Today, nine months after the historic referendum that saw the UK vote to leave the European Union, Prime Minister Theresa May has triggered Article 50, officially beginning the two-year period of Brexit negotiations before the UK’s eventual exit from the trading bloc.
With so many questions about the UK’s ongoing relationship with the EU left to be answered, it’s a time of uncertainty for businesses of all sizes in the UK.
There’s a lot we can’t forecast right now, such as the details of the trade deals UK may strike with the EU post departure, or the visa requirements for non-UK talent. But experts in the business and investment community have a lot to say on what to prepare for in the coming years.
Volatility will be the only constant
Chris McCullough, CEO and co-founder of London scale-up, RotaGeek, believes that this volatility presents a true opportunity for growth companies to prove their mettle. “The triggering of Article 50 will inevitably have an impact on the business landscape for businesses of all sizes. However, this will inspire organisations to go through rigorous introspective processes. Seen from a very Darwinian point of view, great things happen in difficult environments.,” he says.
“People fear uncertainty but there is a great opportunity in it – now is a time to become more focused.”
While the economic implications of this from both a UK and international business standpoint are still yet to become clear, businesses need to be planning now for how they will cope with the inevitable market volatility that is set to ensue. Rob Douglas, VP of United Kingdom and Ireland for American software-as-a-service firm, Adaptive Insights believes if businesses haven’t already begun preparing for the impact of Brexit, they need to start now.
“While there is still two years before Britain should formally leave, during that time, the economy is likely to be particularly volatile and requires a different type of financial planning from businesses. Agility is key, and to achieve this, finance teams need to take an active approach to planning,” he says.
“As more detail comes to light in terms of how our exit from the EU is going to shape up, finance teams should be modelling scenarios and forecasting the possible impact on the business. By making the enterprise as prepared as possible for potential changes that may span personnel, taxes and tariffs, and currencies, to name a few, it will hold on to a level of stability beyond competitors. It is today’s planning that will decide which businesses survive in the volatile economic environment that is on the horizon.”
Given we do not expect the negotiations to begin in earnest until after the French election has concluded in May, today’s announcement is unlikely to change the current state of UK economic affairs. Currency expert and chief economist at World First, Jeremy Cook, says the pound is main barometer of Brexit risk, and since the EU referendum, the sterling has weakened by 12.8 per cent on a trade-weighted basis, which has acutely affected businesses trading overseas.
“It is those businesses facing costs in foreign currencies that are hurting the most,” Cook explains.
In light of Article 50, Cook believes much will depend on the early progress the UK government is able to make against its stated objectives. “A negotiation process marred with delay and disappointment will increase market fears of a worsening of trade terms and could see a decline in the pound of another 5 to 7 per cent through the rest of 2017. If that happens, the pressures on Britain’s SMEs, the backbone of the UK economy, will increase further.”
For James Abbott, president of the UK200Group and director at Abbott Moore, much of the business commentary in the public forum has portrayed a the implications of Brexit in a negative light, countered by a few outspoken ‘Brexiteers’ who see this more as an opportunity for UK businesses to carve out a new future. “I suspect the success of the UK’s negotiations will lie somewhere in between those expectations,” he says. “Whilst I am genuinely confident in our nation’s ability to thrive in whatever environment we face, we as SME advisors can’t sit on our hands and wait for the uncertainties during the negotiation process to be ironed out.”
“It’s essential that we continue to open up new conversations and strengthening existing relationships, we can support (SMEs) in taking advantage of the opportunities Brexit will create.”
Hiring foreign talent: the big unknown
RotaGeek’s McCullough believes innovation relies of businesses being able to hire the best people, regardless of where they come from. With a team 18 employees from 11 different countries, his business is one of the many tech growth companies that rely on foreign talent.
“Personally, Brexit won’t change how we do business – especially not in terms of hiring,” he says. “Start-ups are defined by their agility and their creativity in difficult environments. There are so many huge questions that need to be tackled – for example on the rights of Europeans in the UK and vice versa. Yes, Article 50 must look to foster innovation, but it must do so through looking at the bigger picture and ensuring measures are in place to ensure Britain remains open for business and people. These critical and emotive issues need to be the focus of the negotiations,” McCullough adds.
Peninsula employment expert, Alan Price has been inundated with calls from business owners this morning, hoping for more clarity after the triggering of Article 50. While he believes the triggering of Article 50 starts a maximum two year negotiating process, the impact of the discussions are already visible in the business community.
“There is already evidence that numbers of EU workers are falling and continued uncertainty surrounding their status may lead to a further decrease during this period, leaving to employers struggling to fill their workforce.”
While varying immigration targets depending on sector and location have been discussed as one of the future possibilities, Price adds that the government is playing its cards close to its chest to ensure they are in the best negotiating position when it comes to exits talks. “For areas such as healthcare, hospitality, agriculture and manufacturing, reliance on EU workers is key, especially when used to meet fluctuating seasonal demands, and these employers will keep a close eye on the final immigration arrangements that are reached.”
Tom Freeman, MD of graduate recruitment firm, Sanctuary Graduates, says that Brexit is already impacting the UK’s ability to attract the best and brightest graduates from across the continent. Close to 40 per cent of the graduates placed via Sanctuary Graduates in 2015 were from EU countries, but in 2016, this dropped to just over a quarter of the total. So far this year, it’s at 12 per cent.
These figures are worrying for three reasons, says Freeman.
“First, UK businesses recruit graduates from all over Europe because they want the best graduate talent and for some skills – especially those around STEM subjects – European graduates are in high demand as there is a skills gaps in the UK market. However, we know from the graduates we’ve spoken to that the current and future uncertainty makes the UK less attractive now than it was before the vote on 23 June, and many are preferring graduate offers from the continent,” he explains.
Freeman also examined recent university application data, which reveals that EU students are less likely to apply to UK universities, suggesting that the graduate talent pool in the UK may shrink. “As a country, we need to counteract this if we and our UK businesses are to remain competitive on the global stage,” says Freeman.
“Even our home grown graduates are looking to move outside of the UK. We received 10 per cent more applications for a continental tech graduate scheme of a London-based financial services company than for the same scheme in the same company’s UK offices. Without the ability to attract the best graduates – whether from the UK or EU – the overall quality of talent available will decline, the skills gap will grow, and UK businesses will suffer.”
James Parsons, CEO and founder of strategic resourcing firm, Arrows Group, echoed Freeman’s worries over UK potentially losing out on the EU’s talent pool. The stats are alarming, according to Parsons. “Some overseas candidates are turning down competitive roles in the UK. Over the last year, we’ve seen a 10 per cent reduction of skilled workers from within the European Union relocating to the UK.”
This trend is also being felt at a business level as some of Arrows Group’s clients are apparently second guessing the need to increase their investment in the UK, given current uncertainties. “As many of our clients want to expand their tech teams quickly, they need to invest in a location that can give them a healthy supply of talent to meet their objectives, which they may not be able to cannot guarantee here in the UK. If this trend continues it could lead to a brain drain of top UK talent as generally they will want to work where the exciting projects are. We’re already seeing an increase in best-in-class developers taking roles in Switzerland which continues to be a fast-growing hub for tech innovation,” Parsons warns.
“My advice to any UK business is that they should consider expanding their global footprint and potentially expand operations to where the talent is located, as well as be proactive in expanding their pipeline of homegrown UK digital talent.”
SME funding may see a short-term dip
Angus Dent, CEO of peer-to-peer lending firm ArchOver, believes Article 50 may hit SME funding in the short-term, for which businesses should be ready. “With uncertainty comes a decline in investment and the threat of growth halting altogether. Without strong investment, businesses will be unable to keep their heads above water in an unpredictable post-Brexit market,” he says.
“SMEs will find this an especially daunting period. If investment and lending levels drop following Article 50, tomorrow’s entrepreneurs will remain in the shadows, lacking the cash to drive their businesses and our economy forward.”
“To offset that we must support our homegrown businesses. We must let them know there’s help available beyond the nervous banking sector. There’s a key role for alternative finance to play in helping SME borrowers maintain healthy cash flow. Through this period of change, peer-to-peer lending platforms can assist even more than before, giving businesses quick access to the funding they need to put themselves in a position of strength.
“We must all treat Brexit as an opportunity. SMEs must use quick access to peer-to-peer funds to fire up their businesses – and avoid being dragged down by uncertainty.”
For the investment community, Article 50 shouldn’t essentially cloud the fact that UK businesses are some of the fastest growing and most robust in the continent, says Tim Mills, investment director at Angel CoFund.
“Although there’s a inevitable sense of uncertainty surrounding Brexit, today’s triggering of Article 50 should not eclipse the golden opportunity for British businesses to flourish,” he adds. Citing the UK’s track record for innovation, Mills explains that digital start-ups contributed £97 billion to the economy, and attracted £6.8 billion in tech investment last year, despite the result of the EU Referendum. “These statistics instil confidence for a post-Brexit future where innovative high-growth businesses will generate ever greater value – providing a positive outcome which can too easily be lost amongst the headline grabbing challenges.”
Mills believes investors need to stay focussed on the bigger opportunity and continue to back bold investments that can boost post-Brexit Britain. “Specifically we need to continue to work together with individuals and institutions, using syndication to enhance investment prospects and spread the risk. A model that allows a more extensive range of companies to be supported with a greater supply of finance across the UK,” he explains. “Undoubtedly, something our economy needs as we approach this uncharted territory.”
Freedom from EU funding regulations
Taking on a contrarian view, Justin Arnesen, director, R&D tax and grants at business performance consultancy Ayming argues that Brexit offers the UK the perfect opportunity to unshackle itself from EU regulations regarding funding. “For too long our funding has centred on Innovation and European grants, and while this has worked up to a point, Britain has lacked the ability to make real, fundamental change. Now, post-Brexit Britain has an opportunity to take control of its own initiatives and create industry-specific incentives that wouldn’t otherwise have happened under the guidance of the EU,” he says.
The UK can now incentivise industries that need financial assistance – which will in turn attract leading organisations and top talent into those specific sectors, according to Arnesen. “For example, we can provide grants to construction to truly ‘get Britain building’ and we can focus our efforts on world-class technology,” he adds.
Brexit is also an opportunity for the UK to expand its focus. “At the moment, Britain’s focus is on innovation grants,whereas other jurisdictions have better grants across the value chain. This is something the UK needs to adopt. Innovation is the first pillar of development, but once we have incentivised innovation we then need to encourage organisations to manufacture that product. Those currently don’t exist – but now have a chance to put them in place. Ultimately, Britain can now create its own rule book and approach R&D legislation in a way that benefits British business.”
Retailers: opportunities may grow post-Brexit
Claire Davenport, MD at VoucherCodes.co.uk and RetailMeNot, believes retailers do not need to panic. If anything, Brits are still buying goods and services more than ever from overseas retailers, which is a positive sign. “More and more retailers are expanding internationally and this won’t change now Article 50 has been triggered. Often customers are not even aware they are making an overseas purchase, meaning Brexit isn’t going to push them away,” she explains. “With varied payment options widely available and simplified return policies, consumer confidence in cross-border trade is growing at an unprecedented rate and is offering a fantastic solution for both consumers seeking lower cost and available items, and retailers looking to increase global sales.”
For UK businesses looking to export to the EU, uncertainty looms. Since the Brexit vote, International trade has jumped from one uncertainty to the next, and UK businesses are finding it increasingly difficult to gauge where they stand.
The uncertainty around Brexit, according to Lee Murphy, owner of accountancy software Pandle, can be likened to Pandora’s box, in that no one can truly prepare for what may lie ahead. Research from the FSB shows a quarter of small businesses that export would be deterred from trading with the EU should tariffs be imposed, which Murphy believes could pose a serious threat to UK’s competitiveness. “This may see some companies relocating to Ireland, or even Scotland should there be a Scottish referendum. Or equally, we could experience a greater level of trade with other markets, the research finding that 49 per cent of SME’s top preference would be the US, followed by Australia (29 per cent) and China (28 per cent).”
“Without knowing the outcome it’s impossible to prepare your business, and there are many important elections coming up in the EU that will impact this Brexit also.”
Ultimately, despite the unrest in the run up to triggering Article 50, and the expected period of uncertainty and volatility that lies ahead, until the formal discussions are underway, it is too early to predict exactly what changes will be made and what path the UK will follow in its future relationship with the European Union. Until then, all UK businesses can do is stay informed and expect the unexpected, all while taking measured risks to grow and expand.