Accenture – A Good Long Term Investment

I have written a fair bit lately about the Indian outsourcing industry’s challenges. In my article Death of Indian Outsourcing, I had talked about how outsourcing companies need to come up with solutions to fight the growing inefficiencies of the cost structure in India. Labor Arbitrage strategies need to change for those in the outsourcing business who are using India as a key competitive advantage, including Accenture and IBM, besides the 3,500 odd Indian companies.

Last week, Accenture (ACN) reported their Q2 financials for fiscal 2008. Their revenues of $5.61 billion for the quarter met analyst expectations and recorded an 18% increase year on year.

Segment wise, Consulting Revenue contributed $3.35 billion i.e. 60% of the revenue and Outsourcing Revenues brought in the balance $2.26 billion. Both the segments grew by 18% year on year.

Region wise, Americas contributed $2.32 billion or 41% of the revenue. The American contribution is marginally down from 43% recorded the previous year. EMEA contribution increased marginally from 49% to 50% to reach $2.79 billion and Asia Pacific regions recorded an impressive 35% growth to reach $0.5 billion for the quarter.

Their EPS grew by 42% for the year to $0.64 and was substantially higher than market expectations of $0.56.

During the quarter, they repurchased 16.3 million shares at a total cost of $549 million.

For the year, they reaffirmed their revenue growth to be in the range of 9-12%. However, they increased their diluted EPS outlook by $0.19 to a range of $2.55 to $2.60.

For Q3, they are projecting revenues of $5.85 – $6.05 billion.

Today, potential outsourcing clients are looking for a vendor who comes with the ability to handle multiple processes, applications and infrastructure outsourcing. The outsourcing game is also become increasingly global, with offshore centers spreading well beyond India to China, Malayasia, Phillippines, Eastern Europe, Latin America, and elsewhere. There is also “near-shoring” interests from major multinationals. All these dynamics make the business more complex, and Accenture’s experience of operating as a true global multinational will likely stand them in good stead over the longer term.

Accenture is also investing in technology partnerships that can help scale and improve the margins of their outsourced services. SaaS vendors are a good place to go for such partnerships, and as Michael Gregoire, CEO of talent management SaaS vendor Taleo discusses, these partnerships are becoming increasingly common. Lars Dalgaard, CEO of SuccessFactors, also offers a similar perspective, that BPO vendors have given up having their own technology, and are now partnering with SaaS companies.

Accenture’s stock has been improving steadily as well. Since the Jan ’08 record low of $31.91, the stock has crossed $36 recording a 13% increase in the last two months. Not bad under such traumatic market conditions!