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Also, check out: "IGS Profits, Productivity Surge," "EDS: Growth Slows, Equity Grows,"  "CSC: A Mouse That Roars?", "A Solid Quarter", "EDS Sets New Records", "Andersen: Another Super Year", "Cap Gemini: The Most Improved?"
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SERVICES

 







 Analysis of Andersen Consulting 1997 Results

Another Super Year!

Revenue Growth Exceeds 25% for 2nd Year in a Row; Outsourcing Leads

Common sense and an Eastern European proverb suggest that when two (people) fight, a third party is usually the beneficiary. Not so in the Andersen household. Even though Arthur Andersen, the auditing house, and Andersen Consulting, the IT services partnership, have been embroiled in a bitter family feud during last year, the latter global competitor has continued to grow by leaps and bounds.

Andersen's 1997 revenue rise practically matched its record 1996 surge (25.4% vs. 25.5% respectively) finishing the year at just over $6.6 billion - a virtual third-place tie with Computer Sciences Corp. (CSC) which is also expected to come in at $6.6 billion when its fiscal year ends March 31 (see Annex Bulletin 98-08, 2/19/98).

Energy industry segment recorded the fastest growth, soaring 68% last year to $435 million. It was followed by insurance (up 56%), electronics and high-tech (up 45%), automotive (up 42%), chemicals (up 37%), utilities (up 31%) and health care (up 26%). The rest of the industry sectors were either at or below the overall corporate growth rate of 25%.

Banking was the biggest industry segment at over $1.2 billion in revenues in 1997, followed by telecommunications sector at $930 million. Electronics, insurance, utilities, government and energy were all around the half a billion dollar-mark (see Table 2).

Outsourcing Surges

There was one "cross industry" activity, however, which also stood out among Andersen's business segments. It was outsourcing, or "business process management" in the company's jargon. Now at almost $1 billion in revenue, outsourcing business soared by 58% in 1997 on the heels of a 46% jump in 1996.

George Shaheen, Andersen's worldwide managing partner and CEO, said in a statement that this success came "because the firm met a market demand for a different type of outsourcing service that focuses on relationships, service and capability, as well as cost management."

In other words, Shaheen seems to be saying that Andersen's outsourcing growth was due to new value which it added to clients, not just cost reduction. And he referred to it as "a different type of outsourcing."

Really? Frankly, to us this sounds like an old tune. IBM and EDS, for example, have been saying the same thing since at least 1992 (see Annex Bulletins 92-16, 3/18/92 and 92-17, 3/19/92). And Cap Gemini did it in a series of articles in its 1991 Annual Report, which we dubbed "Joie d'Outsourcing" ("Joy of Outsourcing," - see Annex Bulletin 94-09, 2/23/94).

So, welcome to the real world of outsourcing, Mr. Shaheen. Outsourcing of IT services has long ceased to be a cost-driven facilities management trend. It's amazing that Andersen seems to have discovered it only now.

What Andersen must also be in a process of discovering is that outsourcing margins tend to be lower than those in the systems integration or consulting projects. As a result, as outsourcing is gaining prominence within Andersen's business activities, it will help LOWER the company's margins.

Nevertheless, even though Andersen's overall gross margins, which we estimate at 30%, are down from 32% in 1996, we still figure that they are the "best of breed" among the IT services companies. As are its pretax and net margins of 12% and 7.5% respectively.

Europe Fastest Growing

A European slump? You'd never know it by looking at Andersen's 1997 financial results. In fact, Europe was its best geographic segment in terms of revenue growth in local currencies. European revenues grew 31% last year (23% in U.S. dollars), followed by Americas' jump of 29%. Andersen even scored a double-digit growth in Asia, despite the financial turmoil in those markets (24% in local currencies, and 16% in U.S. dollars).

Andersen's international success has been, in part, based on its ability to assemble teams of global experts for its global clients. At the Danish mortgage bank, BRFkredit, for example, the company assembled a team of 100 professionals from Scandinavia, Britain, Ireland, France, the Netherlands, South Africa and the U.S., Shaheen pointed out. They came up with a solution which helped this client create new business functions, such as the customer service call center.

At other times, such solutions are created at Andersen's "solution centers." In 1997, Andersen opened 11 such centers, increasing its worldwide total to 41 centers.

As a result of its focus on global multinationals, three-quarters of the Fortune 100 global firms are now Andersen's clients; and 44 of the Fortune 50 most profitable companies.

Happy bargain hunting!

Bob Djurdjevic

Charts

  • Andersen: 1997 International revenue shares
  • Andersen: 1997 Revenue shares by industry
  • Andersen business trends: 1990-1997
  • Andersen gross margins: 1990-1997
  • Andersen 1997 sales productivity - by international markets
  • Andersen 1997 employment - by function

Tables

  • Andersen Worldwide Operations: 1995-1997 (Operating Profit, Field Operations, Total Employees, 1997 Financial Ratios)
  • Andersen Financial Results: 1995-1997 (Revenue by Industry   Segment, Revenue by Application Segment, Cost of Revenues, Income Before Taxes).

Also, check out "EDS Sets New Records" Annex Bulletin.

Annex Research is a well respected consulting firm serving the information needs of today's senior IT executives, for over 28 years. For more information please call 602/824-8111.


Volume XIV, No. 98-13
March 25, 1998

Editor: Bob Djurdjevic
Published by Annex Research;
e-mail: annex@djurdjevic.com

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