Landlords need to focus more on risks now and less on life after Brexit

Who will ‘own’ the risk?

The first stage is to accept possible threats and take responsibility for them. Has someone been appointed to take charge and have accountability around Brexit-related procurement vulnerabilities in each department? If an area of risk reaches a certain level, it’s worth creating a corporate risk register where someone at board level has responsibility.

What is your appetite for risk?

Every organisation has a different attitude to risk. Your job is to work out what level is acceptable to yours, particularly within a new post-withdrawal contracting environment. Without this knowledge it’s hard to make decisions when you are negotiating contracts today, yet I’m hearing that many purchasing teams still don’t have a clear picture.

It’s vital that conversations with senior executives about risk appetite are had sooner rather than later. I’m confident that as Brexit gets nearer, creeping up priority lists, there will be greater signalling from boards on how much risk they will entertain and mitigating actions. Use the information you glean to build risk profiles and consider the most appropriate contracting approaches going forward.

If appetite for risk is low then your housing organisation might want to offset uncertainty to its suppliers, stipulating, for example, that it wants to pay a fixed price for goods in UK pounds for a total of four years, so it knows exactly where it is on price. This transfers the exchange rate risk to the suppliers, but they will charge you a premium for it.

A housing provider with a larger risk appetite might agree to pay a supplier in euros. Typically in the sector we don’t have the skill sets to purchase euros in house – but those landlords that have the confidence to accept the exchange rate risk will benefit from lower supplier prices.

A middle ground option is where a provider agrees to an index-linked cost model. For example, if the exchange rate goes up and down by more than 10 per cent in a rolling three-month period then both the social landlord and their supplier reserves the right to amend pricing accordingly, sharing the risk. This can take quite a lot of resources to manage internally and it wouldn’t be a practice to adopt for all contracts. However, for higher-value agreements, where a supplier is heavily reliant on imports from the EU, this ‘blended’ approach can pay off.

How exposed is your supply chain?

What Brexit-related challenges are your suppliers already grappling with? Find out which ones rely on imports from the EU economic area. Do they make products that contain parts manufactured in the EU? It’s also worth identifying what proportion of your suppliers’ workforces are from EU countries – something that might pose workforce challenges next year.

Asking your supply chain about their Brexit mitigation strategies will allow you to develop individual risk profiles. These can be aggregated to inform an overall risk management strategy.

How would different types of Brexit affect your procurement activity?

A melee of options is still on the negotiating table. These range from a hard and clean Brexit to one that is soft and bespoke; a Norway-style deal, a Canadian-inspired free trade agreement or a no-deal exit on World Trade Organization terms.

The key is understanding the risks posed to your housing organisation by the main scenarios. If you haven’t already done so, begin to map out different situations on your procurement approach. Weigh up the opportunities and challenges for each possibility.

For example, with a hard Brexit, where the UK comes out of the EU economic area and there are trade barriers and the potential for tariffs, what might that look like? There may be restrictions on movement of labour that could impact your workforce and reduce demand for social housing, creating financial problems.

If the final deal is soft and the UK remains, to a large degree, part of the EU area, with frictionless trade and free movement of labour, what would the economic, social and technological outcomes be for your housing organisation?

It’s important to remember that this scenario planning will be very top level – exploring hypothetical outcomes in generalised situations. It’s only when the UK government and the EU agree the finer detail that more in-depth planning can take place.

The solution to Brexit uncertainty is not to guess what might happen after EU withdrawal. Instead, focus your time on understanding the pressures now, for you and your suppliers, and how you can mitigate these today, tomorrow and the day after ‘Brexit day’.

Steve Malone, managing director, Procurement for Housing