The Factors That Will Drive Accenture’s Outsourcing Revenue Growth

Accenture (NYSE:ACN) remains a global leader in the outsourcing industry, but competition has intensified not only from firms offering lower rates but also from advancement in technology such as the advent of chatbots and Artificial Intelligence. As a result, Accenture has been fortifying its outsourcing business by adding robotic process automation (RPA) capabilities to its offerings. In this note, we explore Accenture’s outsourcing business and what will drive its growth in the coming years.

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Accenture’s Outsourcing Revenues Will Continue To Grow

Traditionally, outsourcing and offshoring are cost reduction measures. But with the advent of Artificial Intelligence and chatbots, the need for employing extensive manpower at offshore centers has been reduced, albeit slightly at this point. As a result, traditional outsourcing revenues and signings have declined. While Accenture’s outsourcing division continues to outpace its peers, its net revenues grew at a relatively tepid CAGR of 4.7% from $13.3 billion in 2013 to $15.33 billion in 2016. Additionally, new contract signings have declined at a CAGR of 3.4% from $18.1 billion in 2013 to $16.33 billion in 2016. The book-to-bill ratio has declined from 1.36x to 1.08x over this period. The trend continued in the first nine months of 2017 as revenues grew by 6% to $11.88 billion and signings by 5% to $12.6 billion.

Studies indicate that AI can augment outsourcing that will not only improve the profitability of outsourcing but also enhance the productivity of the outsourced work. While the RPA  business process services industry is still in a fairly nascent stage, we believe that Accenture can gain a firm footing in the space, which is expected to grow to $3 billion by 2021. Accenture has taken proactive steps to implement RPA capabilities to its outsourcing business. Its analytics and AI platform, myWizard, helps clients to improve the productivity of existing employees. We believe that these initiatives will help Accenture to maintain its leadership in the outsourcing industry as it holds an edge with the superior implementation of AI engines and its pool of experienced consultants. We expect that Accenture will continue to leverage the technical know-how, complemented by RPA and AI capabilities, to bag more outsourcing contracts and keep competition at bay.

At present, we have a $125 price estimate for Accenture, which is around 15% below its current market price.

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