Wednesday, December 12, 2012

The "Transformation" of IT Outsourcing

I went to go hear Rod Bourgeois yesterday.  Rod follows the Computer Services and IT Consulting group for Bernstein Research, and is always worth a listen.

Much of has been made of the outsourcing of administrative and support services by corporate America. While it has its critics, outsourcing has enabled many companies to achieve and maintain record high profit margins.

In Rod's view, the trend to outsourcing is essentially over.  Any company that wanted to outsource such tasks as payroll processing has already done so.

The next wave will be "transformation". Rod believes that the benefits from simply outsourcing administrative tasks to lower cost locales have largely been realized.  Now companies are looking for ways to more efficiently integrate all the various moving parts to see if even more synergies and cost savings might be realized.

This is where companies like Accenture (ticker: ACN) come in. 

Rod has long been a fan of Accenture because its consultants can offer clients the types of services necessary to achieve the benefits of outsourcing.  While Accenture has some pretty stiff competition (e.g. IBM), Rod believes that Accenture is not only the best IT consulting group in the market but also among the most price competitive.

Accenture and other consultants are helping companies cope with four secular trends.

First, globalization of operations makes system integration more complex yet also more important.

Second, the regulatory environment in both U.S. and Europe is becoming even more rigorous.  Complying with new laws and rules is very expensive.  Corporate managements are turning to IT services to offer solutions.

Third, companies are deploying some of their vast cash hoards in mergers and acquisitions activity.  Integrating different systems quickly and efficiently can be crucial to the success of any M&A activity.

And, fourth, the move toward "cloud" computing is creating both opportunities and challenges.  Rod noted that most transactions still are mainframe based, but new data is gradually being shifted to the cloud. As technology shifts to the cloud, and to a more mobile tech world, companies need to make sure that data is secure yet available.

While Rod believes that Accenture will be a winner in the years ahead, he is a little more cautious about buying the stock at these levels. ACN trades at a +26% P/E premium to the S&P 500.  Historically, when ACN trades at a valuation premium, the stock tends to underperform in subsequent months.  While Rod was quick to say that history is not always the best gauge, I got the sense he would rather wait for price pullbacks rather than buy now.

Still, I found his discussion of the trends in technology most helpful.