More Offshoring Will Help Preserve Accenture's System Integration Margins

Includes: ACN, INFY, WIT
by: Trefis

Accenture (NYSE:ACN) competes with IBM (NYSE:IBM), HP (NYSE: HPQ), and Indian IT services players like Infosys (NASDAQ:INFY), Wipro (NYSE:WIT) and TCS in the System Integration (SI) business which entails implementing IT infrastructure and application software to increase operational efficiency for clients.

Accenture’s SI revenues for 2009 were close to $2.6 billion, down 10% from 2008, in part due to increasing demand for SI, though at reduced costs. We expect Accenture’s billing rates per hour to decline to $57.5 in 2010. However, we believe shifting more work to offshore locations will protect Accenture’s SI margins.

Below we discuss the significance of SI business to Accenture, reasons why Accenture’s billing rates for SI will decline in 2010, and why the decline in billing rates won’t significantly impact Accenture’s SI margins.

Systems Integration 9% of Accenture’s stock

We estimate that SI division constitutes 9% of the $52 Trefis price estimate for Accenture’s stock. Some of Accenture’s SI services include Enterprise solutions and Enterprise Resource Planning (ERP) software, industry solutions for Customer Relationship Management (CRM) and Supply Chain Management (SCM), Information Management and Software as a Service (SaaS).

Demand for Lower Cost ERP software will drag down 2010 billing rates for Accenture

Accenture is seeing increasing demand for its SI business, though at reduced costs. The new SI bookings (deals signed and that are soon to start) are mainly for ERP add-ons and customized SAP implementations over the client’s current IT infrastructure. We believe the push for lower project costs by clients will lower billing rates for Accenture in 2010.

Professional bill rate is the average fee that Accenture charges to its clients for its consultants, and is an important driver for SI revenues. We expect the average bill rate for Accenture’s SI consultants to decline from $60 in 2009 to about $58 in 2010, and pick up thereafter.

You can modify the forecast above to see how Accenture’s stock would be impacted if its SI billing rates were to decline more than we estimate.

No Major Impact on Accenture’s SI Margins

We believe that greater demand for lower cost ERP and SAP implementation will put Accenture’s SI margins at risk, but that Accenture will be able to offset the pressure from declining bill rates by:

1) Cutting costs by shifting more work to offshore locations

2) Staffing more junior consultants per project as junior resources come at lower costs

3) Continuing with a high utilization rate of 87% in 2010 which is higher than the average levels. Utilization is the average ratio of headcount working on a project at a given time, or being utilized, versus the total headcount available to Accenture.

With the ability to control costs effectively and maintain high utilization rates, we expect Accenture to maintain its SI margins to reach 15.5% by the end of Trefis forecast period.

You can modify the forecast above to see how the Accenture’s stock price will be impacted if its SI margins were to decline in the long term as opposed to our estimate.

You can see our complete model for Accenture’s stock here.

Disclosure: No positions