Why the service giant has made a strategic change
Accenture’s results are flat where the economy suggests they ought to be growing. Chris Middleton and Stuart Lauchlan explain why this is happening, and explore why the company has changed its mission statement.
This is the latest in the Strategist’s weekly series, The Decoder, which pulls strategic insight from companies’ financial results and CEOs’ public statements.
Management consultancies are often brought onboard to help clients deal with transformation – both internally, in the form of change programmes, and externally, when market transformations affect companies’ strategic thinking.
Clearly there has been a transformation in Accenture’s strategic thinking: in April 2014, Accenture’s mission statement changed from ‘Consulting, Technology, Outsourcing’ to ‘Strategy, Digital, Technology, Operations’. Why?
Some clues are visible in the service giant’s second-quarter results, which reveal the pressures within its own historic key markets: consulting and outsourcing – changes that put pressure on all large services organisations.
“Lower contract profitability, primarily due to pricing pressures and higher payroll costs and, to a lesser extent, lower margins in the early stages of a few large contracts,” is Accenture CEO Pierre Nanterme’s assessment of his firm’s performance, as it reports consulting revenue down by one per cent year on year at $3.7 billion.
Overall, Q2 net income was nearly flat: $722 million on revenues of $7.13 billion, marginally up on the same quarter’s $720 million in 2013.
Lessons and insights
As many Western economies return to growth, flat financials and reduced contract profitability would seem to be bad news for a company that ought to be benefiting from clients’ increased spending power. So why is Accenture experiencing these downward pressures?
Some answers may be found in a new report, The Future of IT Services, produced by analyst firm Gartner. In it, Gartner predicts that “torrential changes will reshape the service provider landscape over the next several years as organisations struggle to adjust to a digital future.”
The claim is based on a global survey of CIOs which found that 70 per cent believe they will drastically change their technology and sourcing strategies over the next two to three years, as technology moves towards a blend of hosted business services and away from on-premise infrastructures.
“The picture is clear for service providers as clients are struggling to keep up with change,” says Eric Rocco, managing vice president at Gartner. “They are strongly considering changing the providers they work with as part of responding to this change.
“Market share will shift to service providers that are able to help clients respond to the business and IT opportunities and challenges that are overwhelming more than half of organisations today.”
Head in the cloud
As the Strategist‘s interview with Professor Leslie Willcocks of the London School of Economics (LSE) explains in our separate report, the ‘digitally enabled organisation’ presents a strategic challenge to IT leaders, as it is more about managing business services than purchasing and maintaining technology.
The challenge for Accenture in this context is therefore one of market positioning and cost. As enterprise IT drifts inexorably towards on-demand, pay-as-you-go platforms and services in the cloud over the next decade, the traditional ‘big ticket’ IT consultancy model begins to look pricey, slow and outmoded, designed as it was for the era of on-premise systems and enterprise applications.
Rocco describes digital business as “an unstoppable and irresistible catalyst for change — change that will affect the fundamental foundations and baseline assumptions of every business”.
He says: “The digital business revolution is underpinned and enabled by the macro technology forces of cloud, social networks, analytics, mobility, and the Internet of Things [the broad range of household and other devices connected by IPv6].
“Not every business fundamental will need to change to the same degree, nor will every technology driver have a role to play in every business scenario; however, businesses that decide to ‘wait and see’ are likely to become irrelevant.”
Gartner believes that assisting clients in digital business transformation will be the driving factor in the majority of IT services opportunities, while at the same time the consumerisation of technology will reshape provider selection criteria. Put another way, organisations’ employees increasingly expect access to systems that are as easy and intuitive to use as social platforms, and many of them will prefer to access them from their own devices.
This shift within client organisations from a technology focus to a broad strategic one, coupled with services that enable operational excellence in a global market, is the reason for Accenture’s own shift in strategic focus.
Accenture’s Nanterme believes that his company is well placed for servicing organisations’ needs in this emerging world. “One of the things that truly sets Accenture apart is that we combine our capabilities across consulting, digital, technology and business process outsourcing to deliver tangible results for our clients,” he says.
On 1st January 2014, Accenture set up a dedicated global division of 23,000 people, Accenture Digital. “We’re combining all that’s related to digital marketing with Accenture Interactive, Accenture Mobility, and Accenture Analytics,” says Nanterme. “The level of demand is extremely high.”
But can such an offering really compete when Google and other suppliers offer much of this functionality for free – albeit without enterprise-scale consulting services? “I truly believe that Accenture is differentiated in the marketplace,” says Nanterme. “We are more end-to-end than anyone else in digital marketing. Our Mobility organisation is just on fire. And there is great demand for Analytics.
“And, of course, through the creation of Accenture Digital, we have the unique ability now to create synergies among these three capabilities and be even more end-to-end.”
But the digitally enabled enterprise is surely not just about marketing. Nanterme argues that the main challenge for Accenture lies in the area of application services, where he says the “business is highly competitive, and clients continue to be very mindful, thoughtful, good negotiators with procurement, and so it’s putting some very specific pressure on that part of the business.”
This is another way of saying that clients now expect a lot more for a lot less, as cloud commoditises technology and puts the focus strongly on providers’ service levels and service quality.
“When you can differentiate and provide differentiated innovative solutions, you can keep your price stable or even improve your price,” says Nanterme. “But in the market which is more about application services [and] less about innovation – even if we’re working hard on it to differentiate – there is some price pressure because the competition is intense.
“Application services is probably one of the largest IT markets in the world. So it’s a market that’s going to remain extremely competitive for long time. You have many providers, all extremely competitive, and they all want to grow. They all want to take market share – including us.”
Of course, Accenture is not just about onshore IT services; it is a major playing in the global outsourcing market – although it no longer likes to shout about it, judging by the change in its mission statement.
The negative public perception of outsourcing as being about sending domestic jobs overseas may be one of the reasons for the change in Accenture’s message, but the main catalyst is that outsourcing is now seen less as a sector in its own right and more as a normal activity of globalised markets. Indeed, outsourcing activity is increasingly heading offshore.
Nevertheless, outsourcing remains a cornerstone of Accenture’s business, and in terms of that traditional business, the company is adapting its strategic thinking to reflect new market trends. “What we’ve seen there is a structural shift, from onshore to offshore, especially in application services,” says Nanterme.
“Indian pure-plays are already very offshore-centric, if you will, but many of our more ‘classic’ competitors are accelerating their move to offshore as well. And we see [clients in] Europe moving offshore in a more robust way.
“I’m taking that as good news for Accenture. In Continental Europe – I’m thinking about Germany, France, Italy, Spain – we see offshoring picking up. So it’s good news for us, because we’ve been able to leverage our Global Delivery Network.”
There is evidence that Accenture is making the right moves in the outsourcing space – which the LSE believes is set to grow, rather than shrink, in the wake of increased cloud uptake. Accenture reports outsourcing bookings of $3.4 billion, up by four per cent year on year, largely driven by interest in business process re-engineering, says the company.
But analyst Anthony Miller of research house TechMarketView advises that Accenture should beware of getting too comfortable, given the increased competition and market specialisation coming out of Europe and India. “This only goes to reinforce our view that, despite the frenetic activity around ‘all things digital’, the mood of the market is still about saving on cost and that is something that is simply never going to change.”
The year-on-year decline in Accenture’s consultancy revenues may be evidence of that. And by changing its public face to one of a strategic helper in the digitally enabled world, the company may also be recognising that big-ticket consultancy services are becoming less relevant in a world of commoditised business services. TS
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