Dramatic Exit: Walking The Cliff Edge

  • October 26, 2018
 

Ahead of his FourthLine workshop, Patrick Healy examines what you can and should be doing to protect your business from a no-deal Brexit.

 

A no-deal Brexit is now a real possibility.

I still do not believe that it is the most likely outcome but, given the apocalyptic predictions about what could happen, it’s a possibility that has at least to be considered seriously.

There has been an awful lot written about a no-deal Brexit, but most of it is about the politics and the negotiations.

This article is about what you can and should be doing now to protect your business.

A few basics:

- There really are things you can do,

but;

 - Preparations are unlikely to be cost-free; and,

 - Senior time needs to be spent on planning.

This is obvious, but in order to do anything you have to consciously acknowledge its reality. This is particularly true because the temptation to ‘wait and see’ is large, particularly given the government’s almost superhuman ability to keep kicking the can down the street.

Even if the likelihood is not as great as the 50:50* the EU is predicting, it is still is still a prospect real enough to require consideration.

It is also worth reminding ourselves that the Bank of England’s stress tests (real estate prices down by a third, interest rates up to 4 per cent, unemployment at 9 per cent and the economy in a 4 per cent recession) are just that, tests of banking resilience in the most extreme circumstances, and not necessarily the most likely effects of a hard Brexit.

How will your business be affected?

In talking to businesses about Brexit, I have used various ‘buckets’ to provide a frame for how you can examine how you might be affected - there are many ways you can examine the impacts but, broadly, the people, trade, regulation and government policy split has always seemed sensible.

There is probably a slightly different mix for the hard Brexit scenario. The list will, of course, vary according to your business but the following should definitely be considered:

  •  Supply chain
  •  Other trading effects
  •  Currency and capital effects
  •  Travel and people

Supply chain

Honda has taken the unusual step of publicising with some specificity the potential impact of Brexit on its UK operations and came to the conclusion that if the UK came out of the customs union this would increase the time of its general EU/UK ‘product journey’ from less than a day to up to nine days. This includes additional time for customs declarations, actual customs clearance, border checks and the potential impact of congestion on channel ports. How does your supply chain look when these are added?

Are substantial delays a real prospect in a hard Brexit? I think the answer is undoubtedly ‘yes’, and the period around the hard Brexit date may have additional delays as interim measures are put in place, and theories of what should work are tested to destruction.

Should you start stockpiling, either to guarantee that you can still meet UK demand or to create a stock buffer for your UK production? I think the answer to that depends on the nature of what you need and the cost to store it e.g. Sanofi and AstraZeneca have started to build up stock reserves in the UK but if you have low-value, bulky, perishable stock, there may not be an economical way to factor for delays this way, but at least think about it and make the decision consciously, rather than waiting for it to hit.

Other trading effects

Delays at the ports are likely to work in both directions so the desirability of your products may decline, at least for EU members. How good are your contracts? Time to refresh them?

If the most extreme predictions are realised, UK demand for non-basic items may fall as consumers deal with a recession. Consumers will be hit by higher prices and feedback loop could develop, further depressing demand. How are you configured to deal with this?

Currency and capital effects

Another extreme prediction relating to a hard Brexit is a fall in Sterling by as much as 15%. Good news if you have mostly UK inputs and are exporting to non-EU countries, but worth understanding the implications if not.

It is also worth thinking about your financing needs. The banks themselves will be hit and lending may become harder. Better to do some refinancing now? How good is your buffer?

Travel and people

Additional border controls could have an impact on business travel and, in the helter-skelter post a hard Brexit, undertakings, like that of the UK government in relation to rights of movement in the transition period, could still go back in the pot.

The effects on the ‘People’ category I have used in broader discussions of Brexit could theoretically be quite extreme in a hard Brexit, with up to three million EU citizens in the UK potentially losing their right to stay and work, with consequent effects on business. It would, of course, quite insane for a UK government to take this approach and it is more likely that there would be some kind of transition leading to enhanced third country national rights. However, the very fact of a hard Brexit would have a chilling effect on both confidence of EU nationals working in the UK and also on the ability to recruit from the EU.

Hard-Brexit as a Business Continuity Event

It may be helpful to consider a hard Brexit on the basis we use for other high impact events. As the deadline approaches, it would be sensible to up the tempo of planning meetings. Unlike many other business continuity events, there is likely to be some warning, so plans can be refined as you approach the day. Take advantage of this and continue to adapt your plans as the likely effects become clearer.

More positively...

Because corporate Britain was mostly ‘Remain’ in its instincts, there may be a tendency to omit risk upside in the consideration of potential outcomes.

In whatever form Brexit eventually takes, there will be some opportunities; make sure that your risk analysis includes these (and not just the currency effects).

There is some thought that the government would have money to spend if it does not settle the £40bn Brexit divorce bill. It’s hard to say what effect this might have and it seems reasonable to think that they mightn’t be too profligate, on the basis that there might be bills to pay as a longer term settlement is agreed (or the EU sues for the money) but there are still likely to be opportunities

...and bear in mind that it isn’t just Brexit

With all the noise, one can be forgiven that Brexit is the strategic risk that is going to have the biggest impact on your company over the next few years. For many businesses, the impact of Brexit, even a hard Brexit, may not be as significant as disruptive cherry-picking of your profitable activities (e.g. the impact of fintech start-ups on ‘old banking’ and other financial service businesses), a large trade and tariff war (any UK firm manufacturing in China for global export) and technological change (most companies). Make sure that your examination of risk addresses these things and keeps pace.

These are, of course, just broad guidelines with general applicability. Merlance has worked with clients in a number of sectors provided some sector specific advice. Please feel free to contact us to discuss.

* The EU is, naturally, likely to be biased in this assessment but it is interesting to note that the UK’s betting market actually rates a no-deal Brexit as more likely than this.

Written by Patrick Healy.

This article originally appeared here and has been reproduced with permission. Image and text © Patrick Healy.

Patrick, Principal at Merlance Consulting, is a senior executive with a unique combination of risk expertise and leadership insight developed over many years working both in industry and in management consultancy, most recently as Executive Director at EY, heading the Strategic Risk Outcomes group. He led EY’s internal risk management for UK & Ireland and was UKI Risk lead for Brexit and the FRC’s Corporate Governance Code. His career has included senior risk management roles including Group Head of Risk Reporting for Man Group plc, where he set up the Group Risk function.  He has also been Head of Risk & Compliance for Cordea Savills and has worked in other risk, audit and control roles for Morgan Stanley, Aviva and a JP Morgan JV. He is a chartered accountant, having trained at Deloitte, and has a Law degree from University College, Dublin.

To find out more about Merlance Consulting click here, or find Patrick on LinkedIn.

Upcoming Workshop

If you are currently wondering how to get out from under the Brexit rock or how to leverage your Brexit preparations to address other uncertainties, Patrick Healy will be facilitating an interactive workshop (Strategic Risk | Brexit | Coping with Uncertainty) on the 21st November 2018 to delve deeper into this topic. Whether you are a CEO, CFO, CRO, NED, Risk Manager, Head of Internal Audit, or a Brexit-responsible Manager, becoming a delegate at this event will enable you to walk away with the practical tools and frameworks required to prepare as well as find opportunity in the Brexit challenge. Spaces are limited – please get in touch to secure your place.

 

 

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