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What You Need to Know About Accenture Plc's Winning the Contract

Following the hobbled launch of the Affordable Care Act this past fall, fingers pointed squarely at CGI Group (NYSE: GIB  ) , a Canadian IT vendor that beat out IBM, (NYSE: IBM  )  Computer Sciences, (NYSE: CSC  )  and Quality Software Services, or QSSI, for the health contract in 2011.

Given the high-profile stumble and all the scrutiny, it's not surprising to learn that CGI has lost the lucrative contract to run the health website to Accenture (NYSE: ACN  ) .

Accenture takes the keys
Despite its own hiccups, a comparatively successful roll-out of California's insurance exchange served as a compelling resume for Accenture, landing the company a one-year deal with the Centers for Medicare and Medicaid Services, or CMS, to prepare health for its second open enrollment this coming fall. 

The transition from CGI to Accenture should be fairly smooth. CGI still does millions of dollars of work for CMS and was -- interestingly -- a subcontractor for Accenture on the California exchange.

CGI's role in has been diminished over the past few months as responsibility for managing repairs was handed off to QSSI, which insurance giant UnitedHealth Group's (NYSE: UNH  ) OptumInsight acquired in 2012. That was the year QSSI won an $85 million contract to build a data hub supporting information exchange between parties and a tool that helps consumers register on the site.

While QSSI's work has helped the site operate better, that doesn't mean Accenture won't have its hands full in its first few months on the job. Older consumers, particularly those with pre-existing conditions, have been among the first to sign up. But a rush of younger consumers, whose needs weren't as pressing, has analysts expecting a swell of new visitors to the site over the next two months.

The industry stumbles its way to hundreds of millions in contracts
Four bidders originally competed for the health contract back in 2011. According to The Washington Post, CGI won that $94 million contract based on technical competency and cost, with little attention given to high-profile mistakes by a subsidiary, American Management Systems, which CGI acquired in 2004.

But that health contract has been dwarfed by the overall contract value CGI won from the CMS. Since CGI's selection as an umbrella provider of IT services in 2006, the company has been awarded contracts worth more than $600 million.

That suggests Accenture's opportunity may not be limited to the one year deal. Instead, that deal may prove to be a launch pad for Accenture's federal government business to win other lucrative government contracts. 

Of course, Accenture will face stiff competition for those deals, including from IBM, which provides a variety of technology services to the government. IBM was on the hot seat for a bug-ridden launch of a federal website consolidating contract awards long before CGI's debacle. But IBM has since fixed that site, and recently awarded contracts include a 10-year, $1 billion cloud hosting contract with the U.S. Department of the Interior.

Accenture also has to fend off Computer Sciences, which had sales of $3.2 billion last quarter. Like IBM, Computer Sciences has stumbled in the past, including as the lead system integrator for a U.S. Air Force initiative to build a comprehensive logistics system. Although Computer Sciences was awarded a contract worth $628 million in 2006, the USAF pulled the plug on the deal after realizing it had spent a billion dollars and would need to spend another billion to achieve just a quarter of its original planned modernization. Despite that hiccup, the U.S. Navy signed on Computer Sciences as one of 13 companies providing cyber operations work in September, and Computer Sciences notched more than $1 billion in federal government contract revenue last quarter.

Fool-worthy final thoughts
There's little question companies can earn big money from providing services to the federal government. However, Accenture's $90 million win to operate health will hardly move the needle, given the company had more than $7 billion in revenue last quarter, including $1.2 billion from its health and public service segment. That suggests that investors should view the high-profile win more as an opportunity for Accenture to open doors and win more deals over time than as a source of big earnings this year.  

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Help us keep this a respectfully Foolish area! This is a place for our readers to discuss, debate, and learn more about the Foolish investing topic you read about above. Help us keep it clean and safe. If you believe a comment is abusive or otherwise violates our Fool's Rules, please report it via the Report this Comment Report this Comment icon found on every comment.

  • Report this Comment On January 16, 2014, at 10:29 AM, dgalbers wrote:

    Computer Science Corporation (CSC) has a contract with the Center for Medicare and Medicaid (CMS). The contract specifies that CMS can give an "award fee" for contract performance.

    Usually the award fees are 90 percent or higher of what the company is eligible to receive.

    CSC received an award fee of 62 percent. That's how bad their performance was. Of course, low level staff were reassigned. However, the incompetent senior management remains in place to this very day.

    That is why CMS did NOT award to CSC, assuming CSC management was smart enough not to even try getting the contracty.

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Todd Campbell

Todd has been helping buy side portfolio managers as an independent researcher for over a decade. In 2003, Todd founded E.B. Capital Markets, LLC, a research firm providing action oriented ideas to professional investors. Todd has provided insight to a variety of publications, including SmartMoney, Barron's, and CNN/fn.

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