Accenture Signs Security Deal

Yesterday, the information technology outsourcing firm Accenture (NYSE: ACN  ) announced that the Department of Homeland Security has awarded it a five-year contract valued at up to $10 billion. It will be overseeing a project called US-VISIT, which is supposed to integrate immigration databases on millions of foreigners and track that information to help identify those overstaying visas and bar entrance to criminals and suspects.

While it will do little to prevent people from disappearing into the crowds or falling off the map once they are inside the country, it would build a foundation for keeping people who are likely to do so out of the country while making it easier to determine who has disappeared.

But that's neither here nor there. The important question is, what does this mean for Accenture? The natural assumption is that a $10 billion contract has to be a good thing. And that's probably, but not necessarily, true. The fact is that there isn't a big outsourcing firm out there -- IBM (NYSE: IBM  ) , Electronic Data Systems (NYSE: EDS  ) , and Computer Sciences (NYSE: CSC  ) included -- that hasn't had a big contract go bad at some point. And more often than not, they've been doing work for the government where the contracts are especially complex, the expectations are high, and the competition squeezes margins.

From an investor's perspective, there really isn't any way to analyze a contract like this and determine the odds of success. The details won't be readily available, and even if they were, the company has likely put an incredible number of man-hours into ensuring its contract will be profitable. But things go wrong -- all too frequently. In fact, the Homeland Security agency would only give a wide range for the value of the contract from $10 million to $10 billion. The actual amount would depend on government funding, policy, and performance.

The problem is that really big contracts require a firm to bet the farm. Don't get me wrong. Bring on the contracts. I'm just saying it's generally a good idea to embrace the law of large numbers and diversify across several outsourcing firms. Computer Sciences, for one, has been signing many smaller, less risky Homeland contracts recently. Don't put all your eggs in one basket.

Fool contributor Mark Mahorney doesn't own shares of any of the companies mentioned.


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