Brexit: A Case Study in Using Contract Management for Risk Mitigation

Case Study in Using Contract Management

The spectre of Brexit has been dominating the UK news cycle for over four years now and, in the UK at least, it can sometimes seem like a never-ending project. Businesses in the United Kingdom have been bombarded with messages from the Government, telling them to “get ready for Brexit,” but with state-level negotiations between the UK and the European Union continuing right down to the wire, it has often been perceived as an impossible feat to truly Brexit-proof a commercial enterprise operating in the UK. This, in particular, makes Brexit a great case study in using Contract Management to mitigate risk, because it demonstrates the importance of both readiness, and business agility.

What is Brexit?

In June 2016, the United Kingdom held a referendum on its membership of the European Union. The result indicated that 52% of voters wished to leave the European Union, and the Government of the UK then forged ahead with formulating an exit plan. The process of extricating the country from a now 47 year-long membership of the European Union is extraordinarily complex, however.

We can think of Brexit in terms of a business contract. The contract is highly detailed, covering everything from trade, movement, security, energy, and law. One party wishes to terminate one contract and begin another, and this new contract has to be negotiated and agreed by all involved. It is important that this new contract be agreed by 1st January 2021, which is the first day of the new relationship. This is because the European Union is both a large international trading bloc of 27 member states, and also a close neighbour of the UK. The contract negotiation is about redefining the relationship between the UK and the European Union – from member state with voting rights, to trading partner.

How does Brexit impact business?

For businesses in the UK and the European Union, Brexit has a significant impact. After 47 years of membership, the UK is deeply enmeshed with the European Union on several levels. Freedom of movement has meant that commercial enterprise has been able to establish productive connections across the EU, involving both personnel and goods. The global economic crash of 2008 notwithstanding, the function of the European Union has enabled a general level of market stability – particularly within the internal single market that member states create. In addition, there are a range of legal implications to consider, as the UK exits all aspects of the European Union, including its laws and jurisdiction.

This means that, for those businesses conducting commercial operations between the UK and the European Union, preparations have been needed in terms of supply chain, location, pricing of goods and services, data security regulations, risk management and internal policies and governance. For those businesses based in the UK that do not involve the European Union in their operation, preparations have been needed to reflect the imminent change in UK legislation. For example, where doing business with countries inside the European Union will still require compliance with the General Data Protection Regulation (GDPR), updated data protection and privacy policies will be needed for operations that do not involve the European Union, in compliance with UK law.

Using Contract Management to enhance preparedness

With the Brexit process having taken so long, it is easy to become mired in the controversies associated with it, which are regularly replayed across the media. However, the fact remains that the contract between the UK and the European Union is changing, and businesses must be prepared in order to survive. With this in mind, we can see that Brexit is, in fact, simply another event that has repercussions for an increasingly globalised business world. This means that the process of preparation is largely the same as the process of preparation for the transition from LIBOR to SOFR, for example. While the LIBOR-SOFR transition is essentially focused on currency and interest rates, Brexit involves a more complex range of business areas – but the actions needed within your Contract Management System are similar.

  1. Identification – Using customised reporting features to apply filtration, you can identify which specific contracts will be impacted by the event.
  2. Assessment – Once the affected contracts have been identified, the severity of impact can be assessed. In the case of an event such as Brexit, this would include every element involved, from tariffs and movement of goods and personnel, to the processing and security of data.
  3. Decision – Having assessed and estimated the impact on affected contracts, decision pathways can be mapped out. For Brexit, which is a fixed event with as yet undefined parameters, this involves plotting a variety of courses to cover every eventuality, for each affected contract.
  4. Remediation – As expected impacts become clearer, decision pathways can be followed and remedial work can be completed on affected contracts.
  5. Audit – Once remedial work is complete, it is vital to conduct an audit of your Contract Management System, in order to confirm that issues have been addressed in as pro-active a manner as possible.

These are the basic risk management steps needed within your Contract Management System to prepare for any impactful event, including Brexit. Indeed, as the nebulous, uncertain nature of Brexit poses a number of issues, it is vital to approach the decision planning process, along with any resulting remedial action from a much more generalised perspective. It is impossible to know in advance, for example, what the detail of the future trading relationship between the UK and the European Union will be. We cannot know for certain what specific tariffs set by other countries will be. But, if we confirm a number of details as part of the assessment phase, we can make the best general plans. These details include:

  • Financial triggers
  • Indemnity clauses
  • Liabilities
  • Severability
  • Termination clauses
  • Territories
  • Jurisdictions
  • Force Majeure clauses

This generalised preparation is not specific to Brexit, and is the very best practice in ensuring business continuity in the global marketplace – because when you know the content of your Contract System, you are prepared for anything. This is the basis of effective risk management in business.

Boosting business agility

The case of Brexit demonstrates the way in which businesses can be affected – both directly and indirectly – by political shifts and changes around the world. It is the very best example of the need to boost the agility of your business, in order to insulate it from commercial harm. The businesses most likely to survive in any economic climate or situation are those that are efficient, productive, and adaptable.

To achieve this position of strength, it is imperative to invest time and resources in your Contract Management System. Ensuring that you have the most up-to-date information – particularly about currencies, interest rates, and territories – means that you can act quickly when change occurs. Though affected contracts will still need to be identified through filtration, you can reduce your reaction time by having as many pre-determined decision pathways in place as possible. These generalised decision pathways can be included in your corporate governance, as part of business resilience measures, and should address such eventualities as market fluctuations over and above a level considered to be tolerable for your sustainable operation.

Making the most of your Contract Management Software

Contract Management Software is invaluable for several reasons. In addition to enhancing general efficiency across your business, and reducing operating costs associated with premises and personnel, the right Contract Management Software package will include features that are powerful tools in terms of boosting business agility and dealing with events such as Brexit. Chief among these is customised reporting. When truly harnessed, this feature can provide all the actionable data required to insulate your business from harm, as far as possible.

The key is to first determine where your commercial vulnerabilities lie, and then run customised reports to identify those contracts that would be impacted by each vulnerability. In the case of Brexit, that would be the contracts that agree terms between the UK and a country in the European Union. But, it would also be every non-EU agreement, because UK legislation around data protection will need to change. Customised reporting can sort your contract library into those categories.

In more general terms, determining that your supply chain is a vulnerability of your business means that you are able to use customised reporting to identify those contracts connected to your supply chain, and put in place pre-determined decision pathways to protect your commercial interests. The point here is that this risk management process can highlight areas within your Contract Management System that would benefit from preventative remedial action – and this feature gives you the opportunity to do that.

The next Brexit

In business, there is always another Brexit-level event looming on the horizon, and preparedness is a prerequisite of effective risk management. The nature of customised reporting means that it can be fine-tuned to reflect the needs of your business, and the vulnerabilities you need to identify. By using your Contract Management Software in this way, you can take the steps necessary to mitigate risk, boost agility, and build resilience.

Call Symfact today to discuss your Contract Management Software needs, and start working to ensure the future success of your business.