Opinion Risk Management

Brexit: A Chaotic Road to Nowhere?

Written by Philip Ideson

As you already know by now, the UK electorate opted in a referendum last Thursday to leave the European Union.

The result triggered a seismic chain of events politically in the UK, and unleashed uncertainty across global markets.  If you are in procurement, whether or not you are based in the UK, then this is an issue you need to understand.

Things have moved fast over the past week:

So all in all, it has been a pretty chaotic week, and a week where you cannot move for reading another proclamation of a bleak future.

At this point I will admit, I am firmly pro-Remain and my initial reaction last Thursday night was one of confusion.  I was gutted about the result.

 

However, it is all for (almost) nothing?  

I believe so.

As procurement professionals, we are trained in taking an educated view of the future and building strategies to enable our organizations to take advantage of those situations.

There are a couple of ways I look at how the situation will play out.  Either, negotiations will be based on power-dynamics, where there are clear winners and clear losers, or they will be collaborative to get to a point where there is pain to go around, but everyone finds an alternative which provides enough of what they want.

It appears to me that the knee-jerk path is the one that has the highest probability of all sides “losing”, with negotiations based on power-dynamics.

But I do  think this is where we start.  And this is what causes most uncertainty in the market. There will be lots of posturing.  It is important for the EU to maintain this position for as long as possible – to provide as much pain as possible to the UK for their decision – in an attempt to stave off similar referendum in other countries where support for the EU is marginal at best.

However, I don’t anticipate any real desire for the EU – or the UK for that matter – to cut their nose off to spite their face.

So eventually I think we will get to a point that is as close to status quo that is possible, and that is as acceptable as possible to the British public and the EU leaders.  Any concessions that are made by the EU in terms of the movement of people (the issue that appears to have been behind the result) will come at a higher price, not a lower price as the Pro-Leave campaigners speculated during the campaign.

 

If I was to get out my crystal ball, this is where I could see us ending up:

  • No change on the Four Freedoms of the European Union (goods, services, people and capital).  The EU leaders get what they want.
  • A reduction in the amount of money that the UK contributes to the EU in return for those Freedoms, with the reasoning being that it covers the cost of increased migration.
  • A reduction in Brussels led “red tape”.  It appears that even leaders in the EU have accepted that they have gone too far in trying to impose what are perceived as “meddling” EU regulations across member countries.

This deal would then be put back to the UK people in another referendum.  The mood of the people at that time I think would then determine if this is pitched as “we stay in the EU but look at the benefits we negotiated” or “we leave the EU to maintain the will of the people from the original vote, but we are going to have a very close “special relationship” (aka be a member of the European Economic Area).

I imagine that this would lead to a lot of disenfranchised votes in the UK that voted for Brexit under the notion of a Britain fully independent of the UK that was pitched by factions of the Pro-Leave campaign.

However, the alternative – a full exit – likely leads to much greater ramifications including the breakdown of the EU (and possibly UK), and I’d speculate that that ultimately isn’t in the interests of any EU members.  So in the end, I think they will begrudgingly take a deal that maximizes their long term chances of achieving their vision for the European Union, rather than throwing the baby out with the bathwater.

 

What does this mean for procurement?

Fundamentally, it means managing in times of uncertainty and volatility over the short term, but we likely end up in a place similar to where we are today.

I talked yesterday to Susan Grelling to get her perspective on how procurement can manage volatility in times of change.  Susan is extremely well qualified to comment.  She is a trained Economist, a Chief Procurement and Chief Commodity Risk Officer, and was a Peace Corp volunteer in Latvia at the time of the break up of the Soviet Union.  Susan’s insights included:

  • Be prepared  – when you are in times of fluctuation, you have no clue when the next shock to the system is, and what impact it is likely to have.
  • Understand your risk exposure – for any area of the business that sells a product or service, form a cross functional group with Sales, Marketing, Finance and Operations and look at the potential exposure in terms of fluctuating price, fluctuating demand and the cost of raw materials / services.
  • Have options ready – while you may be prepared for scenario A, what other potential scenarios are out there (however unlikely), and make sure you at least have options if that eventuality occurs.
  • Recognize that optionality comes at a price.  The party – you or your supplier – that bears the most risk will be financially rewarded for taking that risk.  So, as procurement, we need to help our organizations determine if there is value in
  • Unknown unknown’s create winners and losers.  If you are prepared, and have options, then you can turn volatility into a competitive advantage by preserving cash that you company can invest in growth (such as competitor asset fire sales, investing in customers, in strategic partners etc).
  • Procurement can play a key role – but if your procurement organization has never been an active participant in risk discussions, do not expect to be welcomed to the table with open arms. You need to use Brexit as a reason to start becoming relevant when it comes to risk management so that when the next event happens (and it will), your CPO will be the first person to receive the phone call for help from the c-suite.

(you can hear Susan and I’s conversation on today’s episode of the Art of Procurement:).

Do you agree?

Is this reality or am I clinging to a notion that all participants will ultimately find a way to co-exist. I’d love to hear your opinion!

 

About the author

Philip Ideson

Philip Ideson is passionate about the role that procurement professionals and leaders can plan in creating competitive advantage for their organizations in ways that go beyond the traditional value proposition.

Philip founded Art of Procurement as a way for the procurement community to learn from each other, increasing the impact they have on their organizations. In 2017, he co-founded Palambridge, a virtual platform of procurement experts, technology, and intelligence. Palambridge provides a broad range of flexible procurement solutions, available on-demand.

Prior to Art of Procurement and Palambridge, Philip enjoyed a career that spanned the procurement value chain, working across three continents for organizations such as Accenture, Procurian, Ally Financial, Pfizer and Ford Motor Company.