Warren Buffett's quick-and-dirty test for a competitive moat is high returns on equity with no debt. Accenture's (NYSE:ACN) return on equity has averaged 63% over the past 10 years. That's nearly three times the average returns on equity for 63 IT Services firms tracked by NYU-Stern Professor Aswath Damodaran. This high level of return on equity results from sticky client relationships, scale and scope, intellectual property, and brand.
1. Switching costs
Accenture works with 91 of the Fortune Global 100 companies and more than three-quarters of the Fortune Global 500. These client relationships tend to be sticky. Accenture consultants work very closely with clients and learn a lot about the clients' businesses, and, over time, consultants become indispensable. Of Accenture's top 100 clients, 92 have been clients of Accenture for at least 10 years. These client relationships are also crucial as reference clients when bidding for new business.
2. Scale and scope
Accenture is one of the world's largest consulting firms, and it serves the world's largest organizations, the Global 2000. These clients operate globally and at a huge scale, and they need partners to operate at the same level. For instance, a typical systems integration project or outsourcing deal might require putting 50 or more experienced consultants on site, in addition to another 50 developers off site. Only a handful of firms have the ability to operate at this scale, which generates pricing power for those handful of firms.
Accenture has a very broad offering of services -- from up-front McKinsey-type strategy consulting to back-end outsourcing. Thus, Accenture can honestly offer clients a one-stop shop to improve their business. In Accenture-speak, it's called "transformation," which is a holistic approach to solving business problems. Very few if any other firms have Accenture's broad scope of capabilities to go from development of a business solution through to implementation, including expertise in business processes, industry issues, technology, and back-office functions.
3. Intellectual property
Accenture has multiple delivery methodologies, playbooks, offerings, and the like. This is a codification of past work, which makes it easier and quicker to deliver new, similar work. As such, Accenture consultants don't walk into a new engagement empty handed -- they will be armed with an instruction-manual. This allows the firm leverage intelligent, hard-working, junior people who tend to be inexpensive and high performers.
The Accenture brand was ranked No. 41 on Interbrand's 2013 list of the Best Global Brands. The brand conveys three distinct advantages. First, it offers downside-protection to CTOs and CIOs that hire Accenture. If an engagement goes wrong, they're not likely to take flak for hiring a no-name. If an Accenture engagement goes wrong, the CIO/CTO has the automatic out ("I hired the premier global firm; they messed up; not my fault"). Second, as a global brand, purchasing officers will seek out Accenture. As part of their job, they want to know someone at Accenture, and if a request for proposal is going out, Accenture will be included in the list. Third, and perhaps most importantly, Accenture's brand is a differentiator in the recruiting process. Junior-level hires want a brand-name on their resumes to start their careers, and senior-level hires, rain-makers that exist in small numbers, want to be selling a premier service.
Foolish bottom line
Accenture does face competition, but this combination of factors gives the company an edge that allows it to generate economic profits, even in the face of competition.
Brendan Mathews owns shares of Accenture. The Motley Fool recommends Accenture. Try any of our Foolish newsletter services free for 30 days. We Fools don't all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.