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Accenture Should Lead Near-Shore Trend

Posted on Monday, Oct 4th 2010

At a Senate roll call on Tuesday, all forty Republican senators, joined by four Democrats and one independent, voted against advancing to a full debate on legislation that proposed tax benefits to companies that did not outsource jobs and brought jobs back to the United States. Fifty-three senators voted in favor of advancing the proposed bill and 45 against; 60 votes were need for it to advance. While many had been expecting this outcome, outsourcing companies were still waiting anxiously for the result. Meanwhile, the global consulting and outsourcing giant Accenture (NYSE:ACN) continued to deliver a performance far exceeding market expectations.

Accenture’s Financials

Accenture reported Q4 revenues of $5.42 billion, growing 5% over the previous year and easily beating the Street’s target of $5.31 billion. By segment, consulting revenues grew 6% to $3.1 billion and outsourcing revenues of $2.3 billion grew 4% over the year. Q4 EPS of $0.66 was 69% higher than previous year’s and exceeded the market’s projected $0.63, leading the company to announce a 20% increase in the semiannual dividend to $0.45 per share.

Accenture ended the year with flat revenues of $21.6 billion revenues with consulting revenues dropping 1% over the year to $12.4 billion and outsourcing revenues growing 2% over the year to $9.2 billion. EPS for the year grew to $2.66 over previous year’s $2.44.

Accenture’s Operating Metrics

Accenture ended the year with approximately 204,000 employees worldwide, more than 50,000 of whom are based out of their India centers. During the quarter, utilization fell 200 basis points over Q3 to 86%, while attrition remained flat over the quarter to 17%. However, attrition has risen significantly over the previous year’s recorded 10%. Attrition has been bothering most Indian outsourcers. Last quarter, Wipro was grappling with 23% attrition and Infosys had recorded attrition of 16%, the highest since 2002. Accenture, however, has managed to maintain utilization at comparatively higher levels. Indian players Wipro and Infosys recorded 82% and 73% utilization levels a quarter ago.

Accenture’s Strategy and the Midterm Elections

Accenture continued to implement their three-pronged strategy of driving growth on their core business, developing newer initiatives such as analytics, digital marketing and new technology areas, and expanding geographically. As a result, they are broadening the nature of core services they offer to clients. For instance, they are expanding their business process outsourcing (BPO) services by offering solutions that combine management consulting expertise with BPO capabilities. Further, to improve services offered in the automotive and industrial manufacturing segments, they recently acquired Acceria. Acceria is a privately held French company that specializes in providing business processes and methodologies dedicated to the after-sales operations of industrial companies.

Accenture has identified strategic growth markets as the BRIC countries of Brazil, Russia, India, and China, as well as South Korea and Mexico, to be their initial focus areas for expansion, with other markets to follow.

While the outsourcing bill may have been squashed for the time being, there is no denying that with unemployment in the United States still close to 10% and much higher in some regions and among various populations, the November midterm elections in the country may call for a bill that will favor job growth in the United States over foreign nations. Rural outsourcing in America is continuing to grow: nearly 20 companies offer such services, compared with 12 a year ago. Businesses are finding that they can save as much as 30%–60% by migrating work from the metropolises of America to rural towns. According to a survey conducted by accounting and consulting firm BDO Seidman LLP, 22% of CFOs at technology businesses are proposing the United States as the outsourcing destination, compared with 16% opting for China and 13% for India. This is a trend that Accenture cannot ignore, and given its global footprint and managerial capabilities, I strongly believe that it should become a leader in addressing the trend by expanding within America to gain share in the near-shore market.

Accenture’s Projections

Accenture is projecting fiscal 2011 revenues to grow 7%–10% over the year to $25.0 billion–$28.0 billion. They are projecting EPS of $3.00–$3.08 for the year. For the current quarter, they expect revenues to be in the range of $5.6 billion–$5.8 billion. The stock is trading at $44.38 with a market capitalization of $31.33 billion. In April of this year it touched a 52-week high of $44.67.

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