. This has meant I fell behind on marketing, sales, finance and other tasks. Each of these tasks has an outsized effect on the long-term trajectory of the business. Dropping the ball on one deal means that we don’t get the client referred to by the client referred to the one we could have landed this week.

We can just about absorb the immediate changes in our monthly outgoings. Taking a look at the sales/marketing board, we have enough ambient discussion about potential work that we’re likely going to stay at a high utilisation for at least the next few months. It in fact makes sense to hire one more billable developer, as that will make us enough extra profit to cover the loss caused by the drop (and a bit more).

In terms of my mental health, writing this strategy document makes me feel better about the business, so I can focus more on the day-to-day and carry out my duties with less of a feeling of paralysis. Members of my family have already fallen victim to acts of racial abuse, which is not something I can so easily deal with. My productivity will therefore will be negatively effected for the time being.

[Note: If this were a smaller company and I wasn’t the founder then the last paragraph may not have been worth mentioning. As it turns out there are only a few of us, and I am the founder, and effects on me and my family life have outsized effects on the business. I’m afraid that’s what you signed up for!]

I do however feel that the processes we started building in terms of company communication, lead generation etc. will help carry our business through my (hopefully temporary) drop in productivity. In particular, I’m confident the EAP (see the wiki) will keep us busy with work for the foreseeable future.

Additionally, due to consistent demand I’ve spun up bearclaw.io. We’re currently booked up for one vulnerability assessment per month all the way to September. We also have various companies that have expressed an interest in running the security workshop in-house. All this will keep me quite busy but also help to ride out the increase in costs we’re facing.

How might this effect us in the future?

The truth is that no one really knows what’s going to happen next. We can however make a few reasonable guesses about the negative effects the situation might have on us and take steps to mitigate them.

Here are some potential further developments and their effects on the business depending:

• USD/GBP continues to tank. This means that our monthly outgoings will continue to rise, making it more difficult for us to meet our monthly expenses.
• Less VC Capital in the UK startup ecosystem. A worse economy might result in less appetite for investment. Since many of our current clients are venture-backed startups, this might result in less potential work for us.
• Someone actually triggers Article 50. I’m guessing this will accelerate all other economic effects. Further down the line, the effects of actually leaving the EU will make themselves known on the economy.
• Another act of democracy where one or more sides use xenophobia to get votes. This could be in the form of a general election or second referendum. This may result in a further rise in incidents of racial abuse, meaning it will be yet more difficult for my family and I to live here and feel safe.

How we’re going to deal with those problems

Long term, there are some fundamental resiliences I would like to build into the business that will insulate us from the fallout of Brexit:

• Reduce sensitivity to USD/GBP and potentially EUR/GBP exchange rate fluctuations.
• Reduce any link between economic conditions in the UK and our utilisation rate.
• Insulate the continued operation of the business from my personal family situation.

Specifically, here are the things I intend to do to make the above happen:

• Actively seek clients in Europe and the Americas. This will mean extending my network, probably to the United States and Germany. Practically speaking this will involve week-long networking excursions, where I e.g. go to Berlin for a week and try to get as many talks, presentations, coffee dates, and lunches done as I can in quick succession. This will help reduce the link between the UK economy and our utilisation rate.
• Hold currency reserves in EUR and USD. If we have American/EU clients, then rather than converting the money we can keep it in the original currency. This means opening separate USD/EUR accounts, figuring out how book-keeping and accounting will work, and figuring out how reporting for tax purposes will work. This will insulate us from USD/GBP or EUR/GBP fluctuations.
• Prepare an “escape plan” for myself and my family to move back to Japan. While Japan is by no means a bastion of racial equality, my wife and children at least will be considerably less likely to have abuse hurled at them from strangers. This will mean investigating ways in which the UK company entity could be administered from Japan, planning who will take over my responsibilities during the move, and any legal preparations we will have to make to achieve it (e.g. registering another legal entity for the company). Having this planned out will mean that in the event of further civil unrest, there’s a step by step plan for getting me and my family to safety with minimal disruption to the business.

If for whatever reason our financial situation gets really bad, really quickly, the first step will be for me to get a three to six month development contract to inject a bit of cash into the company. This should at least give us a bit of time to figure out what to do next.

While the situation may seem terrible(hence my sustained grumpiness over the course of this week), the fundamentals of the business are still pretty good. We still have a good profit margin, our clients like us enough to refer work to us, and we’re not hurting for work. If we manage to decouple our financial destiny from the UK economy, then we’re probably going to be fine.

How you can help

From the Consultant Developer Role Definition:

Your primary goal as consultant developer is to provide our clients with custom web development services that they are happy to pay for and would recommend to their associates.

Our clients are, for the most part, very happy with our services (or at least, they say they are). The happier you can keep them in the day-to-day, the more time I can spend preparing for what’s going to kill us three months, six months, or three years from now. If you want to help, keep doing exactly what you’re doing: producing happy clients.

Any questions, clarifications, other info you need, please bug me over email or slack.