Americas Demand for IT, Business Services Slows in Q4, Amid Economic Concerns, ISG Index™ Finds

Rhea-AI Summary

The Information Services Group (ISG) reported a 5% decline in the combined market for IT and business services in the Americas in the fourth quarter, driven by lower demand for XaaS and a 4.25% growth forecast for managed services in 2024. The managed services segment saw a 5% growth in the fourth quarter, while XaaS revenue declined by 14.5% for the full year. Despite challenges, ISG expects a rebound in the market in 2024, with a positive impact from artificial intelligence technology.

Positive

• 5% growth in the managed services segment in the fourth quarter
• 4.25% growth forecast for managed services in 2024
• Record high full-year ACV for managed services in the Americas
• Expectations for a rebound in the market in 2024

Negative

• 5% decline in the combined market for IT and business services in the Americas in the fourth quarter
• 14.5% decline in XaaS revenue for the full year

Insights

Market Research Analyst

The report indicating a 5% decline in demand for XaaS, contrasted with a 5% growth in managed services, suggests a shift in IT spending patterns within the Americas. The decline in XaaS could be attributed to market saturation or a transition towards more traditional managed services, which tend to offer more comprehensive and customized IT solutions. This shift may signal a reassessment of cloud strategies by enterprises, possibly due to the economic pressures mentioned. The sequential decline from Q3 to Q4 further emphasizes the need for companies to adapt to changing market conditions.

Furthermore, the increase in contract restructurings indicates that businesses are seeking to renegotiate terms to align with current financial realities, a move that could have long-term implications for service providers. The report's forecast of a rebound in 2024, with expected growth in managed services and XaaS, suggests that businesses are anticipating a more stable economic environment to resume or increase IT investments. This projection can be a positive indicator for the industry, hinting at a potential recovery and a return to growth trajectories.

Financial Analyst

The reported 6% year-over-year decline in the Americas combined market ACV is a significant figure, marking the first full-year downturn in the region. From a financial perspective, this decline represents a contraction in the industry's revenue base, which could affect the valuation of companies within the sector. However, the record level of full-year ACV in managed services and the growth in ITO spending highlights areas of resilience and potential investment opportunities within the broader market.

For stakeholders, the emphasis on contract restructurings and the substantial increase in mega deal ACV suggests that while the number of new contracts may be declining, the value of individual deals is increasing. This trend could indicate a move towards larger, more strategic investments by enterprises. The forecasted growth for 2024, especially the 15% revenue growth for XaaS, could be a key factor for investors to monitor as it may drive future earnings and stock performance for companies in this space.

Technology Industry Analyst

The downturn in XaaS, particularly the 18% decrease in IaaS and the modest increase in SaaS, suggests a nuanced picture of the cloud services market. The differentiation in performance between IaaS and SaaS indicates that while infrastructure services may be experiencing a slowdown, software services are maintaining some momentum. This could be due to the ongoing need for digital transformation initiatives that require SaaS solutions.

The mention of GenAI and its expected role in driving application modernization and business transformation projects in 2024 is noteworthy. As AI technology matures, it is likely to become a key driver of IT spending, with enterprises investing in AI to gain competitive advantages. The report suggests optimism in the public cloud sector, which is expected to accelerate post-optimization phases, indicating that the current downturn may be a temporary recalibration rather than a long-term decline.

Combined market down 5%, driven by lower demand for XaaS, as managed services grows 5%

ISG forecasts 4.25% managed services growth, 15% revenue growth for XaaS globally in 2024

STAMFORD, Conn.--(BUSINESS WIRE)-- Demand for IT and business services in the Americas was down in the fourth quarter, as economic and geopolitical concerns continued to weigh on the market, 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 fourth-quarter ACV for the combined market—including both managed services and cloud-based as-a-service (XaaS)—came in at $11.8 billion, down 5 percent from a year ago, and off 4 percent sequentially from the third quarter. It was the fourth time in the last six quarters the region’s growth fell into negative territory.

“Economic and geopolitical concerns continued to impact the market, as enterprises delayed the start of new projects and stretched out spending over longer time periods,” said Todd Lavieri, vice chairman and president of ISG Americas and Asia Pacific. “Enterprises are still focused on optimizing their existing investments in the cloud and other tech spending.”

Lavieri said ISG expects the market for IT and business services to improve in 2024. “Conditions are right for a rebound. Inflation is cooling and central banks are discussing interest rate cuts. Deferred investments from 2023 have put pressure on enterprises to deliver in 2024. That should create a more positive environment for enterprise spending and capital deployment this year even as companies continue to optimize their total spending.”

Lavieri also noted the rise of artificial intelligence also will have a positive impact on technology spending in the coming years. “As AI technology matures and new use cases are identified, it will have a massive impact on the IT and business services and software industries.”

Q4 Results by Segment

Fourth-quarter ACV in the managed services segment was $5.2 billion, up 5 percent versus the prior year, but down 13 percent sequentially against a record third quarter. A total of 348 contracts were awarded in the fourth quarter, down 2 percent from the prior year. Activity was driven by contract restructurings, with ACV up 72 percent, to $2.5 billion, the highest quarterly level ever in the Americas. The ACV of new scope awards, meanwhile, slid 22 percent versus the prior year.

Within managed services, IT Outsourcing (ITO) ACV rose 23 percent, to $4.0 billion, driven by strong demand for applications and data center services, while business processing outsourcing (BPO) ACV fell 31 percent, to $1.2 billion.

ACV for XaaS was down 12 percent, to $6.5 billion, the fourth straight quarter of declining year-over-year results, although ACV was 4 percent higher than the previous quarter. ACV for infrastructure-as-a-service (IaaS) was down 18 percent versus the prior year, to $4.0 billion, while software-as-a-service (SaaS) crept up 1 percent, to $2.5 billion. Both IaaS and SaaS saw sequential quarterly gains of 4 percent and 3 percent, respectively.

Full-Year Results

For the full year, the Americas combined market generated $47.5 billion of ACV, down 6 percent over the prior year—the first time ever the combined market declined in a full year.

Managed services ACV rose 6.5 percent, to $21.3 billion, the highest level of full-year ACV ever in this region. A record 1,455 contracts were awarded, up 2 percent from the prior year, including 18 mega deals (contracts with ACV of $100 million or more), the largest number of such contracts since 2006. The ACV of the mega deals, at $2.8 billion, was 58.5 percent higher than the prior year and added an incremental $1 billion of ACV to the market.

Contract restructurings were up 22 percent, to $8.5 billion of ACV, with a record 546 contracts awarded. New-scope ACV came in at $12.7 billion, down 2 percent for the year.

Within managed services, ITO was up 21 percent, to $15.6 billion, driven by spending on applications services, while BPO slumped 20 percent, to $5.7 billion. Record-high spending in the energy, healthcare/pharma and telco/media sectors offset declines in the other large verticals, such as financial services and manufacturing.

ACV for XaaS declined 14.5 percent, to $26.2 billion, the first full-year down market ever in the Americas. IaaS was down 20 percent, to $16.5 billion, and SaaS was down 4 percent, to $9.7 billion. XaaS now represents 55 percent of combined market ACV, down from 61 percent a year ago.

2024 Global Forecast

ISG is forecasting 4.25 percent growth for managed services and 15 percent revenue growth for XaaS in 2024.

“We expect spending for application modernization and business transformation projects led by GenAI to continue at high levels in 2024. Public cloud spending should accelerate as optimizations phase out. We also expect small discretionary deals to recover, as well as Financial Services industry spending to rebound,” Lavieri said.

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 85 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.

The 4Q23 Global ISG Index results were presented during a webcast on January 18. To view a replay of the 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 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/20240123052871/en/

Press:

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 ACV for the combined market in the Americas in the fourth quarter?

The ACV for the combined market in the Americas in the fourth quarter was $11.8 billion, down 5% from a year ago.

What was the growth forecast for managed services in 2024?

ISG is forecasting a 4.25% growth for managed services in 2024.

How did the ACV for XaaS change in the fourth quarter?

The ACV for XaaS was down 12% in the fourth quarter, marking the fourth straight quarter of declining year-over-year results.

What is the percentage of XaaS in the combined market ACV?

XaaS represents 55% of the combined market ACV, down from 61% a year ago.

What is the expectation for the market in 2024?

ISG expects a rebound in the market in 2024, with a positive impact from artificial intelligence technology.