Accenture (NYSE:ACN) is one of the biggest consulting firms in the world. In addition to consulting clients on a range of technology issues, the firm also provides its clients with management consulting services. In the wake of the recession, consulting revenues declined as companies reduced their budgets on discretionary spending. However, the recent results from consulting companies such as Accenture and Deloitte, indicate that the consulting business is on a mend. In this note, we will look at the broader trends in the management consulting industry and how Accenture can leverage its expertise to grow its revenues.
Trends In Management Consulting Industry
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The recession of 2008-09 caused many companies across different industries to reduce their consulting budgets as their profits fell. The graph from Federal Reserve Economic Data (FRED) indicates that corporate profits after tax with inventory valuation adjustment (IVA) and capital consumption adjustment (CPATAX), were the lowest in the last five years at the onset of the great recession.
As a result, the demand for management consulting services fell, in tow with revenues from these services. According to Plunkett research, revenues for many consulting companies fell by 5% to 10%.  Consulting companies reduced their employee strength to counter the decline in profits. While corporate profits grew dramatically in the ensuing period, companies were hesitant to hire consultants as business conditions remained tepid. However, buoyancy in business sentiments backed by improvement in economic indicators makes us believe that companies will require consultants for advice and guidance. We expect that consultancies will increase hiring to meet the rising demand, and both profit and revenue will improve in the coming quarters. According to us, following segments offer opportunities for growth in consulting revenues:
- Healthcare sector in the U.S.: With the passage of Affordable Care Act (or Obamacare), a significant overhaul in the U.S. healthcare system has created a demand for consulting projects, which has led to spawning of specialized companies such as hCentive.
- Increasing government regulation: Post the financial crisis, governments around the world implemented regulatory reforms such as the Dodd-Frank Act of the U.S. These sweeping government regulations have created opportunities for consulting firms, who can now help companies navigate this complex maze.
- Opportunities in Emerging Economies: While most of the consulting firms were concentrating on companies in the developed economies earlier, the focus has now shifted to companies in emerging economies, which are looking to expand or improve their production process. We expect this demand to propel revenues for consulting companies too.
- Improving Business Efficiency for Existing Clients: Consulting companies continue to milk their existing clients, who are willing to authorize new projects to improve their efficiency and reducing costs.
Accenture – A Power House For Management Consulting
Accenture is consistently ranked among the top consulting firms in the world. Accenture’s management consulting practice operates within its vertical industry groups as do all of its consulting services. The breadth of expertise offered within this go-to-market approach is considerable, encompassing: 1) Sales and Customer Service (including Customer Relationship Management); 2) Finance & Performance Management; 3) Talent & Organizational Performance; 4) Operations (including Supply Chain Management); and, 5) Risk Management.
In fact, the practice was formerly structured into these five functional platforms, though the company in recent years has adopted a team based approach within its vertical groups. Moreover, reflecting the level at which it engages its closest clients, the consulting practice leads with its great strengths in strategic advisory services. In the past few years, Accenture has stepped up hiring for its management consulting division, anticipating growth in demand for these services. We estimate that the consulting head count has grown from 46,900 in 2009 to close to 50,000 in 2013. Within this estimate we believe, the management consulting head count has gone up as well and may approach nearly 20,000.
In CY 2013, the company reported $15.3 billion in consulting revenues, which constitutes 3.7% of the expected $415 billion global consulting revenues.  However, management consulting contributed 21% to overall revenues and 40% of consulting revenues. Going ahead, we expect management consulting head count to increase to 25,000, and revenues to grow to $7.9 billion by 2020.
Currently, we have a $76.09 Trefis Price Estimate for Accenture which 8% below its current market price.