Accenture, EDS, Perot, Affiliated Computer: Stock Risk From Increased Outsourcing?

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 |  Includes: ACN, ACS, EDS, PER
by: Eric Savitz
Cynthia Houlton, an analyst with RBC Capital Markets, this morning cut her ratings on Accenture (NYSE:ACN), Affiliated Computer Systems (ACS), Electronic Data Systems (NASDAQ:EDS) and Perot Data Systems (NYSE:PER) to “Underperform,” based on what she expects to be “the disruptive impact” of those companies substantially increasing their mix of offshore employees.

She says the group will boost overseas workers to 60%-75% of their total workforce, from 21%-40% now.

By shifting work to areas with lower cost labor, she says, IT service companies create a set of distinct risks, including “service delays, contrat disruption and lower productivity.” She notes that increasing offshore hiring also requires “adjusting recruiting, training and local compensation policies to address different geographic requirements and expectations.” Houlton cautions that shifting employees from high-cost to low-cost markets will trigger material costs, including “severance, real estate restructuring and other write-offs.” She also warns that moving workers overseas will result in sharp revenue declines in commercial contract revenue, ranging from 17% to 53%, depending on the company and how aggressively they push into low cost labor markets. (You can’t just cut labor costs and pocket the extra margin, of course; you have to cut the costs of service contracts, which will shrink revenue over time.)