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How might Scottish Independence affect Procurement?
Posted 16 September 2014 | 
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So we're into the last few hectic days before the Scots decide whether or not to pull out of the United Kingdom. As procurement specialists we have been considering the impact (both positive and negative) from a procurement perspective. Whilst we're based in England, we have many Scottish clients and both sides of the border will have to consider very carefully how to prepare for a "Yes" (and to a lesser extent, a "No" vote).
Arguably the biggest single considerations from a supply chain perspective will be related to changes to currency, tax, tariffs and the impact on business continuity. But there may well be other serious issues too - technology transfer, pensions, employment law, foreign market access. And what about the risk of financial institutions moving south of the border? Some commentators also see a high risk of increased costs of borrowing in Scotland, particularly if there is a need to change currency. The combination of higher debt (resulting in a loss in national credit ratings), the additional cost of currency exchange conversions and the increased uncertainty resulting in a flight in capital flows all add up to a higher risk supply chain in Scotland.
There are also legal impacts with further massive implications. One example is if Scotland cannot join the EU - which will happen if just one EU Member state vetoes their entry. This will mean that the EU Procurement Directives will be null and void, causing the rules of public procurement to change, creating confusion and chaos. To counter this, the Scottish government has recently passed the New Procurement Reform (Scotland) Act 2014. If the Scots vote "Yes" we would advise all procurement departments to consult with their legal advisors to gain advice on the inclusion of clauses specifically to tackle currency, tax and regulatory changes.
On the currency issue, there is no clarity currently concerning whether or not an independent Scotland will have a currency union with the rest of the UK. Whilst the SNP believe this can happen, the remainder of the UK may not be too keen to accept a union, particularly because of the heightened risks associated with Scotland's finances post independence. If however Scotland manages to join the Euro, prices are likely to rise in Scotland. This has certainly happened in most countries who have joined the Euro in the past. So companies in the rest of the UK with contracts for supply with Scottish companies will have to make sure that contracts are negotiated in sterling.
The creation of a customs border will also impact on the supply chains. Just look at what happened to suppliers to the motor industry when the Czech Republic split away from Slovakia.
So how should buyers react to this massive change? We've prepared a checklist for consideration:
- Rank your suppliers based on risk. Those at high risk should be considered first, with a contingency plan developed (such as the identification and development of a new source of supply).
- Remember to consider tier 2 suppliers (the suppliers to your suppliers) when considering the impact of independence on your company.
- Are you aware of the key categories in the supply chain affected by independence?
- Have you perceived supply chain risk from sourcing from one particular source?
- Have you assessed how your sourcing strategies will be affected in both the short and longer term?
- Have you assessed the impact of ongoing international uncertainties on the key input commodities?
- How does independence impact on your bottom line and gross margins?
- What can your company do to shield itself from the negative impact of independence?
- How will your industry sector be impacted?
- How will your competitors react to the changes?
- Will Wales and Northern Ireland follow suit, and if so, what impact will this have on your business?
This uncertainty may well impact on consumer demand across the UK, not just in Scotland. People may choose to save more, divest away from the UK. There may be a nationalist backlash against Scotland (in the rest of the UK) or a nationalist fervour in favour of supporting Scottish suppliers (in Scotland). How will this impact on your business?
And of course all of this turmoil may be a dress rehearsal for the possible referendum in the UK in a few years time to consider our continuing membership of the European Union. If you think our current challenges re Scottish independence is significant, you wait until the European membership question is posed!
On a positive note, Scottish independence for many companies may be great news. A more vibrant economy no longer shackled by the rest of the UK may get a boost which will feed through to higher growth and greater consumer demand. And we must also remember that after the Yes vote, the rest of the UK will remain by far the biggest and most important export market for Scotland. And Scotland represents an important market for the rest of the UK too. So it makes no sense for either Scotland or the rest of the UK to damage the supply chain between the two nations. Some of the fears raised by the "No" camp may be overblown.
In summary, we're all living at a time of big changes here in the UK. Even if Scotland votes "No" later this week, buyers in both Scotland and the rest of the UK will need to reflect on how it will impact on their supply chains. If your company isn't considering and adapting, you can be sure that your competitors will be. So its a critical time for procurement.
by M Roper | 16 September 2014
