Why Accenture Profits from a Bad Economy

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Accenture (NYSE:ACN) has proven itself to be immune to the global financial crisis. While banks and insurance firms post losses, protestors decry income inequality, job seekers struggle with high unemployment, and sluggish demand hurts retailers, the struggling economy is producing one silent, almost unnoticed winner: accountants.

Take, for example, MF Global‘s recent and increasingly infamous downfall. Within two days of the fund’s collapse, the firm’s trustee hired two consulting companies (Ernst & Young and Deloitte) to help process creditors’ claims. Deloitte is reportedly being paid $1 million per month for its part in balancing MF Global’s books.

A large institution does not need to go bankrupt to require the help of outside consultants. Often, organizations will hire consultants to avoid bankruptcy, to optimize production, to streamline operations, to cut costs, or to create new strategies for future operations. In good times and bad, consultants are in demand to help firms go forward. In volatile times, consultants’ input can seem essential as companies struggle with uncertainty.

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With greater government regulation of business operations on the horizon, the need for accountants and consultants to help firms comply with regulation will be greater than ever. Nowadays accountants are a rare and lucky group of workers profiting from government regulation and market demand at the same time.

Accenture’s Strong Performance

Recent growth at Accenture demonstrates the growing demand for accounting and consulting services in this new economy. In the fourth quarter of fiscal year 2011, the firm’s revenue increased 23 percent thanks to $8.4 billion in new bookings for the quarter alone, and $28.8 billion of new bookings for the full year. For 2011, net revenues were up 18 percent on FY2010. The firm increased its stock dividend 50 percent to 67.5 cents per share.

Accenture expects more expansion in the future. The firm expects to grow between 7 and 10 percent in 2012, which is extremely conservative considering its past year’s performance. Accenture should have no trouble matching those figures because it is extremely diversified; the firm operates on every continent except Antarctica and has both a strong presence and strong brand recognition in emerging markets, thanks partly to its golf sponsorship.

Accenture’s operations are also well diversified, providing consulting services on operations, management, technology, infrastructure, and tax issues. The company is nimble enough to jump from one operation to another; for example, as demand for consulting on green energy issues declined after the subprime mortgage crisis, the company’s tax consulting and accounting operations easily picked up the slack.

The firm’s Trefis analysis reflects the company’s operational diversity. Outsourcing, management consulting, and technology consulting each accounts for roughly a third of the company’s Trefis price of $59.28. Since technology outsourcing and business outsourcing are 18.58 and 10.1 percent of the company’s stock price respectively, it is easy to see how the firm can easily shift from one service to another in case demand slackens in one sector.

Big Four Competition

Accenture’s largest Achilles heel is that it faces stiff competition from behemoths in a highly optimized industry. Currently, the consulting firms are known collectively as the “big four,” a reference to Deloitte, Ernst & Young, PwC, and KPMG. The Big Four was once the Big Eight, until competition and scandal culled the weak.

There is no sign that this will happen to Accenture anytime soon, but it will continue to face stiff competition for future contracts as long as the Big Four dominate this sector. The company’s more immediate challenge will be winning contracts and competing with these larger and more influential firms.

From an investor’s perspective, Accenture has one unusual strength that its larger competitors does not: it is a public company. Since individuals cannot buy stock in KPMG, Deloitte, PwC, or Ernst & Young, Accenture is the only place to go to invest directly in the consulting industry.

Industry Changes

While Accenture’s outlook is bright, there is one serious European threat to the future of business consultancy as a whole. The European Commission has drafted a law that would ban firms from consulting companies they have previously audited, effectively making it impossible for auditing and consulting divisions to remain part of the same company. If the law passed, it could cause large consulting firms to split. While Accenture does not offer accounting or audit services, this could impact Accenture’s competitors meaningfully.

This article was submitted as part of our Trefis Contributors program. Join our contributor network and submit a post powered by data and interactive charts.