Brexit and the fear of the “awkwardness premium”

If the United Kingdom does vote to leave the European Union on June 23, everyone will be desperate to understand what this means for their business. The problem is that it could take years for agreements on trade and other economic issues to be finalised, and even then the specific implications for individual businesses are unlikely to have fully unfolded.

Procurement and supply chain management may not transpire to be many companies’ single biggest issue arising from Brexit – but it may well be the first thing they have to deal with.

That’s because I don’t see how Brexit can’t result in some sort of short to medium-term economic downturn – and it’s at times like that when organisations are typically forced to look to their supply chains.

Looking for new suppliers, reducing costs with existing suppliers, securing supply or developing new partnerships – these are all common tactics for coping with an economic downturn.

The problem is that the game will have changed. For many European suppliers, UK businesses may no longer be perceived as an easy customer. As a result, suppliers’ pricing may well in future include what might be seen as an ‘awkwardness premium’ for dealing with UK businesses.

Whether this is justified or not is another matter – but even those organisations which have traditionally operated from a position of strength with their suppliers may find the dynamic shifting and their influence diminished.

Some organisations, especially smaller to medium sized ones, may dismiss this as irrelevant because they have limited current exposure to Europe. Yet it is relevant precisely because it is not only current exposure that matters; it is the scope which businesses have (or won’t have) for making their supply chain fit for purpose in future with suppliers from outside their national boundaries.

Companies who have not already invested in relationships with European sourcing markets and suppliers will find it more difficult to start in future. Competitors who are already active on the continent will be at an advantage over companies sourcing mainly within the UK.

Of course, longer term growth and competitiveness may mitigate against short-term economic pain and uncertainty, meaning that the ‘awkwardness premium’ becomes less of a factor. With no precedent for how a Brexit would play out though, no-one can be sure what happens next.

Why should a company think too deeply about the implications of Brexit when it could be years before new trade agreements begin to take shape? Uncertainty abounds and it is this uncertainty which, I think, will result in many organisations being happy to sit on their hands, for now at least.

For smaller businesses in particular, lacking the resources to investigate all their options in greater depth, doing nothing probably seems a better option. Even if that might appear the best thing to do, all it really does is give competitors an opportunity to get ahead and probably makes the challenges more difficult to manage whenever they do fully unfold.

At the very least, in an effort to better prepare for the impact of that ‘awkwardness premium’, I would urge companies to consider their approach to the risk management of their procurement and supply chain. I believe there are three critical factors to focus on – but more about that next time…

Author: John Dowling, Principal at INVERTO