Monday, October 14, 2013

Accenture Plc (ACN): Is Cloud Friend Or Foe For Accenture

Deep industry expertise is critical today to survive in any business, especially in the IT services sector. This is a considerable advantage for Accenture Plc (NYSE: ACN), which is investing heavily in cloud and digital. Services is a good place to be in the IT-as-a-Service era and Accenture emphasizes on business services and end-to-end outsourcing.

Services companies are better positioned than hardware companies and even advantaged relative to some software-as-a-service (SaaS) providers in the IT-as-a-service sector because the future is in integration and customization work requiring vertical depth and expertise.

Accenture's consulting services represent nearly 60 percent of its revenue, providing a wide-array of offerings that include management consulting and technology consulting. The company's outsourcing services constitute more than 40 percent of revenue, consisting of technology services outsourcing (ITO) and business process outsourcing (BPO).

"Accenture's investment is around cloud and digital—the company made a good case for Accenture Interactive and its advantages in both front- and back-end capabilities and superior resources," UBS analyst Steven Milunovich wrote in a note to clients.

Investors are skeptical whether the investment in cloud might backfire for Accenture. Accenture is active in helping clients implement new approaches like SaaS and Big Data. In fact, cloud and mobility are each $1 billion businesses already.

Less upfront software-as-a-service (SaaS) implementation revenue is offset by large transformation deals, and the objectivity makes Accenture an attractive cloud broker.

"Our CIO Surveys so far find that cloud should not be negative for IT services providers. In our recent survey out Monday, we specifically asked about the ERP to SaaS shift impact on Accenture with the answer being it is neutral (20% each said would do more and less with the company, 60% said no change)," Milunovich said.

Executives made the case that the 25! -35 percent efficiency of SaaS over ERP in the initial implementation has narrowed to 15-25 percent and that there is additional transformational work around cloud required. Moreover, engineered systems such as Exadata need significant set-up and integration work.

Accenture was explicit in calling out $1.5 billion of cloud revenue—which includes more than SaaS, such as the Accenture Cloud Platform—and 3,500 people working on SaaS implementations. However, it would not enumerate its resources dedicated to more legacy apps.

The Accenture Cloud Platform is a mix of software and services, including a procurement portal that can be deployed internally or hosted in the cloud itself.

Enterprise Resource Planning (ERP) could be the bulk of Accenture's systems integration work for many years, and the trick is managing the transition to new SMAC (Social, Mobile, Data Analytics and Cloud) technologies.

The catch here is that Accenture can't take its eye off the legacy ball and turn off traditional business too fast as they likely will be the majority of revenue in five years.

The opportunity is greater demand for complex solutions to transformation problems. Accenture is one of the few players with both technology and industry expertise focused on solutions rather than point products and able to deliver successful outcomes.

As enterprises move to the cloud, the question is whether it will be public, private, or hybrid. Accenture sees the private cloud (on-premise) as the winner for now. Daugherty confirmed Accenture's view that 20 percent of workloads should make it to public cloud by 2020, similar to estimate that 13 percent of IT spending will go to public cloud by 2016.

Investors are concerned that services vendors may lose substantial legacy revenues, such as ERP and SCM integration. However, Accenture says traditional systems integration and application outsourcing will be its meat and potatoes for years to come.

Also, it has become the largest! m integra! tor and supports Workday, NetSuite, and other SaaS players. In addition, clients increasingly are looking to do broader process transformations. This trend should bode well for Accenture and its services.

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