What Is The Potential Upside To Accenture’s Outsourcing Business?

December 13th, 2017 by Trefis Team
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ACN: Accenture logo
ACN
Accenture

Accenture (NYSE:ACN) is a global leader in the outsourcing industry. However, the competition in the space has intensified, not only from firms offering lower rates but also from advancements in technology such as the advent of chatbots and Artificial Intelligence. As a result, Accenture has been fortifying its outsourcing business by adding new capabilities such as robotic process automation (RPA) to its offerings. While we currently project the company’s Outsourcing revenues will grow to $18.5 billion by 2024, the potential upside to these revenues from new business processes and supplemented RPA services is enormous. In this note, we explore the potential upside to Accenture’s stock price from the Outsourcing business.

Take a look at our interactive breakdown of Accenture’s Outsourcing business and upside potential here. We have a $125 price estimate for Accenture, which is around 15% below its current market price.

See our full analysis for Accenture

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New Capabilities Can Drive Growth In Outsourcing Business

The Outsourcing business accounts for 45% of Accenture’s total value, according to our estimates, and contributed 46% of its total revenues in fiscal 2017. Accenture’s Outsourcing business offers services across application management, infrastructure, and business processes. These services are offered across multiple verticals and industries such as banking, chemicals, energy, health, insurance, life sciences and retail.

Over the past four years, the company’s Outsourcing revenues have grown at a CAGR of 5.1% from $13.2 billion in 2013 to $16.1 billion in 2017 (fiscal year ends in August). An important driver of this growth has been the growth in new contract signings, which have grown at a relatively tepid CAGR of 1% in recent years to $17.6 billion in fiscal 2017. As a result, the book-to-bill ratio, the key metric that shows the growth in new contracts, has decreased from 1.30x to 1.1x in the period.

The primary reason for the decline in new signings has been intense competition in the outsourcing industry as well as the advent of Artificial Intelligence and chatbots, which reduces the need for employing extensive manpower at offshore centers. However, studies indicate that AI can augment outsourcing and only improve the profitability of outsourcing but also enhance the productivity of the outsourced work. Accenture has taken proactive steps to implement RPA capabilities to its Outsourcing business. Furthermore, the company has pivoted its business to new high growth areas, which includes Artificial intelligence, cloud and machine learning, for application and operations outsourcing. As a result, the company reported close to 9% y-o-y growth in new Outsourcing orders booked in FY2017. While we project new bookings to grow at a CAGR of 3%, it is possible that new bookings can grow at a CAGR of 6% to $26 billion by 2024 due to augmented outsourcing services, which will supplement legacy outsourcing services. As a result, the company’s Outsourcing revenues can grow to $25.8 billion by 2024. If this were to materialize, there would be an upside of around 15% to our $125 price estimate for Accenture’s stock.

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