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Americas IT and Business Services Industry Sees Continuing Decline in Q1: ISG Index
Rhea-AI Impact
(Low)
Rhea-AI Sentiment
(Neutral)
Tags
Rhea-AI Summary
The Americas IT and Business Services Industry experienced a 3% decline in Q1, with managed services down by 8% and XaaS up by 1%. The BFSI sector accounted for over 70% of the managed services decline. Despite economic and geopolitical concerns, the market is showing signs of improvement, with a slowdown in the rate of decline compared to previous quarters. ISG forecasts a 3% growth for managed services and a 15% revenue growth for XaaS in 2024.
Positive
Managed services ACV down 8% in Q1, with two mega deals awarded
BFSI sector saw an 18% decline in ACV, driving the overall decline in managed services
XaaS ACV up 1% in Q1, breaking a four-quarter declining trend
ISG forecasts 3% growth for managed services and 15% revenue growth for XaaS in 2024
Negative
None.
Insights
Looking at the Americas IT and Business Services Industry performance in Q1 as reported, the 3% decline in the combined market is a notable yet not drastic change. The 8% drop in managed services suggests companies may be re-evaluating their long-term commitments, which could result in a shift towards more flexible, scalable solutions like cloud-based services, evidenced by the slight uptick in XaaS. It's essential to discern whether this decline is a result of cyclical industry trends or indicative of a more substantial structural shift. From a financial perspective, investors should monitor the managed services segment closely, as it appears to be the most volatile, with significant declines in key sectors like BFSI.
The decline in ACV for managed services within the BFSI sector reflects broader economic headwinds and may suggest a systemic shift towards digital transformation and cloud services. The rise in contract volume but drop in mega deals could indicate a greater distribution of smaller, possibly more agile contracts over large-scale commitments. This could represent an evolving market where clients favor a 'try and buy' approach, reflecting a preference for flexibility in the face of economic uncertainty. The growth in IT Outsourcing ACV, driven by bundled services, aligns with an industry trend towards integrated solutions that can offer more value and efficiency.
The report's highlight on the expansion of generative AI's impact on market investments is significant. As AI becomes more engrained in business operations, we may see an acceleration in the adoption of cloud computing and related services. The XaaS growth, particularly in IaaS, underscores this trend and long-term, we can expect further capital injections into this sector as companies seek to leverage AI's capabilities. It's also worth noting that while SaaS remained flat, it still represents a significant portion of the market, suggesting that software solutions continue to be a critical component of enterprise IT ecosystems.
Combined market down 3%, driven by an 8% drop in managed services; XaaS up 1%
BFSI accounts for more than 70% of managed services decline
STAMFORD, Conn.--(BUSINESS WIRE)--
Roiled by economic uncertainty, the Americas market for IT and business services was down in the first quarter, extending the region’s year-over-year decline to five straight quarters, 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 first-quarter ACV for the combined market—including both managed services and cloud-based as-a-service (XaaS)—was $12.1 billion, down 3 percent from a year ago. The rate of decline in Q1 slowed compared with the average 5.4 percent decline over the last five quarters. Versus the fourth quarter of 2023, the combined market was up 2 percent.
“The Americas continues to be impacted by economic and geopolitical concerns, extending a market downturn here that began in early 2022,” said Todd Lavieri, vice chairman and president of ISG Americas and Asia Pacific. “The widespread expansion of generative AI in the fall of 2023 also put a chill on large-scale investments as clients worked through potential strategic opportunities, while balancing those opportunities with current needs. Amid the uncertainty, enterprises remain focused on optimizing their existing investments across their IT portfolio. We saw discretionary projects being delayed and spending on those projects being stretched out in Q1.”
Lavieri said ISG expects the market for IT and business services to improve in 2024. “We are cautiously optimistic that companies will increase their spending on IT and business services later this year. Investments in cloud computing are starting to grow again, partially due to rising interest in generative AI and the data needed to train the large language models that support this powerful new technology.”
Q1 Results by Segment
The managed services segment generated first-quarter ACV of $5.1 billion, down 8 percent from the prior year and down 7 percent from the prior quarter. Contract volume rose 2 percent, to 367 contracts, the third highest quarterly volume ever for the Americas. Two mega deals (contracts with ACV of $100 million or more) were awarded in the quarter, the lowest number since the third quarter of 2022.
The ACV of both new scope (down 9 percent) and restructured contracts (down 5 percent) fell this quarter, while the number of smaller contracts (those with ACV of $30 million or less) rose 2.5 percent, bucking a downward trend in other regions.
By industry, ACV in the banking, financial services and insurance (BFSI) sector was down 18 percent, accounting for more than 70 percent of the region’s decline in overall managed services ACV this quarter. Other large industries fared better, with ACV in healthcare/pharmaceuticals and manufacturing both gaining more than 2 percent in the quarter. Other industries, such as energy and travel, transport and leisure, saw double-digit increases in ACV, although off smaller bases.
Within managed services, IT Outsourcing (ITO) ACV rose 1 percent, to $3.4 billion, driven by strong growth in bundled infrastructure and application development and maintenance (ADM) services, offset by sharp declines in areas such as data center and end user computing services. Business processing outsourcing (BPO) ACV, meanwhile, fell 22 percent, to $1.7 billion. Contact center and industry-specific services were off sharply, partially offset by growth in finance and accounting (FAO), engineering and supply chain services.
ACV for XaaS was up 1 percent, to $7.1 billion, breaking a four-quarter string of declining year-over-year results to reach an ACV total not seen since the fourth quarter of 2022. It was also the second straight quarter this segment saw sequentially improving results.
Within this segment, ACV for infrastructure-as-a-service (IaaS) was up 2 percent versus the prior year, to $4.6 billion, while software-as-a-service (SaaS) was flat, at $2.5 billion.
2024 Global Forecast
ISG is forecasting 3 percent growth for managed services, down 125 basis points from its January forecast, and maintaining its forecast of 15 percent revenue growth for XaaS in 2024.
“Looking ahead to the rest of the year, economic conditions are forecasted to be less volatile than in 2023, but challenges persist,” Lavieri said. “Clients remain focused on quality of service, innovative customer experiences, IT security and costs. Global competitiveness continues to be a challenge especially in an environment where interest rates remain elevated from the previous cycle.
“Outsourcing could see a boost as companies seek to balance cost management and service quality. GenAI, meanwhile, is poised to be a growth catalyst, with large hyperscalers expected to manage increasing workloads. The data layer, integral for training AI models, presents a prime opportunity for service providers.”
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 86 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 1Q23 Global ISG Index results were presented during a webcast on April 11. 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 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.
