Beyond Brexit - Time to act: Reviewing contracts and commercial relationships

Mark Gough Negotiation Strategy Group Leader, PwC United Kingdom Jul 25, 2019

Mark Gough, commercial negotiations expert, offers some recommendations in our series of ‘no regrets’ decisions to make now in preparing for Brexit.

In my role I support clients through the planning, preparation and execution of complex negotiations. Brexit represents an upheaval for many commercial relationships and as organisations get under the skin of their own preparations for Brexit, some of the commercial negotiations we are seeing are approaching the complexity of those between the UK and the EU.

Whilst many organisations I speak with are thinking about Brexit in the context of new contracts or negotiations they are entering now, many business critical relationships were born before the EU Referendum was even on the horizon. The risks or additional costs associated with the Brexit process and in the trading environment thereafter will not have been foreseen or planned for. This presents an opportunity to reexamine existing business relationships or establish new ones.

One of the key areas of clarity that has emerged in the year since I first made my ‘no regrets’ recommendations is that many of the changes - and disruptions - it presents are systemic, affecting multiple organisations at once. My two ‘no regrets’ recommendations are more relevant than ever to responding to this nature of risk.

First, analyse your existing contracts - The first step is to identify those contracts with key suppliers and customers where there are potential financial and operational impacts on your business. While supply chains are the obvious place to start, there are almost certainly other third parties with whom you have a critical interdependence. It is unsurprising that many organisations are thinking about how their freight and logistics arrangements may be impacted by future border arrangements, but the range of contracts affected is potentially very broad.

All contracts have the potential to contain clauses – relating to people, delivery of goods and services, business infrastructure, pricing, supply chain and data – that rely on the established legal framework provided by the EU. Major contracts (including those for outsourcing, supply of goods and services, support and maintenance contracts, and other long-term investments or financing arrangements) are unlikely to include commercial levers and mechanisms that will deal effectively with the specific issues that arise out of any future relationship between the UK and the EU. Contracts may include references to a particular currency or detailed pricing mechanisms. The impact of Brexit on external factors such as currency could result in significant increases in cost and render contracts uneconomical.

The companies we’ve talked to who are ahead of the pack on these reviews have identified contracts as diverse as IT development agreements, intellectual property licenses and joint ventures as being an issue.

Analysing your existing contracts will highlight both challenges and opportunities. Some of these are a matter of a simple re-contracting process or can be more complex, but others represent an opportunity for both sides to revisit the fundamental terms of the relationship. Either way, what we have learned from the preparation process so far is that this exercise has taken more time than many have expected.

As you refresh your own planning therefore, my second ‘no regrets’ recommendation is to engage with your key third parties. Putting yourself in the best position - for either a potential future negotiation of a key relationship, or simply to preserve continuity in some scenarios - is best achieved by proactively and regularly discussing how Brexit will affect all of your most important partners, and how they are preparing.

Planning these discussions means thinking carefully about the future of these relationships. Some of these business relationships may become uneconomical, or have new factors to consider (for example, who will bear the risk of any customs delays). Performing an analysis of your relationships economics and dynamics beforehand allows you to anticipate the challenges and conversations ahead. This will give you valuable time to put together the right team, fully understand the variables at play and carry out the necessary preparation, putting you on the front foot when renegotiating terms.

When it comes to dealing with change, knowledge is a very valuable resource. At a minimum we suggest scoping how your partners think Brexit will affect their own business models. The best stage to gain some insight into your partner’s view of the world is early, when there isn’t already a negotiation process in place.

Your banks, insurers, facility managers, regulators, joint ventures or sales alliance partners can all have a critical impact on your business, especially where they are also adjusting to their own Brexit related challenges. Key to negotiations with any of these is preparation, preparation, preparation. Take the time now to open conversations because it is not just your own readiness, but also theirs, that will matter on day one.

Mark Gough

Mark Gough

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Mark Gough

Negotiation Strategy Group Leader, PwC United Kingdom

Tel: +44 (0)7841 563494

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