We’ve owned Accenture (ACN, Financial) for a long time; in fact, it’s been in our portfolios pretty much since I started managing money for outside clients. Accenture has recently hit all-time highs, and at 19.9 times forward earnings, isn’t what you could call cheap, so we can’t say now is a great time to buy the stock.
Instead, I thought we’d write about why the company was one of our first holdings and why we’ve continued to own it. I’ll dive into what we believe it’s the true source of Accenture’s economic moat. I hope that you can learn about the company’s unique position in corporate America from this article, expand your “circle of competence,” and perhaps add Accenture to your watch list as a stock to consider buying once there is a more attractive entry point.
Accenture’s moat
There is no denying that Accenture has a moat. The company earns extremely high returns on capital. The chart below taken from Morningstar.com shows the company rarely had returns on invested capital dip below 50% and even return on assets have been stellar.
Think about all of the people you know who work as consultants. I know many people who’ve retired from their careers to become part-time, one-man shop or consultants. Drive around your local town and look at all of the signs outside the offices of accounting firms. Many of them offer business consulting services. Small IT shops are everywhere and likewise offer technical consulting services. The business world is littered with consultants. So what allows Accenture (and others) to generate above market returns with all that competition?
I’ve frequently seen brand name, customer switching costs, broad and deep industry expertise, and global scale cited as the source of Accenture’s economic moat. All of these contribute to the company’s ability to earn high returns, but I think it’s the brand name and an interrelated aspect that is frequently overlooked. That facet is the role consulting plays in corporate America and something I glimpsed first-hand when I worked in IT several years for a Fortune 500 company (even though it may have been based in Lancaster, PA and closer to 500 then 1 on the list).
The role of consultants
Suppose you are a middle or upper level manager at a large corporation. You make a nice six-figure salary, have a great health care plan, and decent retirement plan with a good company match. Your boss tasks you as the lead on implementing some new project or process. Sure, you could take the lead role and you may have a capable team of employees under you that could handle it but why take the risk? Why not call in the consultants? If you do things yourself and take the lead role, you also take all the risk. With consultants you get someone to blame if things go wrong. If things go right with the consultants, you also get a lot of the credit. (Hey, who is the brilliant guy or gal that hired them? You!) This is something I saw play out several times on a smaller scale during my time in corporate America.
Accenture plays a key role in helping managers everywhere cover their butts. The company brand plays an important role in the “dodge the blame game” as well. Imagine hiring Jim Bob’s Consulting Company. If things went wrong, you’d catch just as much flack as if you had done everything and made all the decisions yourself. No one is going to be criticized for hiring Accenture, or McKinsey, or Bain, or Deloitte, or… you get the picture. The brand name issue severely limits the ability of new entrants to enter the market and capture significant share from the established players.
Knowledge may be part of it, but I remember reading an executive say (I really wish I could remember where I read it), “They’re people who come in and use PowerPoint to state the bleeding obvious.” To a large degree, that’s true. Most large companies are going to have knowledgeable and talented people sprinkled throughout the organization capable of meeting whatever business and technology needs the company has. Accenture’s client list includes 94 of the Fortune Global 100. I’d find it hard to believe the 100 largest companies don’t have the resources to do most tasks themselves. What Accenture really provides is someone to blame if it all goes wrong. That’s something the non-name brand consultants just can’t provide and why the oligopoly nature of the high-end consulting business is likely here to stay for the long term.
Accenture is a good watchlist candidate
Like we said in the introduction, Accenture isn’t cheap and we wouldn’t recommend buying a large position, but we do think it’s a great company and would be worthy of being put on an investor's watchlist. Fads come and go and technology changes, but corporate managers wanting to cover their butts will always be here and it’s highly unlikely Accenture’s business model will be vulnerable to disruption.
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