Americas’ Demand for IT and Business Services Rebounded in Q2, ISG Index™ Shows

Rhea-AI Summary

The Americas' IT and business services market rebounded in Q2 2023, according to the ISG Index™. Combined ACV rose 10% to $12.1 billion, marking the first double-digit increase since Q2 2022. XaaS spending drove growth, rising 15% to $7.4 billion, while managed services ACV increased 3% to $4.7 billion. The BFSI sector saw an 18% decline in spending, but other industries showed growth. Cloud-based services and AI investments are driving demand, while managed services remain sluggish due to cost optimization focus.

For H1 2023, the combined market rose 4% to $24.2 billion. ISG forecasts 2% revenue growth for managed services and 14% for XaaS in 2024, slightly lower than previous projections. The global market lacks a clear catalyst for higher discretionary spending, with enterprises focusing on cost optimization and AI growth potentially masking underlying weakness in the industry.

Positive

• Combined ACV rose 10% to $12.1 billion in Q2 2023
• XaaS spending increased 15% to $7.4 billion
• Managed services ACV grew 3% to $4.7 billion
• Four mega-deals signed in Q2, up from three in the prior year
• Strong growth in consumer packaged goods (29%), retail (46%), and media and telecommunications (250%+) sectors
• IaaS ACV climbed 24% to $5.1 billion
• BPO surged 25% with strong demand in facilities management and ER&D services

Negative

• Managed services contract volume down nearly 6% from the prior year
• BFSI sector spending fell 18%
• IT outsourcing (ITO) declined 4% to $3.4 billion
• SaaS dipped 1% to $2.3 billion
• Combined market remains 7% lower than the record high in H1 2022
• ISG lowered its 2024 forecast for managed services and XaaS growth

Insights

Market Research Analyst

The latest ISG Index™ report indicates a rebound in demand for IT and business services in the Americas, primarily driven by cloud-based 'as-a-service' (XaaS) solutions. This increase in demand is significant because it suggests a shift in how companies are allocating their IT budgets, particularly with an eye toward modernizing data capabilities to support emerging technologies like generative AI.

The report further breaks down the growth segments, with the XaaS segment rising by 15 to $7.4 billion. In contrast, managed services saw a modest increase of 3 to $4.7 billion, highlighting a continued shift away from traditional managed services towards more flexible, scalable solutions.

This trend might suggest that companies are increasingly looking for scalable and agile solutions to respond quickly to market demands, which could be an indicator of future growth in the cloud services market. However, the decline in managed services, especially within the BFSI sector, suggests that companies are still cautious about expenditures, focusing on optimizing existing investments before committing to new ones.

For retail investors, understanding this shift can provide insights into which sectors may offer growth opportunities. The increasing demand for cloud services is a positive sign for companies providing these solutions, indicating potential for stock price appreciation in this segment.

Financial Analyst

The ISG Index™ report provides a detailed financial overview, indicating a 10 percent increase in annual contract value (ACV) to $12.1 billion for IT and business services in the Americas. Though this is a positive trend, it's important to consider the broader context.

The report highlights a decline in BFSI spending by 18. Given the sector's significant contribution to IT outsourcing and business process outsourcing, this could be a red flag. BFSI is often a bellwether for the broader economy and a decline may signal caution among corporate clients in response to macroeconomic conditions.

On a more positive note, the report shows growth in other industries such as consumer packaged goods (29), retail (46) and media and telecommunications (> 250). These sectors' increased spending could offset the BFSI decline and contribute to overall market resilience.

Investors should note the increasing influence of mega-deals, with four signed this quarter compared to three in the prior year. These large contracts can significantly impact financial performance, but they also introduce variability and risk, as losing a mega-deal client can substantially affect revenue.

Short-term, the market appears cautiously optimistic. However, long-term growth might hinge on macroeconomic factors such as inflation and interest rates, which are cited as potential influencing factors. Investors should closely monitor these economic indicators and the performance of key sectors like BFSI to gauge the market's overall health.

Tech Expert

The ISG Index™ report highlights a growing demand for cloud-based services, particularly as companies aim to modernize their data capabilities in preparation for adopting generative AI. XaaS spending has shown a notable increase of 15, reaching $7.4 billion. This upward trend in XaaS is a testament to its flexibility and cost-effectiveness, which appeals to companies looking to innovate without hefty upfront investments.

The report also notes that Infrastructure-as-a-Service (IaaS) climbed by 24 to $5.1 billion. IaaS allows businesses to outsource their computing infrastructure, offering scalability and reducing the need for physical hardware. This growth indicates that companies are prioritizing scalable infrastructure solutions to support their evolving technological needs.

Interestingly, Software-as-a-Service (SaaS) experienced a slight dip of 1 to $2.3 billion. This could be due to market saturation or a shift toward hybrid models combining on-premise and cloud solutions. It's worth noting that while SaaS is still a vital part of the IT landscape, its slower growth may prompt providers to differentiate their offerings further to maintain market share.

For retail investors, the continuous rise in IaaS signifies robust growth potential in cloud infrastructure providers. However, the slight dip in SaaS suggests that while the sector remains strong, it may require more innovation to sustain its momentum.

Region’s growth paced by XaaS demand, as managed services remains sluggish

STAMFORD, Conn.--(BUSINESS WIRE)-- Demand for IT and business services in the Americas rebounded in the second quarter as the region produced its best growth in two years, even as spending on managed services remained sluggish, according to the latest state-of-the-industry report from Information Services Group (ISG) (Nasdaq: III), a leading global technology research and advisory firm.

The Americas ISG Index™, which measures commercial outsourcing contracts with annual contract value (ACV) of $5 million or more, shows second-quarter ACV for the combined market—including both cloud-based as-a-service (XaaS) and managed services—rose 10 percent, to $12.1 billion, the region’s first quarterly double-digit increase since the second quarter of 2022.

The latest quarter ends a streak of five straight quarters of year-over-year declines, after the market peaked at $13.5 billion of combined ACV in the first quarter of 2022.

Overall, second-quarter growth was driven largely by XaaS spending, which rose 15 percent, to $7.4 billion, the first time XaaS ACV exceeded $7 billion in a quarter since the fourth quarter of 2022. Managed services ACV, meanwhile, rose 3 percent, to $4.7 billion, against a soft year-ago quarter. It was only the second time in the last seven quarters that managed services ACV fell below $5 billion in a quarter.

Managed services contract volume, at 347 deals, was down nearly 6 percent from the prior year. There were four mega-deals (with ACV of at least $100 million) signed in the quarter, compared with three such deals in the prior year.

Managed services growth was held back by a sharp decline in spending by the banking, financial services and insurance (BFSI) sector, the region’s largest industry for IT and business process outsourcing. BFSI ACV fell 18 percent, as other industries advanced, including manufacturing (up 9 percent), consumer packaged goods (up 29 percent), retail (up 46 percent) and media and telecommunications (up more than 250 percent).

“Enterprises are spending again on cloud-based services, particularly as they look to modernize their data capabilities to pave the way for generative AI at scale,” said Todd Lavieri, ISG vice chairman and president of ISG Americas and Asia Pacific. “Managed services demand continues to be sluggish, as discretionary spending remains under pressure. Companies continue to focus on optimizing their existing investments and are slow to begin or accelerate new initiatives.”

The downturn in the BFSI sector this quarter is emblematic of that trend, Lavieri noted. “We continue to see banks laser-focused on cost optimization and ensuring ROI from past investments, but we also see a strong desire not to miss the boat on AI, which is driving new project-based work.”

Lavieri added: “With signs of slowing inflation in the U.S., and early indications that interest rates may be easing, we expect the Americas market to slowly rebound in the coming quarters.”

Results by Segment

Within managed services, IT outsourcing (ITO) declined 4 percent, to $3.4 billion of ACV, as growth in data center and infrastructure services was offset by a sharp decline in application development and maintenance (ADM) services. ACV for business process outsourcing (BPO), meanwhile, surged 25 percent, on strong demand for facilities management; engineering, research and development (ER&D) and industry-specific services.

On the cloud side, infrastructure-as-a-service (IaaS) ACV climbed 24 percent, to $5.1 billion, even as software-as-a-service (SaaS) dipped 1 percent, to $2.3 billion.

First-Half Results

The Americas’ combined market rose 4 percent year to date, to $24.2 billion, versus a soft first half last year. The combined market, however, remains 7 percent lower than the first half of 2022, when it reached a record high.

Managed services ACV declined 2 percent, to $9.8 billion, on 717 contracts – including six mega-deals, compared with nine such deals last year. Within managed services, ITO was down slightly (0.6 percent), to $6.8 billion, while BPO fell 6 percent, to $3.0 billion.

XaaS spending in the first half was up 8 percent, to $14.4 billion, with IaaS up 13 percent, to $9.6 billion, and SaaS essentially even (up 0.1 percent), at $4.8 billion.

2024 Forecast

For the full year, ISG is forecasting 2 percent revenue growth for managed services, down 100 basis points from its April forecast, and 14 percent revenue growth for XaaS, down from its 15 percent growth forecast in April.

“Globally, there is no clear catalyst at the moment to push discretionary spending higher,” Lavieri said. “As in the Americas, global activity in the important BFSI sector remains dampened, due to the higher-for-longer interest rate environment. Enterprises in general continue to focus on cost optimization, and AI growth, while strong, is likely masking underlying weakness in the IT and business services industry.”

About the ISG Index™

The ISG Index™ is recognized as the authoritative source for marketplace intelligence on the global technology and business services industry. For 87 consecutive quarters, it has detailed the latest industry data and trends for financial analysts, enterprise buyers, software and service providers, law firms, universities and the media. For more information about the ISG Index, or to view a replay of the 2Q24 webcast and download presentation slides, visit this webpage.

About ISG

ISG (Information Services Group) (Nasdaq: III) is a leading global technology research and advisory firm. A trusted business partner to more than 900 clients, including more than 75 of the world’s top 100 enterprises, ISG is committed to helping corporations, public sector organizations, and service and technology providers achieve operational excellence and faster growth. The firm specializes in digital transformation services, including AI and automation, cloud and data analytics; sourcing advisory; managed governance and risk services; network carrier services; strategy and operations design; change management; market intelligence and technology research and analysis. Founded in 2006, and based in Stamford, Conn., ISG employs more than 1,600 digital-ready professionals operating in more than 20 countries—a global team known for its innovative thinking, market influence, deep industry and technology expertise, and world-class research and analytical capabilities based on the industry’s most comprehensive marketplace data. For more information, visit www.isg-one.com.

View source version on businesswire.com: https://www.businesswire.com/news/home/20240716091564/en/

Press Contacts:

Will Thoretz, ISG

+1 203 517 3119

will.thoretz@isg-one.com

Julianna Sheridan, Matter Communications for ISG

+1 978-518-4520

isg@matternow.com

Source: Information Services Group, Inc.

FAQ

What was the combined ACV for IT and business services in the Americas in Q2 2023?

The combined ACV for IT and business services in the Americas in Q2 2023 was $12.1 billion, representing a 10% increase year-over-year.

How did XaaS spending perform in the Americas during Q2 2023?

XaaS spending in the Americas rose 15% to $7.4 billion in Q2 2023, exceeding $7 billion for the first time since Q4 2022.

What was the performance of managed services in the Americas for Q2 2023?

Managed services ACV in the Americas rose 3% to $4.7 billion in Q2 2023, with contract volume down nearly 6% from the prior year.

How did the BFSI sector perform in the Americas IT and business services market in Q2 2023?

The BFSI sector in the Americas experienced a sharp decline, with ACV falling 18% in Q2 2023 compared to the previous year.

What is ISG's (III) forecast for managed services and XaaS growth in 2024?

ISG (III) forecasts 2% revenue growth for managed services and 14% revenue growth for XaaS in 2024, slightly lower than previous projections.