Wide-Moat Accenture Bridges Problems, Solutions

Accenture ACN is one of the largest IT services company in the world, providing both consulting and outsourcing capabilities. We think that Accenture’s growth will remain at a healthy and gradual pace, rather than experience a massive uptick. Still, with Accenture’s prominent reputation, which we believe to be crucial to the consulting business, and Accenture’s proven ability to bring expertise to a gamut of enterprise issues, we are confident Accenture will maintain its wide-moat business.

In both the company’s consulting and outsourcing divisions, Accenture has stressed the increasing portion of its business as “the New.” This includes the firm’s digital marketing agency, Accenture Interactive, as well as its Applied Intelligence, supply chain, cloud, and security services. In our opinion, however, there is always something new in the realm of enterprise technology to keep Accenture relevant and engaged with its most important customers.

We assign Accenture a wide-moat rating, which we believe stems from intangible assets, largely derived from Accenture’s reputation and expertise. Accenture also benefits from switching costs, in our opinion, as we think familiarity makes it hard to risk changing consultant or IT outsourcing providers.

In our view, Accenture’s wide moat stems from intangible assets associated with a stellar reputation for reliability and strategic and technological know-how, especially with large, risk-averse enterprise customers. We also believe Accenture benefits from high customer switching costs as the company’s key customers loathe to switch service providers for large or ongoing contracts. Further, we think Accenture generates industry leading returns on capital because of its scale, given that there are only so many blueprints and software partners an IT services company needs to solve enterprise problems. Plus, with one of the largest IT workforces (at half a million) and an industry leading number of diamond accounts (typically $100 million annually or more), smaller IT services companies may find it hard to keep up with the increasing innovation and know-how required to service enterprise technology.

We think intangible assets are apparent through Accenture’s consulting projects, which make up 56% of Accenture’s top line. This includes traditional consulting services spanning areas like supply chain, blockchain, talent, and overall digital transformation, but it also covers higher level strategy consulting for areas like tech, mergers and acquisitions, and security.

Accenture Demystifies Consulting Consulting is a peculiar industry in that an enterprise doesn't know exactly what it's buying. They have a problem, know they don't have the resources to solve it, and are banking on someone like Accenture to do just that. In addition, these problems often relate to large-scale projects where smaller consulting firms simply don't have the resources or wherewithal to compete. Finally, such projects often involve mission critical data across many geographies and locations, so large enterprises might be especially risk averse and outsource such projects only to best-of-breed service provides such as Accenture.

Accenture has a strong reputation, in our view, around reliability but also a treasure trove of institutionalized industry expertise and experience. Not only does Accenture have technological and strategic proficiency across a wide variety of industries (which smaller consulting shops might be able to replicate in niche markets or industries), but just as important, Accenture has the expertise to handle large scale enterprise contracts with diamond accounts that smaller competitors simply can’t match. As a result, we think Accenture’s place as the 28th best brand worldwide (according to BrandZ) is evidence of its reputation, which we consider an extremely valuable intangible asset to Accenture that enables it to gain larger client accounts that are looking for extra insurance in the high-cost world of enterprise projects.

We think that switching costs is a moat source throughout Accenture’s business and that it comes in the form of the switching cost "industry standard" argument. In other words, we think that Accenture’s clients' broad familiarity with the company is a source of resistance to switching to other consultants and outsourcing providers. We think that this trust in Accenture is reflected in account size. Accenture now has 200 Diamond clients, which is the company’s category for its largest clients. This number has steadily increased over the last several years, from 140 as of fiscal 2014. We think that client retention also reflects high switching costs out of familiarity. Accenture reports that 98 of its 100 largest clients have been clients for at least 10 years.