Can This Consulting Company Deliver?

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Accenture (NYSE: ACN) is a management and technology consulting firm offering its clients services in management, operational, and technological issues.  It also provides its clients with outsourcing services and has been flourishing well in a globally challenging environment. It provides business process outsourcing services for management functions like finance and accounting, human resources, learning, and procurement.

Revenues and Costs

Living up to the expectations of the street, Accenture’s revenue soared by 2 percent to $6.84 billion for its fourth quarter over the comparative last quarter. There was a rise in outsourcing revenue by 10 percent moving to $3.1 billion while consulting revenue fell by 4 percent to $3.74 billion in the fourth quarter, as compared to same period last year. Revenue from Europe, Middle East, and Africa declined 4 percent whereas revenue from America and the Asia Pacific region rose by 11 percent and 5 percent, respectively. Net income slumped to $636 million, from $683 million, largely due to increase in Accenture’s effective tax rate from 27 percent to 32.8 percent.

Accenture’s business expansion in developing economies like India, China, and the Philippines provides opportunities for cost efficient outsourcing services. The Company already has a strong workforce of 50000 employees in the above mentioned countries with further plans to triple it in a period of three years thereby benefitting from low costs compared to costs of employees at home.

Challenges and Peer Pressure

Accenture’s major concern is to support its business structure of hiring and retaining engineers, researchers, programmers, and technically skilled manpower. Continued salary inflation will make the company’s emphasis on expansion in India more difficult. Presently, one-third of Accenture’s workforce is located in off-shore developing markets thereby exposing it further to unpredictability of government regulations.

International Business Machines Corporation (NYSE: IBM), is a market leader in Systems Integration and  Technology services and it leads Accenture by a large margin in terms of revenue, profitability, and scale. IBM has about 18 percent of its workforce in developing nations and is reaping the benefit of low costs. The combination of capabilities in building, pricing, positioning, and delivering, matched with the right set of strategic initiatives; IBM is a threat to Accenture.

Infosys (NYSE: INFY) and other offshore service providers provide a major threat for Accenture. The average cost per employee compared to its US counterpart is almost one-third (numbers are skewed by Accenture's upper level management in the United States) for Infosys, thereby giving stiff competition to Accenture in outsourcing and systems integration services. Rapidly growing global market of outsourcing brings ample opportunities along with threats from other Indian companies like Tata Consultancy Services Limited and Wipro.

Cognizant Technology Solutions Corporation (NASDAQ: CTSH) has grown in revenue even in challenging economic conditions and pitched in direct competition with the multinationals Accenture and IBM. Cognizant’s with its series of acquisitions in the past five years have grown swifter than expected. The acquisition CoreLogic improves Cognizant’s capabilities in software product development, analytical modeling, domain-centric back-office services, and technology support. Another acquisition, Zaffera, a company specializing in SAP solutions was acquired recently which has a potential to add CTS’s current retail expertise.

Final Words…

Accenture has shown a very strong balance sheet with a cash surplus of $6.6 billion which would sustain the company’s dividends in the medium term perspective. The economy is showing signs of improvement thereby providing more opportunities for the company in Management Consulting, Outsourcing, and Systems Integration and Technology services that the company provides. The diverse portfolio of business with focus on execution and growth prospects the company has a promising future. I would recommend a HOLD strategy for the stocks of the company.

 


tarunbachhawat has no positions in the stocks mentioned above. The Motley Fool owns shares of International Business Machines. Motley Fool newsletter services recommend Accenture Ltd.. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.If you have questions about this post or the Fool’s blog network, click here for information.

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