Accenture is Not Immune to the Challenging Economic Environment
Eugene Zakharov, Senior Analyst, Professional Services, TBR
2009-03-27
Even a bellwether can succumb to pressure, and Accenture is showing that it is not immune to the challenging economic environment.
The company reported a top line decline of 6% in U.S. currency (up 3% in local currency) for its fiscal 2Q09. Accenture's results highlight the struggles that most IT services companies are going through: decelerating economic growth, clients' slashed IT budgets, a strengthening U.S. dollar and unstable global markets. Given the market conditions, Accenture continues to be very cautious about the rest of the year, revising the guidance down to 0%-4% in local currency.
At the same time, Accenture's cost containment is certainly notable, allowing the company to post improvements to its bottom-line in the recent quarter. Accenture's painstaking approach to managing risk and cost containment is well known and it comes in handy in this economic environment.
TBR believes Accenture decreased hiring, canceled some expansion plans while layoffs have been taking place over the last three months, the company implemented a redundancy program in the Manila facilities, affecting about 500 employees, or 3% of its 16,000 people in the Philippines; deferred the plan to add 200,000 square feet space in Chennai, India, and there is a chance there will be fairly large layoffs in the US in March and April.
TBR believes "cost containment" and "fueling growth" will be key themes for Accenture in the next 6-12 months.
While some IT players, such as IBM or HP, have earned a reputation for their R&D investments and developing groundbreaking technologies, Accenture may not necessarily lead in services innovation, but prefers to save and invest in more applied approaches that can help clients in the short-term.
Additionally, Accenture has historically stayed away from major acquisitions and focuses on "tuck-in" acquisitions (not usually exceeding $600 million a year) to expand its expertise in specific functional areas or expertise. It appears that Accenture will stay true to its approach and will observe from sidelines merger discussions of IBM and Sun, as well as Satyam and BearingPoint sell off and potentially missing out on the consolidation in the industry.
Overall, TBR believes Accenture remains one of IT services leaders given its general adaptability to changing market environments. Over the years, the company successfully and timely reinvented its business model and at remained relevant for its clients. In the last IT downturn in early 2000s, outsourcing became key to Accenture's differentiation and success. This time around, Accenture will need to re-start its consulting engine (most of declines in the quarter came from consulting unit) and TBR believes outsourcing will need to pick up as well.
TBR believes Accenture's capabilities in transformation, cost reductions, consolidation activities and performance improvements should resonate well with the clients. Just like in the past, Accenture will aim to benefit from strong client demand for its brand name and reputation.
At the same time, TBR does not underestimate the changing landscape and competitive pressures, Deloitte is becoming stronger through its acquisition of BearingPoint parts, IBM may acquire Satyam and Sun, HP Services' acquisition of EDS is going well, while the Indians are regaining strength too. TBR believes all these companies and market environment will continue to keep Accenture awake at night.
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