WHAT WILL SCOTTISH INDEPENDENCE MEAN FOR IT IN THE FINANCIAL SERVICES SECTOR
By John Joyce, Practice Director at Xceed Group
The campaign for Scottish independence is gaining ground with five months to go until the referendum. According to an ICM poll for the Scotland on Sunday newspaper, support for independence is at 39 per cent, whilst opposition has fallen four points to 42 per cent. The results suggest that a two-point swing could be enough to secure a ‘yes’ vote on September 18.
The rise in support for independence has forced many UK financial services companies to seriously consider the implications of a ‘yes’ vote in September’s referendum for their IT and Data Centre infrastructure for the first time.
With issues such as data sovereignty, regulatory oversight, the cost of supporting a cross border IT infrastructure, and Scotland’s potential re-application for membership of the EU, now is the time for the IT Industry to begin contingency planning.
The polling of major Scottish companies by the Financial Times indicated that those in the finance sector are the most nervous over the issues Scottish independence presents. Those concerned have cited changes in the regulatory regime as their biggest concern, followed by potential change in the currency, uncertainty of EU membership, and the need to transact business with a foreign state. Standard Life are considering moving some or all of their business south if Scotland gains independence and Lloyd’s Banking Group and RBS have both listed it as a risk in their recent group results. In particular, their uncertainty regarding the application of EU directives in the event of a separation is a significant risk factor for financial institutions.
In a bid to address concerns the Scottish government has already published a white paper, detailing its plans to set up equivalent institutions to regulate and support retention of the sterling currency. However the assertion that Scotland will be able to keep the Sterling has been widely challenged.
Keeping the large finance sector companies domiciled in Scotland is crucial to support local employment and raise corporation tax. However, to do so Scotland will need to move fast to establish those institutions if they are to ensure stability and avoid a flight of capital south of the border.
Given that up to 90 per cent of the customers of these companies reside outside of Scotland there may be a demographic driver in encouraging their move south of the border. Even if they don’t relocate, it will still be in their interest to limit the impact of independence.
Whilst studies do reveal some positives for Scotland from gaining independence, including a reduction in personal tax and a kick starting of the development of new products and services. It seems that the majority of finance companies see independence as creating more risks than opportunities.
Despite the uncertainty over the final result, it is becoming clear that a ‘yes’ vote will lead to key finance companies relocating their business and key IT assets such as data centre facilities.
Scotland will no doubt try to minimise the departure of companies. Given that an independent Scotland would be able to determine its own tax regime it is likely to copy the Irish example during the “Celtic Tiger” boom years. Besides making it appealing for the incumbents to stay put, they may try to attract other large multinationals with corporate tax incentives.
Data intensive companies such, as Google and eBay, are always looking for more cost effective locations to house their large power hungry data centres. The use of ‘free air’ cooling in a data centre, thanks to the cooler climate of Scotland, could represent a significant cost saving.
Companies that will be impacted by Scottish Independence need to ask a range of questions, addressing a range of issues from the strategic to the tactical. These questions generally fall into two initial categories:
If Scotland becomes independent, will a company physically relocate areas of its business and if so what are the activities needed to support the move?
Or, if the business decides not to relocate, what needs to happen to support a new cross-border business model?
Of course, it could also be a bit of both.
Significantly, companies who run their IT services across the new state (and non EU) border will have less control of their data. IT security and compliance professionals are always uncomfortable at the thought of not having physical control of core data. Currently, certain electronic records proving asset ownership e.g. share and bond certificates have to be within the EU boundary. For data centres in Scotland this could be a significant barrier, particularly if application for EU membership is a long time coming.
Companies will need to assess whether data can be freely moved across the new border and whether there will be any physical restriction when trying to access data. This is particularly vital in the event of a time critical disaster recovery situation.Some companies may have data centres in Scotland and backups in rest of the UK or vice versa. These companies will need to investigate the impact of moving this data across the border.
All affected companies need to be planning now for how to respond to a ‘yes’ vote victory.
As an example they should consider how to rapidly deploy temporary data centre facilities on their chosen side of the border. For those requiring their own data centre then they will find that building a permanent data centre from scratch can take up to three years so interim measures are vital in the event that data sovereignty is compromised.
Short term co-location facilities are the obvious alternative. However the sudden change in the local dynamics of supply and demand, plus the requirement to be close enough to the data centre, may make the option less viable.
More radical thinking may be required. As an example they could consider using a temporary ‘containerised’ data centre which is effectively a data centre in a shipping container. These are already used in various global locations where rapidly deployable data centres are required in challenging environments e.g. oil exploration in remote African locations. A 1.5 MW Containerised Data Centre, which would comprise of four or five containers, could be operational in less than six months.
Beyond data sovereignty the impact of independence and a possible change of currency will take its toll upon every sector of the IT function. Whether it’s the cost of sourcing power from Scottish companies (As the Scottish Government states it is a net exporter of power, providing 25% of its excess to the rest of the UK), renegotiating supplier contracts, managing exchange rate fluctuations or the new ‘international’ tariffs from the telecoms providers.
A further consideration will be how moving, or not moving, will impact employees. An independent Scotland may create new challenges associated with attracting, managing and retaining a skilled work force across a new national boarder.
Given the growing support for independence, companies need to start contingency planning now or risk significant consequences.