Does Brexit change the outlook for SITS Investment?

Four years on from the referendum, Brexit has finally dawned on the UK.

Some have put the total cost of departure at £200bn (Bloomberg Economics’ claim, based on lost GDP), but as businesses and public sector organizations get to grips with the new rules, our attention turns to the impact on the software and IT services market.

During the course of the last 12 months, PAC has provided three updates to our core UK market model to account for the changing impact of the pandemic on the economy. Our assumption on Brexit had been that a deal of some sort would be struck, and that scenario finally came to pass in December after an extended period of negotiation. 

So three weeks into the post-Brexit world, are we seeing a major impact on SITS spending? The answer is….not really. Or perhaps more accurately, not yet.

The UK press are full of stories of the sudden surge in red tape with which businesses now have to contend, from fishing companies unable to sell their stock outside the UK due to border delays, through to the challenges facing small businesses in shipping low-value products to customers on the continent.

But while some smaller manufacturers and retailers may be forced to pause or cut back IT spending as they reset their activities around new regulatory demands, we have yet to see clear indication from other sectors that larger organizations are easing tech investment due to Brexit. There’s a couple of factors at play.

Firstly, the full impact of Brexit will not be immediate as there are several important areas to work through. The EU-UK Trade and Cooperation Agreement is now in place, and for some companies, the framework may act as a green light to push ahead with some planned investment that they had delayed until the outcome of the negotiations became clear, particularly in the manufacturing, transportation and retail sectors. 

But many areas remain under negotiation, including some that may be significant enough to encourage UK businesses to relocate part of their operations (and also their IT budgets) on to the continent. The thorniest issue here is the rules around the transfer of personal data between the EU and the UK, and the two sides have an additional six month period to thrash out whether the UK’s approach to data regulation if sufficiently rigorous to work alongside that of the EU.

But even if any new restrictions drive some businesses out of the UK, we expect any related fall in tech spending to be offset by increases in investment in other areas, in particular the public sector. While some departments have spent the last few years racing against the clock to adapt systems and processes to support any potential Brexit outcome, the likes of the Home Office (with its overrunning Digital Services at the border initiative) and DEFRA (which has a raft of new policies to develop and implement in 2021 in areas such as gene editing in agriculture.

There are signs that the UK – and London in particular – has not lost its pulling power as a location for businesses looking to attract investment, talent and access to international markets. Lithuanian biometrics specialist Ondata announced that it was moving its headquarters to London to provide a launchpad for global expansion. 

Our current outlook for the UK SITS market is for growth of 4.1% in 2021 versus 2020, and we don’t anticipate making any significant changes in the coming months based on the outcome of the Brexit deal. 

Of much more significance is the impact of the pandemic, with the UK now several weeks into a new period of extended lockdown. The extent of the lockdown is severe, but the experience of last year showed us that it is likely to impact relatively few segments (small retailers, small services companies, tourism, transport). Most of the affected companies are small in scale, with a very limited impact on the overall software market and a neglectable impact on the services market. Only the very few large tourism and transport companies have a real impact on SITS investment, which will likely delay the recovery. However, given the collapse of 2020, this will be from a very low starting point in terms of volume. 

But again, we think that there will be an element of spending being rebalanced as more companies double down on their digital transformation during the latest lockdown period, in order to reposition themselves to support long-term changes in customer behaviour.