Accenture rides the digital disruption wave as outsourcing slows down

Profile picture for user slauchlan By Stuart Lauchlan December 17, 2015
Summary:
Strong digital growth and a dip in traditional outsourcing - Accenture's Q116 numbers see the firm well-placed in a market where digital disruption is now the desired norm.

Accenture-Pierre-Nanterme_R-copy
Pierre Nanterme

Continuing its own digital transformation, Accenture turned in a 24% increase in consulting bookings on the back of increased demand for digital services from clients, resulting in record revenues of $8 billion for its Q1 16.

But it wasn’t all good news for the firm as tax hikes hit overall profitability, taking it down from $882.2 million in last year’s comparable quarter to $858.5 million. That, plus a predicted revenue decline for the current quarter ending, caused Wall Street to send the share price down 4.4%, even though revenue outlook for the full year was raised.

Digital-related services was the dominant growth theme of the quarter, with CEO Pierre Nanterme pointing to digital, cloud and security work now contributing 40% to total revenues. He said:

Digital is all about enabling our clients to unleash the power of digital technologies to create new sources of value. We continue to see very strong demand in this area and are leveraging our digital capabilities with clients in nearly every industry around the world.

We are working on a five-year digital transformation with a European aerospace company, bringing our capabilities in mobility, analytics and the Internet of Things to drive productivity improvements.

We are helping a global pharma company, improve its supply chain by leveraging our advanced analytics capability including the Accenture Insights platform, giving patients and doctors access to the diagnostics and medicine they need faster than ever.

Financial services is a prime market for digital spend, he noted:

We see double-digit growth in financial services. This is an industry, which is one of the largest. If you put together capital markets and banking would be one of the largest, the largest industry at Accenture. And of course this is an industry historically and currently investing in technology and in transformation. So, we continue to be very pleased with the opportunities offered by financial services. They have to transform.

This is an industry where historically we made the right investments. I am talking about the investment we made in insurance where we are extremely well-positioned with our software solutions. I am talking about the investments we made in credit services where we are now building a leading independent mortgage processor in the US and very pleased with the momentum we getting in Brazil where we are expanding our services.

This interest in financial services is one of the drivers behind the announcement earlier this week of the acquisition of Boston-based Beacon Consulting, which focuses on advising investment firms and will now become part of Accenture’s capital markets practice to provide what Nanterme calls “super-deep expertise”.

Cloud first

In this digital mix, cloud investment is often an entry point for Accenture, he added, citing September’s acquisition of Cloud Sherpas and the formation of a new Amazon AWS Business Group as evidence of the firm’s commitment to a “cloud first agenda”. He explained:

Cloud is increasingly becoming a starting point for clients who want to create new services faster and get access to computing capabilities in a more cost effective way. We are working with a leading US energy company to deliver a new operating model, underpinned by the Accenture cloud platform and our hybrid cloud solution. With this new as a service model, the client can leverage our cloud-based data analytics while benefiting from a flexible consumption based pricing structure.

While traditional outsourcing is clearly on the wane, Accenture still picked up six $100 million + bookings during the quarter. Nanterme is happy with the current mix of revenue streams:

The uptick on outsourcing is lower because consulting is doing extremely well and that is why we have the results we are. And it’s all our ability indeed to take advantage of any move or shift of the budget of our clients from indeed outsourcing type of work to consulting investments. This is exactly the opportunity we are taking to grow.

If you look at our rotation to digital and to the new, the part of the consulting business in this rotation is more important than the outsourcing part of it. So, consulting is back with a strong growth and we are pleased with the growth we have in outsourcing. So from my standpoint, I have zero concern.

At the end of the day, Nanterme argued, it is the broad mix of Accenture’s capabilities and offerings that enables it to compete:

Where we differentiate in the marketplace is our unique ability to combine our services to deliver what we are calling the end-to-end services, because we truly believe that more and more clients are buying an outcome more than an effort. And if you want to deliver an outcome, you need to contribute and participate to the design and planning, typically done by Accenture Strategy and Accenture Consulting, the high value services and consulting if you will. Then you move on to building solution with absolutely leading and cutting edge solutions, exactly the job of Accenture Digital and Accenture Technology for the leading platform solution or application packages.

When you have been building solution, you’re moving to Accenture Operations, the part of Accenture where we could operate on behalf of the clients, either their business process; their cloud operation or their security operation. This depth and breadth and kind of operating model is absolutely unique in the marketplace and is a great source of differentiation for Accenture.

My take

As noted before, Accenture invested early and wisely in key digital services capabilities, in areas such as analytics and security, that are serving it well as clients seek to transform the way their businesses operate, rather than just outsourcing the operation of the business as is. It’s difficult to find fault with the management decisions that have been made to date.

As more of the traditional outsourcers, particularly those in India, beef up their own digital credentials, Accenture retains a head start. How long that remains the case isn’t clear, but for now the firm is positioned extremely well for current market conditions where digital disruption is the aspirational norm.