OVUM. Douglas Hayward

Comment:

We were naturally interested to hear about what Accenture calls the 'new operating model' - the change to the power matrix that has until recently strongly favoured the vertical market groups over the service lines and the geographies.

The new matrix still has the vertical-market groups owning the primary P&L. Service lines (business consulting, systems integration, and outsourcing) and geographies both have shadow P&Ls. But Accenture is effectively transferring many of its staff - particularly junior and mid-ranking people - from the vertical market groups into the service lines. It's doing this by changing their primary reporting line from vertical group to service line, although they retain dotted line reporting into the verticals. The idea is for staff to move more freely between verticals more easily, meaning Accenture gets less stove-piped.

As the head of one of the 13 major worldwide geographies in the new operating model, Thomlinson now has P&L and revenue targets for the UK. He presides over a geography operating board including the UK heads of the vertical-market groups and the service lines, who now have dotted reporting lines to him. Thus, he has more power over resource (i.e. people) allocation within their borders than his successor. He therefore theoretically has the powers to push through his "Grow UK" programme, to match the successful "Grow America" programme (which doubled Accenture's organic growth rate in the US last year, in part by taking a more holistic view of key geographies).

We see all this as a natural swing of the pendulum back from the very heavily vertical-oriented matrix that Accenture has had during this decade, towards a more balanced matrix, with a 'thinner' vertical element and a 'thicker' service-line component. One day, the pendulum may well swing back yet again.

Will it work this time? It should do so, but Accenture's great strength is its deep domain expertise and the relationships with its customers. So it must be careful here - if its consultants are perceived as having their strong domain expertise diluted, customers won't be impressed.

This comes just at a time when customers want deeper expertise and experience, not less. So the balance is tough between flexibility and specialisation. Accenture is a tough beast that learns on its feet, so it will probably get that balance right, no doubt after teething issues.

We naturally asked Thomlinson for details of Accenture's UK revenues in FY 06 - Accenture had a tough financial year ending in August 2006. Accenture used to publish its UK revenues, but no more, and Thomlinson could only indicate that our estimates are pretty accurate. Our standing estimate, based on Accenture SEC filings, is an 18% dollar-terms drop to $2.16 billion, and a 15% sterling-terms drop to £1.2 billion.

The chief cause was the NHS outsourcing mega-deal which Accenture substantively exited in September 2006. It soaked up resources and diverted attention from more promising opportunities. Even worse, the exit agreement had Accenture reversing (writing-off) $339 million (£189 million) in previously-booked consulting revenues. Had it not had to reverse that revenue, we reckon the UK would 'only' have suffered a 5% dollar decline and a 1% Sterling decline - much better, but still shockingly poor for Accenture.

Other causes were a drought in big new deals in 2005 that created relatively little revenue pull-though from big orders during 2006, but also the fact that Accenture took its eye off the ball in some key areas, for example failing to capitalise on some key opportunities such as the revival in business-consulting demand.

The good news, Thomlinson says, is that Accenture UK is once again growing revenues and orders, both in like-for-like (excluding NHS) and absolute measures. In part that's because some big orders from last year (e.g. Unilever) are coming through, in part because Accenture can concentrate its firepower on opportunities much more rewarding than the NHS turned out to be. Financial services growth is 'very strong', and resources is also doing well. Even government, with the NHS behind it, is doing well, he says.

We often compare Accenture to the German football team - most dangerous when it's bouncing back. Accenture UK should be a much stronger competitor this year than it was in its annus horribilis of 2006.