Improvement in Bill Rates Will Benefit Accenture's Consulting Margins

| About: Accenture plc (ACN)

Accenture (NYSE:ACN) is a leading IT and outsourcing consulting business that competes with services offered by firms like Dell (NASDAQ:DELL) and HP (NYSE:HPQ). Accenture expects billing rates for its high end consulting business to stabilize after having registered a decline in 2009. We have revised the Trefis price estimate for Accenture’s stock from $49 to $52, in part to reflect the improved outlook for consulting rates.

Below we discuss the importance of the consulting business for Accenture and how an improved outlook for billing rates can lead to higher margins for Accenture.

Consulting Business is 48% of Accenture’s stock

We estimate that the management and technology consulting businesses together constitute 48% of $52 Trefis price estimate for Accenture’s stock. The consulting business generates higher margins for Accenture compared to other verticals like outsourcing and system integration. In many cases, consulting projects culminate into other opportunities for Accenture’s outsourcing or system integration businesses.

Consulting Billing Rates to Stabilize After 2009 Decline

Change to Accenture’s billing rates directly impact its revenues. The average hourly bill rate for Accenture’s management consultants declined from $200 in 2008 to $180 in 2009. We now expect the consulting rate to remain flat at $180 in 2010 instead of a decline to $174 as we had forecast earlier.

The bill rate for management consultants is higher than that of technology consultants. We expect the hourly bill rate for technology consultants to remain flat at $126 in 2010.

Improved Billing Rates will Increase Consulting Margins

With improved outlook for consultant billing rates, we expect 2010 margins to improve slightly over 2009. Accenture’s margins include the cost of paying consultant salaries, office facilities and other types of overhead expenses.

We estimate management consulting EBITDA margin of 17.7% in 2010 while technology consulting EBITDA margin of 17% in 2010. We expect margins for both businesses to trend slightly higher over the forecast period.

You can modify our margin forecasts above to see how Accenture’s stock price is impacted by the margins on its consulting business.

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