After investigating the likelihood of Brexit (in sum, inevitable), lets turns to look at the outlook for any Transitional Arrangement and its implications on business. I delayed this posting until after taking into account May's Florence speech.

In Florence, May made an important speech - important because it is an effort by the UK Government to lay down what it wants to achieve politically. It wants a close trade partnership with the EU, much closer than that enjoyed by Canada for example, but does not want to be in the single market or customs union. It wants a 2 year implementation period during which the UK would essentially be a non-voting associate member of the EU.

So the UK has now asked for a Transition Period - and on terms that at first sight seem favourable from an EU perspective.

For businesses trying to chart their future over the next few years there are a series of important considerations.

Will the UK Government be able to retain its fragile consensus on the need for a Transition Period?

As I write, the Conservative Party is in Manchester for their Conference, and although we can only guess at how nicely the personalities will play with each other, it does not seem (to say the least) completely certain that the consensus will hold - and perhaps more to the point, its not likely that the Government is in a political position to drive for an early conclusion on a transition period (see later). 

Will the EU agree to a Transition Period?

Consider that post Brexit, the EU will retain the institutions, agencies, procedures, rules, and in short the bureaucracy to administer EU trade. The UK, and therefore businesses, will need to develop new institutions and procedures for the processes currently outsourced to the EU - this will take time and can only start once the UK knows what it is trying to achieve. In this context, the EU can afford to remain silent on any transitional arrangements until near the Brexit date. More generally, although it may agree to a Transitional Period, it does not need one - for the EU it would be a concession for which there would have to be a price (for example, supporting the EU budget).

And delay helps the EU - as businesses see a looming breakdown of trade between the EU and UK they will inevitably move capacity and investment into the EU to mitigate risks of not being able to continue to sell into the EU market. It goes without saying that businesses also have to continue servicing the UK market (although we should fear a demand side shock) but the judgement seems to be that this rebalancing will generally benefit the EU more that the UK (after all Barclays Bank is not going to have concerns about its UK banking licence). It does not matter if you think this is right or wrong - the point is that the EU believe this and that influences their negotiating approach. Generally, I predict a polarisation for businesses, which I will talk about in later posts.

Also what is the strategic aim of Brexit for the UK Government? The current answer is a trade deal but not membership of the Single Market. So why would the EU agree to allow single market access while negotiating a trade deal? Much better to have the UK/EU negotiate this, once the impact of Brexit is known. 

In sum, the EU will probably agree to a transitional period but it is not clear that they will hurry - its for the UK to push for it!

When would businesses have certainty about any transitional arrangements?

Real certainty can only achieved when an agreement is actually ratified by the EU and UK - either as part of the exit agreement (i.e. in 2019 - hopefully before Brexit happens!), or as a separate agreement rushed through early. With political will on both sides maybe this could be done by summer 2018 (6-9 months before Brexit). But I don't think readers should expect any early agreement like this - it is not on the agenda, politically the UK Government is not ready to push for this, and the EU is indifferent.

So the risk is that the transition period is only agreed, along with the exit agreement itself at the last moment, and might be unexpectedly reduced in scope (e.g. the time period, or the industries covered), or indeed end up not being agreed at all.

The mitigation of this must be strong political statements from the EU (Council, Commission and Parliament), and UK (Government, Opposition and Parliament) whereby even if an exit agreement is delayed, or the UK Government falls, businesses know there is broad support to implement the Transitional Period.

The EU has not yet provided this (or rejected it - it has just noted the UK position), and the UK Government has not got a consensus with their Brexit wing (however, the UK Opposition does seem content with a transition period).

So currently there is no certainty that there will be a Transition Period - and I personally cannot see a likely scenario for even reasonable certainty before next summer.

How will any Transition Arrangements be Implemented?

Probably a minor point but there is no clear legal mechanism to implement a transitional period in the way envisaged by the UK. The UK would not be part of the EU but somehow UK and EU businesses, citizens, and institutions would continue to rely on EU law. Article 50 only considers changing the date of exit - not of this kind of twilight zone.  

As I say this is probably a minor point because where there is a political will I am sure clever people can work out a way of achieving it - but it will be messy and non-trivial - and the real point is this: will there be the political will for the effort needed?

What about "No Deal"?

"No deal" - this is part of the Brexit narrative which we should consider. People are saying that a bad trade deal would be worse than WTO terms (in fact, it would have to be a very bad trade deal indeed for this to be true!). So "no deal" is in part referring to a future trade deal. But we all know that one very contentious aspect is the amount the UK may have to pay the EU - so "no deal" also refers to the arrangements for the UK's withdrawal. Some might unkindly say, muddled thinking!

Actually it does not really matter what people mean because as Brexit happens lots will have to be agreed - there will be lots of deals! 

We have already agreed that the EU Treaties shall cease to apply to the UK by the end of March 2019 (because of invoking Article 50) - and so because of time constraints there will be lots of aspects that should really be resolved before Brexit but unfortunately wont be.

At the strategic level the EU believes that there is no time to agree a comprehensive trade deal with the UK. So in reality the EU are not offering something we can petulantly shout "no deal" at anyway - not in terms of trade and not before Brexit anyway.

The list of deals is long: financial settlement, citizens rights, customs arrangements, airlines, nuclear, agriculture standards, fisheries, Northern Ireland, financial regulation, etc. Some strategic, some technical. And in the meantime the UK will need to renegotiate over 700 treaties with over 150 countries - and 8 major Bills will need to be passed by Parliament - busy times!

Many Brexit supporters seem content with WTO trade, so one example. The EU and UK are currently working through the WTO quotas as these have to be divided between the EU and the UK. The next step is for the EU and UK to jointly seek agreement with the 160 odd WTO member countries. Already we know that the UK has been obliged to increase quotas of what the UK will import to facilitate the process of getting this WTO agreement (nothing to do with the EU). This illustrates the point - we rely on the EU's good will and will have to make lots of deals with them. Again the EU is in a better position because, worse comes to worse, by default they will keep the existing WTO agreements (although with arguably too high import quotas), the UK could end up with no WTO agreements at all! Now, I am sure this will not happen but this illustrates the point that we really don't have enough time even for the basics.

So the way to think about the negotiations is to consider what will have been agreed in time for Brexit and what will have timed-out. We don't know of course, but as I write I think that because of time constraints, and the lack of a political consensus in the UK Government, we will achieve very limited agreements by Brexit day.

What about the Upside?

The future vision for the UK, with respect to the EU, is to have a comprehensive trade agreement (possibly the worlds most comprehensive trade agreement) but not to be in the EU's Single Market itself. However for the transition, the UK would like a standstill agreement whereby the UK essentially remains in the Single Market and Customs Union for about 2 years.

So essentially (if the UK and EU agree), at a certain point in the future UK businesses will move outside of the EU and instead rely on a Comprehensive Trade Agreement with the EU and agreements with other countries, or potentially basic WTO terms.

We will explore the manifold changes that this implies in later posts - but for now we can say that there is a potential that proportions of UK businesses will need to relocate to the EU to remain competitive/compliant for the EU market. This will involve investment and management time (for example to create subsidiaries and move business into them; perhaps offices, plant or warehouses will need to be established in the EU).

This investment must be mostly completed either at Brexit, or at the end of any Transition Period (depending on business and scope of the Transition Arrangements), or it may not be needed at all (i.e. depending on the final Trade Agreement with the EU). We just don't know!

So the downside is that to mitigate risk, businesses invest in moving capability to the EU, and later this is found not to have been needed. And therefore the approach must be to focus on upside - that this investment that provides business gain whatever happens with respect to Brexit itself - examples: local EU presence increases EU market penetration, manufacturing/servicing takes advantage of labour arbitrage, currency hedging is reduced, increased scale/collaboration with EU partners maybe supporting rules of origin etc.

In the meantime, the core UK businesses can concentrate on the UK market - with increased focus - and in time business can take advantage of either EU or UK trade agreements - for businesses it really is a "have your cake and eat it" strategy.   

At a certain point sometime before March 2019 (likely autumn 2018), the UK and EU negotiators will finally admit that many critical agreements and arrangements cannot be put in place in time. The Article 50 solution of changing the exit date will still be politically impossible and so a Transitional Period will be cobbled together - I believe it will be an imperfect fudge with key details only known at the deadline, and with legal uncertanty.

In this context:

• Businesses should plan to complete Brexit preparations by March 2019 - these will be essentially about splitting organisations into two: one UK and one EU market facing.
  • Design the value chain to avoid crossing the UK / EU boarder more than needed, and ensure that companies have the correct regulatory coverage by having subsidiaries based both in the EU and UK.
  • Where scale does not allow this, businesses should consider exiting the smaller market. 
• The approach should be to generate business differentiators & benefits, and not to be just about risk mitigation.
• Any Transition Period should be considered a bonus and not be relied on.
• For IT projects, this is an ideal scenario for an Agile approach given a fixed deadline to provide high-priority features, but with the aim of delivering as many more add value features as time allows (for business benefits/differentiation). Also considering the likely changing requirements - as the rules of the Brexit game inevitably change over the year.

Planned Posts

• Brexit - Agilists Rejoice!
• Free Movement - Implications for Workforce & Work Management, and Flexibility
• Digital Brexit - Data Protection and the Cloud
• Government Services - Mega IT!
• Customs - Where will the lorries park?

About me

I am a solution director, enterprise architect and IT strategist with over 25 years architecture and design experience. I have held senior architectural roles in health, consumer banking & fund trading, insurance, and government and have wide experience across business and technology, business development, and programme delivery.

I am also a Trustee of Anorexia & Bulimia Care, a national UK eating disorders charity. We provide on-going care, emotional support and practical guidance for anyone affected by eating disorders, those struggling personally and parents, families and friends. We always desperately require support and donations.

Thank you

Adrian Sutherland