Achieving High Performance in the Postal Industry Accenture Research and Insights 2009 Contents

Introduction 1

Executive summary 2

Organizations analyzed 3

The changing postal landscape 4

Market focus and position 6

Distinctive capabilities 8

Research methodology 9

Performance anatomy 10

The perfect storm 12

Focus on the future 12

Checklist for high performance 13

x Introduction

Market fluctuations have always influenced the postal industry, and the effects of the current global economic volatility are certainly no exception. In fact, the challenges faced today by organizations in the postal industry constitute a “perfect storm” that strikes across every major source of revenue.

Through global research and analysis, Accenture has identified the characteristics of high performance that allow organizations in the postal and express sectors to achieve better results than their peers. Unsurprisingly, the characteristics and the strategies applied by these high-performance businesses have been factors in driving profitable growth in the past and are ideal to position postal agencies for competitive edge and high performance in the future.

Following on from the Accenture conducted using Accenture’s stringent The research includes the original study undertaken in 2006,1 Accenture methodology (see page 9), is further 16 postal organizations and logistics performed a further strategic enhanced by Accenture’s own high- companies evaluated in the report assessment of the postal industry at level industry capability in helping Achieving High Performance in the the end of 2008 to determine the clients achieve high performance. Postal Industry and seven new progress, challenges and future organizations (see page 3 for a list direction facing its players. By The scope of the research is global of the organizations involved). refreshing and expanding our and, in line with the 2006 study, assessment of both the number of includes both traditional postal The research and analysis outlined postal agencies and their geographies, organizations and global express in this report evaluates what it takes Accenture aims to provide a players. The rationale behind this to achieve high performance in the perspective on the overall selection is that the traditional postal industry. performance of the postal industry boundaries between the two are over the four-year period between blurring. A significant number of 2003 and 2007. Due to the absence universal service providers offer of reporting for 2008 at the time the express and logistics services that research was conducted, this period compete against players such as was not included in the findings. FedEx and UPS. Conversely, global express players (also known as Our research approach focuses on integrators) are now offering mail- understanding industry trends and the related services. It is Accenture’s view financials of each postal player. In that all players, universal service doing so, we assess the relative and providers and integrators, are absolute performance of postal servicing the same demand: to agencies and determine the transport information and goods strategies, operating models or from point A to point B. attributes that allow players to 1Achieving High Performance in the Postal Industry, outperform their peers. This research, An Accenture Research Project, Accenture, 2006.

1 Executive summary

In 2009, Accenture refreshed research undertaken some three years previously to assess the industry trends and the financials of global postal and express players or integrators. In addition to the 16 companies originally researched, Accenture added an evaluation of a further seven countries.

Our research in 2006 indicated that • Diversifying revenue sources through high performers were those geographic expansion, new products organizations that had strategic and services. clarity, a solid focus on cost • Leveraging the human capital of management and a strong talent the organization and partnering equation. What was unusual about with labor. these results is that strategic choice • A strong focus on innovation. had little effect on performance—it did • Focusing on the customer and not matter what strategy was chosen, leveraging key customer attributes rather a clear, consistent strategy was such as reliability. the critical factor. In addition, we • Use of technology to deliver found little capability distinction services, manage the business and among the operators. We saw this interact with customers. finding as characteristic of a relatively • Investing in “the network,” whether uncompetitive market and predicted this is a physical, telecommunications that future performance would be far or retail network. more dependent on strategic choice and capabilities. Perhaps surprisingly, value creation has not come from traditional Our latest research indicates that cost-cutting measures or a focus on the factors driving high performance operational excellence unless the have changed significantly and that attainment of these factors has been strategic choice and capabilities are driven by a strategy to capture much more critical to performance. customer demands such as the need In summary, high performance in the for greater reliability or visibility. postal industry is being driven by:

2 Organizations analyzed * New to 2009 study.

North America Europe Rest of World Canada Post Corporation * Ceska (Czech Republic) Australia Post FedEx * (Spain) * Correios Brasileiros (Brazil) United States Postal Service (USPS) * De Post- (Belgium) Japan Post UPS World Net (Germany) New Zealand Post Itella (Finland) Singapore Post Le Groupe La Poste (France) * South Africa Post Office * () * (Italy) () Posten Sverige () (United Kingdom) TNT (Netherlands)

As our research has shown across Figure 1. Building blocks of high performance. multiple industries, achieving a balance between the three building blocks identified by Accenture as essential for high-performance business—market focus and position; distinctive capabilities and performance anatomy—is a critical factor. Indeed, while strength in one dimension is good, strength across all dimensions is the strongest indicator of high performance (Figure 1).

This report looks in detail at the research findings and identifies how some organizations within the postal industry are achieving high performance.

3 The changing postal landscape

Perhaps unsurprisingly, the postal landscape has changed considerably since 2006 when Accenture conducted the first study of high performance in the postal industry. Even prior to the current period of global economic decline, the leading players have jostled for position in response to changing market forces and industry demands (Figure 2).

Figure 2. The changing postal landscape.

Changes in the landscape Postal implications

Increased liberalization • Fewer restrictions and greater competition providing challenges to postal entities not used to new operating model

New entrants in some countries/regions • Increased competition leading to skimming, loss of client relationship, change in product mix and lower revenues

Noticeable shift in mail volumes and mail mix • Mail volume stagnation and decline in many markets • Shifts in mail mix leading to lower value-added products • Mail mix more susceptible to economic and seasonal swings

Companies raising the bar mean higher customer expectations • Customers expecting better overall customer experience means new cross-functional and cross-channel challenges

Costs rising faster than revenue • Expected and unexpected rise in costs leading to questions on viability of current postal pricing and revenue model

Increased penetration of alternative media (broadband, mobile) • Threat to direct mail uncertain • Additional opportunities to provide value-added services

Further evolution of technology • Greater fragmentation of communication channels, particularly with newer generations • Competition from online communication and marketing

Generational shift in users (Gen X, Gen Y, millennials) • Uncertainty as to attractiveness of postal products and services • Opportunities for innovation to reach new generation.

4 Figure 3. Changes in operating margin.

1 13 Mail 9

2 10 Parcel/Express 9

3 11 Logistics 11

4 3 Retail/Financial Services/Other 15

2003 average gross margin in percentage by activity/business unit

2007 average gross margin in percentage by activity/business unit

Note: Available data was used to calculate average for the years 2003 and 2007. Excludes pure integrators such as FedEx and UPS. 1. Mail includes Australia Post, Canada Post, DPWN, Le Groupe La Poste, Poste Italiane, TNT, Posten Norge (Norway), New Zealand Post, Singapore Post, Posten Sverige (Sweden) and Royal Mail; 2. Parcel/Express includes Australia Post, Canada Post, DPWN, Le Groupe La Poste, TNT and Singapore Post; 3. Logistics includes Australia Post, DPWN, Posten Norge (Norway) and Singapore Post; 4. Retail/Financial Services/Others includes Australia Post, Le Groupe La Poste, New Zealand Post and Singapore Post.

Source: Accenture analysis from company annual reports as listed on page 3.

In assessing the impact of recent postal organizations have managed an ongoing volatility in commodity changes on mail volumes, revenue and to grow revenue at respectable rates. prices, and postal organizations will income, our research found: By far the simplest and preferred need to accommodate such changes method for enhancing revenue is rate in their future plans. Mail volumes are shifting increases; but raising rates has a and lagging behind gross negative impact on volume and Profitability is declining for domestic product. impacts the competitiveness of all the mail business. With a few exceptions, consolidated forms of mail, especially advertising Due to the various elements mail volumes have not been keeping mail, versus alternatives. Mail revenue mentioned above, postal organizations up with economic growth and, in continues to decline as a percentage have not been able to translate some situations, are not aligned with of total revenue for nearly all postal revenue growth into net income population growth. Looking at USPS organizations. growth. Meanwhile, gross operating as representative of a mature market, margin on mail has continued to volumes have declined in all segments Costs are outpacing revenues deteriorate over the last four years for except business-to-consumer in many organizations. most postal organizations from our (consisting primarily of transactional All postal organizations or integrators sample analysis. mail and advertising mail). So far, are focused on cost reduction and business-to-consumer sales have been improved productivity. In mature In summary, postal organizations have boosted by the strong growth of markets, where employee spread2 is a harder time extracting a profit from advertising or direct mail as an low, increased productivity is crucial their core business and any attempt effective marketing channel. But it to keep services affordable. The to find new sources of revenues does should be noted that advertising mail industry also faces a gradual yet not represent value for shareholders is highly elastic and subject to greater constant increase in commodity (Figure 3). fluctuations. prices; in many cases, due to regulations, postal organizations were Revenue from mail is mainly unable to mitigate this risk through sustained by price increases. price increases or surcharges. 2 Revenue per employee less operating costs per Despite low-volume growth, most Accenture believes the market will see employee.

5 Market focus and position

As predicted in earlier Accenture research, strategic choice has emerged as a critical determinant of high performance. A strategy of revenue diversification, away from the traditional mail product, has emerged as a clear winner. For the purposes of our research, we have categorized postal organizations into four main groups: the global players, the regional diversifiers, the service providers and the traditionalists.

Clearly, many of the organizations evaluated in the research could be found in more than one strategy category, and these strategies are created in part by regulatory restrictions. However, generally speaking, the strategy category most attributable to the postal organizations and integrators is a reflection of the varying degrees of ambition, direction and focus expressed by the organization’s leadership.

6 Figure 4. Four strategic categories.

Strategy Global players Regional diversifiers Service providers Traditionalists

Criteria At least 25% of At least 12.5% of Dominant strategy Strategic approach revenue outside revenue outside of diversification primarily focused on domestic market their domestic through convenience improving the in 2007. market in 2007. and proximity. efficiency of mail.

Revenue came Revenue from Services beyond National focus. from more than adjacent countries mail, shipping, one continent or or the same banking and trade bloc. continent. stationery.

Clear strategy Innovative solutions of international across channels. growth.

Who’s who FedEx, TNT Itella (Finland), Australia Post, La Poste (Belgium), (Netherlands), Posten Norge Correios Brasileiros Canada Post, DPWN, UPS. (Norway), (Brazil), Ceska Posta Posten Sverige New Zealand Post, (Czech Republic), (Sweden), Poste Italiane, Correos (Spain), Le Groupe La Poste Singapore Post. Post Danmark, (France). Japan Post, Magyar Posta (Hungary), Royal Mail (UK), South Africa, USPS.

Our research finds a significant organizations have experimented with the traditional business model, but performance gap between hybrid mail; however, these efforts still evolving and innovating the products traditionalists and all other players. remain experiments and posts have and services to help confirm Traditionalists have struggled on all yet to drive a significant portion of relevance. Such topics are explored in measures with weak revenue growth revenues from these initiatives. more detail in other Accenture points and negative capital spreads. For of view.3 whatever reason, either regulatory or While there is much discussion in the self-imposed conservatism, these industry on this point, no post is postal organizations have focused drawing significant revenue from primarily on improving the efficiency digital innovation. Is this the reality of their domestic operations and have of the market or are the postal underperformed when compared with organizations missing a critical their peer group in almost every opportunity? From one aspect, the category. Global players have had the argument would be that the industry strongest performance across all has survived despite a lack of focus on measures. Regional diversifiers have the digital space. But perhaps the full strong performance on revenue implications of the digital world have measures and the service providers not yet manifested themselves. have strong performance in return on Accenture believes that a combination capital and employee spread (Figure 4). of factors is reaching the tipping point that demands postal organizations The research findings were surprising address the digital space. Factors such as much for the elements that were as demographic shifts, evolution of not evident as those that were evident. digital marketing and sustainability We did not find postal organizations are eroding the traditional postal with game-changing strategies that business model and postal leverage the trend of convergence of organizations must adapt. Adapting 3 See “About the authors” at the end of this report communication. Some postal does not in any way mean discarding for further details.

7 Distinctive capabilities

In our 2006 research4 we found very little distinction in capabilities amongst the postal players. It was difficult to identify areas where organizations clearly had a capability that proved an advantage. Our latest research indicates that this is changing as competition heats up.

In assessing customer-oriented High-performance businesses know Postal organizations that capabilities we found: their customers well. They have the achieve high performance capabilities, both in terms of talent focus on the customer Postal organizations that and technology, to analyze and experience as a key achieve high performance understand met and unmet customer differentiator and have cross- have the capabilities to needs. Without this insight, postal channel strategies to help analyze, understand and meet organizations will be hard pressed to facilitate consistency. customer needs. develop solid growth platforms and generate shareholder value through The customer experience is defined Seen in many industries for some customer satisfaction. Indeed, as the as the sum of all experiences that time as a fundamental strategic product portfolio of postal a customer undergoes throughout requirement, there are postal organizations continues to evolve into the customer life cycle—from the organizations that do not effectively a marketing channel, this lack of discovery of services to the analyze, or collect, transactional customer-centric analytics becomes termination of services. The customer information from their customer base. an even greater competitive experience assesses attributes such This failure to derive or apply weakness. as access, convenience, products, analytical insight may be, in part, due services, price and relationships. In to the historic complacency of postal Both UPS and FedEx have strong the mailing and shipping business, organizations, often culturally competence in both market analysis from a customer experience embedded over many hundreds of and customer analysis. The former perspective, when an exception years, which did not require them to looks at the market holistically, occurs, this causes significant have a customer-facing capability. reviewing trends that could affect customer issues and reduces brand As a result, the postal industry tends customers in the short- and long- loyalty. Understanding and addressing to be far less mature in this regard term and also assesses the these customer “pain points” is and while the majority of postal competitive landscape. The latter critical to helping to increase organizations have defined a series of is focused on increasing share of customer retention and revenue customer-facing capabilities, these wallet with existing customers and streams. capabilities tend be relatively basic. improving customer loyalty.

8 Since 2002, FedEx’s strategy at the to widen the gap between the corporate level has been to use the strongest and weakest within the customer experience as a key postal industry. competitive differentiator, and this approach has grown into a global Poste Italiane has decided to focus initiative that affects all employees. on the Italian citizen as a means to FedEx has consistently appeared at the generate growth. It sees itself as top of rankings from a customer being a “one-stop-shop” for the experience and customer satisfaction Italian citizen and has embedded perspective. FedEx has done a this strategy into each decision. commendable job in identifying key Poste Italiane leverages its retail customer pain points and addressing network to offer banking, insurance them from a cross-functional and and, more recently, mobile value- cross-channel perspective to improve added services to citizens. Core to loyalty and reduce customer churn. this strategy is the use of SAP FedEx, through superior access and Customer Relationship Management ease of use, has been able to to market, service and sell this broad systematically charge a premium for product offering. These customer services in a highly competitive relationship management capabilities industry, globally. allow Poste Italiane to gain insight into their customer behaviors and What is more, the close connection buying patterns. By any measure, between customer centricity and Poste Italiane’s customer relationship product innovation is clear. A postal management capability is advanced. organization’s ability to innovate will In terms of results, Poste Italiane has be stifled without a deep understanding the second-highest five-year growth 4Achieving High Performance in the Postal Industry, of its customers and will further serve rate of our sample. An Accenture Research Project, Accenture, 2006.

Research • Longevity (continued value creation gathering methodologies as well over industry life cycles). as accounting practices across methodology • Positioning for the future (higher organizations and countries. future-value growth). • Financial analysis was undertaken High-performance businesses • Peer competitiveness (a comparative in local currency to minimize any outperform their industry peers over score for each postal provider). influence from exchange rates. the long term: over economic cycles, • Cross-currency comparisons used over industry cycles, over generations Accenture research and key findings the standard rate of exchange of leadership. focused on the assessment of defined by the source. economic impacts; benefits or risks Accenture measures that performance were directional only and dependent Overall, our research has shown that with a set of widely accepted on available public information. postal organizations and integrators financial metrics. Each metric reflects Accenture undertook rigorous that have applied different strategies a different perspective on the economic and financial analysis in and have realized different results. organization’s results, and together producing this report. However, For the purposes of this research we they combine to portray a readers should consider the following categorized these strategies into four comprehensive picture of business when interpreting our key findings: main groups: the global players, the performance. Accenture’s High • Comparisons were limited by regional diversifiers, the service Performance Business methodology information and time periods providers and the traditionalists. uses data and trend analysis in six available across organizations. categories to measure an individual • Quality of data was dependent on organization’s performance. The six accuracy of sources—triangulated metrics are: wherever possible. • Profitability (greater-than-expected • The most recent information was returns from investments). used in the case of annual report • Growth (top-line revenue growth). statements. • Consistency (reliable and predictable • There are possible differences in performance). definition, scope, information

9 Performance anatomy

The results of this latest research are mostly consistent However, our latest research shows with our previous research. Again, we find that some important changes. For example, organizations that have developed an organizations with strong talent equations lead the innovation agenda are outperforming. pack. That talent equation is evidenced by clarity of Also, investments in “the network” are yielding significant performance leadership, consistency of vision and productive labor benefits—further evidence of how relationships. aligning the building blocks of high performance is critical to success. We found:

Postal organizations that achieve high performance align their investments in “the network” with their market strategies.

Our use of the term “the network” has broad implications. In some organizations the network may refer to sorting facilities, in others the information technology network and in others again, the retail network. What is powerful is the synergy between the market strategy and the infrastructure. A good example is retail networks. The retail industry has

10 historically avoided investing in retail employees. In many cases, employees Postal organizations that as the cost of the physical outlets was are “home grown” and have never been achieve high performance relatively high. Recently, a few players exposed to other industries or business develop strong innovation have bucked that trend and pursued models. Postal organizations are agendas to drive new revenue a strategy of maximizing the return in challenged in attracting new talent, streams and leverage assets. the retail networks through new which leads to an under-representation products and services. Operators who of young or new employees. High performers initiate new ideas have aligned such a strategy with that bring new revenue streams. significant, strategic investments in Furthermore, most employees have Having the capabilities and process the associated networks have yielded grown and been formed in an industry to develop these new capabilities is strong results. These investments that, until recently, was highly key to achieving revenue growth. are typically focused on not just the regulated and akin to a government New product development, a core physical facility but also the department. To make changes happen, capability in most industries and technology backbone that supports even small ones, in such a monolithic especially in sectors such as consumer the retail strategy. culture is challenging. Making goods and pharmaceuticals, is not a accelerated market-driven changes muscle that is commonly exercised by requires strong leadership and faith postal agencies; indeed, the pace and Postal organizations that from all stakeholders. rate of such launch activities is very achieve high performance slow by comparison for many postal leverage the human capital The most relevant example has been organizations, perhaps once every 10 of their employee based and the changes that have occurred at to 20 years. High performers are actively collaborate with postal organizations that have different as they “think outside the organized labor. successfully regionalized and box” as a means of finding ways to leveraged new opportunities related make the customer experience more A classic example of active partnership to liberalization. One example is enjoyable and convenient. Another is the way Poste Italiane has managed Norway Post and its launch of Bring5, perspective may be transforming a to team with organized labor to offer a company offering logistics services traditionally operational company into innovative services across its retail within the parcels, groupage and part a marketing company. network. The Mobile Virtual Network loads, as well as warehousing services. Operator service from PosteMobile, is Bring is seen as a challenger to the Accenture believes Itella has managed a an example of how to create a new incumbent postal organizations in to make this mental switch from a service that not only creates new the Nordic region. Bring consists of traditional post to an innovative and revenue streams but grows current six different business units, each a customer-driven organization. It is services and products. PostMobile relevant player in its segment: Express, one of a handful of postal links to Poste Italiane accounts from Citymail, Mail, Logistics, Frigoscandia organizations that has seriously customers’ mobile phones. Poste and Dialogue. By launching Bring, focused on bridging the gap between Italiane proactively approached and Norway Post is taking charge of its the physical and information worlds. involved organized labor in defining own destiny, making forward-looking, Itella’s organizational structure helps the future state. There was extensive commercial decisions that affect its drive innovation through better socialization to ensure buy-in at all ability to create new demand. accountability of revenue growth. levels. Now, clerks at retail counters sell insurance and cell phones along By contrast, some postal organizations with core products and services. Such have attempted to reinvigorate demand activities have resulted in Poste through emphasizing the importance Italiane’s five-year revenue compound of declining mail categories (social annual growth rate (CAGR) resting at communication, transactional) and 16.5 percent. avoiding innovation. This backward- facing approach only serves to delay the inevitable and should not be Postal organizations that viewed as a growth platform. achieve high performance have a culture of looking forward and not backward.

Perhaps the greatest challenge for traditional postal organizations is to change the mindset of leadership and 5 http://www.norwaypost.eu/

11 In periods of economic volatility, and reducing prices, postal The perfect postal organizations need to consider organizations can take charge and how to both adapt supply with become leaders rather than followers demand and achieve a greater impact of change, particularly in markets storm from changes in their revenue that are being liberalized. breakdown. For some postal organizations, the business model is no longer sustainable, with expenses Focus on the future outpacing revenues and rate increases making them less competitive. In In such a fluctuating climate, driven addition, direct mail, a highly demand- by the need to be both flexible and elastic product, makes up a far greater creative, there is little room for a percentage of revenue, and fuels the traditionalist approach. Indeed, the decline in volume and limited time is ripe to embrace the productivity gains. If postal opportunities opening up in the organizations decide to leverage the marketplace. By addressing costs to traditional means of increasing rates be more responsive to changes in to offset losses, this could have a demand, making operational costs negative impact as a result of the shift more variable and exploring toward more price-sensitive products, opportunities for collaboration with potentially causing a downward spiral competitors, postal organizations will in volumes and revenue. This has not be able to adopt an offensive rather happened to date, but remains a than defensive strategy that will threat. What is more, as economic counter potential threats from new volatility takes a hold, postal entrants in liberalized markets. The organizations find the perfect storm is result will mean the preservation of brewing; declining volumes and limited market share and position postal additional productivity gains are organizations as viable businesses, impacting revenue and profitability. now and for the future.

Before the liberalization of postal Indeed, with a renewed focus on markets and the advancement of the customer, the introduction of e-mail and the Internet, postal new value propositions and setting organizations enjoyed prime position price according to value, postal as suppliers to consumers and organizations can begin to offset the businesses in addressing their inevitable volume decline in their communications and business needs. business and achieve a return on their With few alternatives, customers were core investments. loyal mainly because their choices were limited; postal organizations Viewed in the context of this Accenture were often complacent and spent little research, postal organizations would time and effort assessing the needs do well to heed the warning signs of their customers when determining and adapt their strategy to one where products and services. strong leadership drives change through bold revenue-generating As we have seen from our research, initiatives to achieve high performance. the days when “mail just happens” are long gone; so, too, is the time when postal organizations could simply focus on their internal operational capabilities to be effective. In the new reality, postal organizations need to consider offensive measures to help increase value creation and must focus on customers and their needs. By combining the introduction of new value propositions, decreasing risk

12 Executives in the postal industry Checklist for who hope to mirror the high performers must consider the following questions and realistically high performance assess their answers:

• Who are your customers and what are their met and unmet needs?

• Do you have a segmented view of the marketplace with a clearly articulated strategy for each segment?

• Do you know, through an unfiltered channel, if your customers are truly happy with your services?

• Do you have a strategy for your retail channel to drive increased revenue?

• How can you increase revenues without increasing the price of a stamp?

• Do you have a game plan to adjust supply with declining demand in your core business?

• How much is the share of wallet across all product categories that you are capturing from your clients?

• How much more revenue could you be generating through better pricing and bundling capabilities?

• How can you leverage partnerships and asset sharing to reduce costs and generate revenue?

13 About the Authors Brian J. Moran Andre Pharand

For further points of view around Brian Moran is the managing director Andre Pharand is a senior manager the challenges facing the postal of Accenture's postal industry group. within the Accenture Supply Chain industry or to discover more about He leads a team of more than 1,200 Management service line. He has how postal organizations can achieve postal consultants working at more extensive global experience working high performance, please contact than 15 major postal clients around with and advising senior executives the authors: the globe, helping them to achieve on a number of issues that span high performance. corporate strategy, market and competitive assessments, growth Moran has worked with leading postal platforms, customer experience, organizations on a variety of projects segmentation, operational excellence including strategy, operations, back and large transformations. Pharand's office solutions and large-scale primary areas of focus are the postal, program management. express and third-party logistics sectors as well as global trade and Moran has worked for Accenture for transportation. 20 years across a variety of roles and industries with a specialty in supply Pharand has worked at Accenture chain management. for two years and has led a number of assignments. He is based in Miami, [email protected] speaks four languages and has an MBA and a degree in electrical engineering.

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