How Does Accenture Today Compare to Post Dot-Com Bust?

Accenture (ACN) reported results yesterday and it was on expected lines.

Source: Gridstone Research

While revenue has declined by 16% YOY (4% in constant currency), operating margins held steady thanks to headcount reductions. Companies can't manage currency fluctuations easily and so the constant currency numbers are a better indicator of growth and management's ability to execute its growth strategy. On this count, Accenture has not fared badly.

With this in mind, I thought it would be interesting is to see how Accenture fared post the dot-com bust and compare it with its recent performance in terms of revenue spread and revenue growth. The main idea behind this comparisons is to see what's changed and what's not. Here are some comparisons:

Geographic Revenue Growth

In the recent quarters, Asia-Pacific (APAC) had continued to grow while Accenture has faced revenue declines in Americas and EMEA.

Now...

Then...

Source: Gridstone Research

However this still has not changed the geographical distribution of revenues as % of total in a signficant way. While APAC contributes an increasing portion of revenues(~11% in May09 against ~7-8% in 2003), it still is a suprisingly small chunk of Accenture's revenues. Clearly while the growth rates in APAC looks impressive, it could only get better in the coming quarters due to the low base and the penetration of IT consulting and Outsourcing in APAC countries increases. Unlike IBM which has signed large outsourcing contracts in APAC over the last couple of years, Accenture seems to have largely ignored this market.

Geographic Revenue Breakouts

Now...

Then...

Source: Gridstone Research

Consulting and Outsourcing Revenues

Accenture classifies all management consulting, IT consulting and system integration and product implementation services as consulting while outsourcing is largely application maintenance, business process services etc. With the increased emphasis on its global delivery network and offshoring of 'low-end' services, Accenture has increased the outsourcing revenue chunk considerably over the years bu consulting continues to be the larger chunk. This could also be one reason why Accenture is more affected than India-based outcourcers like Cognizant (CTSH) (See earlier article on Cognizant) in the recent downturn. While Cognizant depends largely on 'steady' revenue streams like application maintenance, Accenture's consulting revenues are largely based on discretionary IT spending.

Consulting/ Outsourcing Revenue Split

Now...

Then...

Source: Gridstone Research

But the rate at which these segment sare growing indicates that this revenue split is not going to change dramatically in the next few quarters. While consulting has declined in the last two quarters (on a constant currency basis), it could revert to prior growth rates as discretionary IT spending picks up. I say this because, barring the last two quarters, consulting and outsourcing have grown at pretty much the same pace.

Consulting/Outsourcing - Growth Rates

Now...

Also if you look at what happened in 2004, post the dot-com bust, outsourcing revenues picked up much before consulting came back to growth territory. But we also need to keep in mind that Accenture was a consulting company till ~2000 and was just expanding its outsourcing services.

Then...

(Consulting and outsourcing revenue growth rates not available for FY03)

Source: Gridstone Research

Customer Vertical Revenue Contribution

Currently, the Products vertical is the largest customer segment for Accenture. The Products vertical is actually revenue derived from various customer verticals such as automotive, retail, consumer goods , healthcare and manufacturing. Note how this vertical has held up much better than the Financial Services or Communications/High Tech vertical in the current downturn. Though it has declined in absolute terms, it is still the largest contributing vertical and has been the largest over the two years. One possible explanation could be that technology adoption in terms of enterprise applications, supply chain optimization for the Products vertical was yet to take off in full earnest prior to 2003 and this vertical has seen the highest growth in the years from 2003 till date.

Now...

Surprisingly, even post the dot-com bubble, Communications/High Tech was much bigger in revenue contribution compared to other verticals though this was the most affected vertical in that period.

Then...

However, the Products vertical could see testing times ahead since industries such as auto and retail are facing their most difficult demand environment in the last decade or more. This is similar to what seems to have happened post-bubble in 2003-04. Products vertical could cease to be the biggest customer segment just as Communications/High tech lost its crown post the dot-com bubble.

New Avenues For Growth

Looking at the data and comparisons above, the overriding theme seems to be that APAC is where Accenture could look for growth in the years ahead and also push for more high-value service (consulting) in this geography. The verticals which could contribute to the next growth wave in IT consulting/outsourcing could be Government and Resources(commodity-led companies) vertical.

While EMEA and Americas could see a trend reversal in the next few quarters, they don't seem to be markets which Accenture can depend on for top-line growth. This hypothesis could hold true for all IT service vendors and not Accenture alone.

Disclosure: No Positions

Comments

[Amit Jindal:]

I am difficulty understanding how the comparison between now and then led to the conclusions. These conclusions could have been achieved even without the comparison.

Jun 27 01:24 AM

[Bandwagon2009:]

The conclusion in this article seems to ignore the cultural buying habits of APAC region -- while consulting can certainly provide higher value (=margins), there is pre-disposition by clients in some Asian countries for not wanting to pay for pure "consulting". Firms like ACN might be able to bundle "solutions" which include a combo of products and services -- and certainly there are some large scale government spoonsored SI projects in India and other countries that ACN could go after...in most cases a local tie up / JV is necessary. A BOT approach might be a better idea.

Jun 27 10:56 AM

[Naveen Selv...:]

As mentioned in the article, Accenture includes a host of services(SI etc) in Consulting. So what I mean by Consulting growth is not vanilla business/IT strategy consulting but all these services combined.


On Jun 27 10:56 AM Bandwagon2009 wrote:

> The conclusion in this article seems to ignore the cultural buying
> habits of APAC region -- while consulting can certainly provide higher
> value (=margins), there is pre-disposition by clients in some Asian
> countries for not wanting to pay for pure "consulting". Firms
> like ACN might be able to bundle "solutions" which include a combo
> of products and services -- and certainly there are some large scale
> government spoonsored SI projects in India and other countries that
> ACN could go after...in most cases a local tie up / JV is necessary.
> A BOT approach might be a better idea.

Jun 29 01:56 AM

[Naveen Selv...:]

You are right. The conclusions could have been more precise or done away with. My intention was to only compare and I should have stopped at that.


On Jun 27 01:24 AM Amit Jindal wrote:

> I am difficulty understanding how the comparison between now and
> then led to the conclusions. These conclusions could have been achieved
> even without the comparison.

Jun 29 03:41 AM