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Anichya G

ACN AT A GLANCE

P/E ► 14.8 AVG EV/EBITDA ► 10.0 AVG ROA ► 13% AVG ROE ► 58.6% HIGH Debt to Equity ► 3.25 HIGH Current Ratio ► 1.46 AVG Interest Coverage Ratio ► 191 HIGH

 

 

 

 

 

 

Accenture (NYSE: ACN) is a management and technology consulting firm. In addition to consulting clients on a range of management, operational and technological issues, Accenture also provides its clients with outsourcing services. In 2007, ACN had revenues of $21.452B ^[1]. Accenture has operations in over 49 countries with 170,000 employees.^[2] Accenture has expanded its business to include a large number of employees in rapidly developing, low-cost nations. From 2006 to 2007 Accenture increased the number of its employees based abroad by 23,000 to 71,000.^[3]. Accenture employs around 50,000 employees in India, China and the Philippines with plans to triple the number within next 3 years. These employees work for significantly less than the company's U.S. workforce, allowing Accenture to profitably provide low cost outsourcing services. However, in recent years, the firm has faced increasing competition from Indian firms specializing in systems integration and outsourcing. In addition to competing with Accenture for clients, these firms compete with Accenture for employees. As a result the salaries of skilled employees in India have risen rapidly over the last 5 years. In the face of increasing competition, Accenture will find it challenging to continue to grow its employee base in India.

Company Overview

Operating Groups

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Accenture offers its expertise to clients in 17 industries. These industries are divided into five five operating groups as outlined below.

• Communications & High Tech - Communications, Electronics & High Tech, Media & Entertainment
• Financial Services - Banking, Capital Markets, Insurance
• Products - Automotive, Consumer Goods & Services, Health & Life Sciences, Industrial Equipment, Retail, Transportation & Travel Services
• Resources - Chemicals, Energy, Natural Resources, Utilities
• Public Service

Services

Accenture offers its clients three types of consulting services.

Management Consulting Accenture offers its clients tradition Management Consulting services similar to McKinsey & Co or The Boston Consulting Group. Through management consulting Accenture tries to improve the performance of clients through analysis of their business model and any business challenges they may face in the execution of the model. This is often referred to as strategic consulting. Accenture operates its management consulting division under six separate service lines: Customer Relationship Management, Finance & Performance Management, Talent and Organization Performance ,Strategy, Supply Chain Management, and Process & Innovation Performance.

Systems Integration and Technology Accenture offers its clients technology related services including system integration and technology consulting similar to International Business Machines (IBM). Accenture assists clients in incorporating new technologies in order to increase efficiency in their operations.

Outsourcing Accenture also provides its clients with extensive Business Outsourcing services. Through outsourcing Accenture aims to allow its clients to focus on their area of expertise by allowing outside firms to deal with non-essential areas of their operations.

Trends and Forces

Skilled Talent is Becoming Expensive

As a consulting firm Accenture's most important resource is its workforce. Given ACN's focus on technology, its success is especially dependent on its ability to hire and retain technically skilled individuals, such as engineers, researchers, programmers and accountants. Moreover, the company has emphasized the growth of its labor force in India. Over the past ten years as companies have moved to India, the demand for labor has driven costs up. In India, salaries for IT professionals have had an average annual growth exceeding 10% from 2004 through 2007. Continued salary inflation, will make Accenture's continued rapid expansion more difficult. It will also place pressure on the company's margins.

Offshore Competition Will Weaken Accenture's Margins

Accenture faces growing competition from Off-shore service providers whose revenues have grown upwards of 30% a year. Such companies offer similar services at extremely competitive prices. For example, the average cost per employee at Infosys Technologies (INFY) is $34,000 while Accenture has an average employee cost $110,000. While these numbers are skewed by Accenture's upper level management in the United States, they reflect the large advantage of Indian firms. These firms compete with Accenture mostly outsourcing and systems integration areas.

Large Exposure to Developing Markets: Potentially High Risk or Reward

Accenture is more exposed to developing markets than most of its large American competitors. One third of Accentures's workforce is located offshore while the percentage for International Business Machines (IBM) is 18%, Electronic Data Systems (EDS) is 12%, Computer Sciences (CSC) is 9%.^[9] By placing a high proportion of its operations in developing countries, Accenture can be hit hard by the unpredictability of government regulations of the private sector.

Competition

Accenture faces a range of competitors across its three main services areas.

Management Consulting In Management Consulting, Accenture competes with traditional strategic consulting groups like McKinsey & Co. and The Boston Consulting Group.

Systems Integration and Technology In technology services, Accenture faces large competitors like International Business Machines (IBM), specifically its Global Services Business Unit. IBM leads Accenture by a large margin in terms of revenue, profitability, and scale. In FYI 2006, Accenture's revenues were $18.2 billion and its operating income was $1.8B. in operating income, while IBM earned $48.2 billion in revenue and $13.3 billion in gross margins for its Global Services business unit. Other smaller competitors include Electronic Data Systems Corporation Electronic Data Systems (EDS) and Computer Sciences (CSC).

Outsourcing Outsourcing has grown in importance for Accenture in recent years. While this is a quickly growing market, competition has become quite fierce, especially from Indian companies.

• Infosys Technologies (INFY) with revenues of $3.090 B and operating margin at 27.57% FYI 2007.^[14]
• Wipro (WIT) with revenues of $3.436 B and operating margins at 19.99% FYI 2007.^[15]
• Satyam Computer Services (SAY) with revenues of $1.46 billion and operating margins of 20% FYI 2007.^[16]

These numbers are extremely impressive compared to Accenture's $21.452B in revenues and much lower operating margins of 11.62%.^[17]

Footnotes

1. ↑ Accenture 2007 10K, Item 15 , pg.F-5
2. ↑ Accenture 2007 10K, Item 1A , pg.33
3. ↑ Accenture 2007 10K, Item 1, pg. 12
4. ↑ Accenture 2007 10K, Item 6, pg. 46
5. ↑ Accenture 2007 10K, Item 6, pg. 46
6. ↑ Accenture 2007 10K, Item 7, pg.56
7. ↑ Accenture 2007 10K, Item 15, pg.F-47
8. ↑ Accenture 2007 10K, Item 7, pg.56
9. ↑ Credit Suisse: Initiation, pg.22
10. ↑ Google Finance(http://finance.google.com/finance?fstype=ii&q=NYSE:IBM)
11. ↑ Google Finance (http://finance.google.com/finance?fstype=ii&q=NYSE:EDS)
12. ↑ Google Finance (http://finance.google.com/finance?fstype=ii&q=NYSE:ACN)
13. ↑ Google Finance (http://finance.google.com/finance?fstype=ii&q=NYSE:CSC)
14. ↑ Google Finance (http://finance.google.com/finance?q=NASDAQ%3AINFY)
15. ↑ Google Finance (http://finance.yahoo.com/q/is?s=WIT&annual)
16. ↑ Google Finance (http://finance.google.com/finance?q=NYSE%3ASAY)
17. ↑ Google Finance (http://finance.google.com/finance?q=NYSE%3AACN)