Cloud Spending Drives Americas’ IT and Business Services Market in Q3, ISG Index™ Shows

Rhea-AI Summary

ISG Index™ reports that IT and business services growth in the Americas was driven by cloud-based services demand in Q3, particularly fueled by interest in GenAI. The combined market ACV rose 7% to $13.2 billion, with XaaS spending climbing 29% to nearly $8.0 billion. However, managed services ACV fell 15% to $5.2 billion.

Key highlights:

• XaaS ACV exceeded $7 billion for the second straight quarter
• Managed services contract volume down 15% from prior year
• Three mega-deals signed, down from four in the prior year
• BFSI sector spending slowed, while manufacturing, retail, and travel sectors showed growth
• IaaS ACV climbed 44% to $5.6 billion, SaaS up 3% to $2.3 billion

ISG maintains its 2024 forecast of 2% growth for managed services and 14% for XaaS, with stronger growth expected in 2025.

Positive

• Combined market ACV rose 7% to $13.2 billion, highest since Q1 2022
• XaaS spending climbed 29% to nearly $8.0 billion
• IaaS ACV increased 44% to $5.6 billion
• SaaS ACV grew 3% to $2.3 billion
• Manufacturing sector ACV up 81%, retail up 35%, travel/transport/leisure up 175%
• BPO ACV increased 2% with strong growth in customer engagement and HR outsourcing

Negative

• Managed services ACV fell 15% to $5.2 billion
• Managed services contract volume down 15% from prior year
• Only three mega-deals signed, compared to four in prior year
• Mega-deals ACV down 55% from last year
• BFSI sector ACV declined 3.5%
• IT outsourcing ACV declined 19% to $3.9 billion

Insights

Market Research Analyst

The Q3 IT and business services market in the Americas shows a mixed picture. Overall ACV rose 7% to $13.2 billion, driven by strong XaaS growth of 29%. However, managed services declined 15% year-over-year.

Key insights:

• XaaS spending, fueled by GenAI interest, reached $8.0 billion
• IaaS grew significantly at 44%, while SaaS increased by 3%
• BFSI sector remains cautious, but other industries like manufacturing and retail show strong growth
• Managed services saw fewer mega-deals, with ACV down 55% in this category

The forecast for 2024 remains unchanged, with 2% growth for managed services and 14% for XaaS. Factors like recent interest rate cuts and increasing GenAI adoption suggest a more positive outlook for 2025.

Financial Analyst

ISG's Q3 report reveals important trends for investors in the IT services sector. The 7% overall growth to $13.2 billion ACV is encouraging, but the divergence between XaaS and managed services is noteworthy.

XaaS's 29% growth indicates strong cloud adoption and GenAI interest, potentially benefiting cloud providers and AI-focused companies. However, the 15% decline in managed services ACV suggests challenges for traditional IT outsourcing firms.

The BFSI sector's continued caution is a concern, given its significance in IT spending. Investors should monitor this sector closely, as its recovery could significantly impact the overall market. The projected 14% XaaS growth for 2024 presents opportunities in cloud and AI-related stocks, while the modest 2% growth forecast for managed services may pressure traditional IT service providers to adapt their offerings.

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

STAMFORD, Conn.--(BUSINESS WIRE)-- Demand for cloud-based services, fueled by interest in GenAI, drove third-quarter IT and business services growth in the Americas, even as spending on managed services continued to slump, 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 third-quarter ACV for the combined market—including both cloud-based as-a-service (XaaS) and managed services—rose 7 percent, to $13.2 billion, the region’s highest quarterly mark since a record first quarter of 2022. Since hitting bottom in the fourth quarter last year, the market has rebounded sequentially for three straight quarters, including by 8 percent in the most recent quarter.

Third-quarter growth, overall, was driven by XaaS spending, which climbed 29 percent, to nearly $8.0 billion, the second straight quarter XaaS ACV has exceeded $7 billion. Managed services ACV, meanwhile, fell 15 percent versus the prior year, to $5.2 billion, but was up 10 percent sequentially from the second quarter.

Managed services contract volume, at 328 deals, was down 15 percent from the prior year. There were three mega-deals (with ACV of at least $100 million) signed in the quarter, compared with four such deals in the prior year. The ACV of these mega-deals was down 55 percent from last year.

Managed services growth continued to be held back by slowing demand from the banking, financial services and insurance (BFSI) sector, the region’s largest industry for IT and business process outsourcing. BFSI ACV fell 3.5 percent against a soft year-ago quarter, as other industries advanced, including manufacturing (up 81 percent), retail (up 35 percent) and travel, transport and leisure (up 175 percent).

“Enterprises are continuing to spend more on cloud-based services, seeking to advance their data capabilities as they prepare to adopt generative AI at scale,” said Todd Lavieri, ISG vice chairman and president of ISG Americas and Asia Pacific. “The financial services industry was cautious with investment as they awaited clarity on the direction of interest rates. As a result, managed services demand remained modest. With an improving interest rate and economic environment, we see that changing in the coming year.”

Results by Segment

Within managed services, IT outsourcing (ITO) ACV declined 19 percent, to $3.9 billion, as growth in data center and managed network services was offset by double-digit declines in application development and maintenance (ADM) and other service lines. ACV for business process outsourcing (BPO), meanwhile, was up 2 percent, with particularly strong growth in customer engagement, HR outsourcing and industry-specific services offsetting declines in other areas.

On the cloud side, infrastructure-as-a-service (IaaS) ACV climbed 44 percent, to $5.6 billion, and software-as-a-service (SaaS) was up 3 percent, to $2.3 billion.

Nine-Month Results

The Americas’ combined market rose 5 percent year to date, to $37.4 billion, compared with an 8 percent year-over-year decline for the same period last year.

Managed services ACV declined 7 percent, to $15.0 billion, on 1,046 contracts, down 6 percent versus the prior year. Nine mega-deals were awarded during the period, compared with 13 such deals last year. Within managed services, ITO was down 8 percent, to $10.7 billion, while BPO was down 5 percent, to $4.3 billion.

XaaS spending year to date was up 15 percent, to $22.3 billion, with IaaS up 23 percent, to $15.3 billion, and SaaS down slightly (0.6 percent), at $7.0 billion.

2024 Forecast

For the full year, ISG is maintaining its forecast for 2 percent revenue growth for managed services, and 14 percent revenue growth for XaaS. The firm sees stronger growth in 2025.

“Despite a strong third quarter, we are maintaining our full-year forecast due to continued mixed signals in the market, especially softness in the BFSI sector,” said Lavieri. “Recent rate cuts by the Fed and European Central Bank are expected to boost IT spending in the coming year, and other factors, such as the growing interest in GenAI, increased server shipments and the reacceleration of hyperscaler revenues, all point to a more positive outlook in 2025.”

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 88 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, 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/20241017110711/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 total ACV for the Americas IT and business services market in Q3 2023?

The total ACV for the Americas IT and business services market in Q3 2023 was $13.2 billion, representing a 7% increase from the previous year.

How did XaaS spending perform in Q3 2023 for Information Services Group (III)?

XaaS spending for Information Services Group (III) in Q3 2023 climbed 29% to nearly $8.0 billion, marking the second straight quarter XaaS ACV has exceeded $7 billion.

What was the performance of managed services in Q3 2023 for ISG (III)?

Managed services ACV for ISG (III) in Q3 2023 fell 15% year-over-year to $5.2 billion, but showed a 10% sequential increase from Q2 2023.

How many mega-deals were signed in Q3 2023 according to the ISG Index™?

According to the ISG Index™, three mega-deals (contracts with ACV of at least $100 million) were signed in Q3 2023, compared to four such deals in the prior year.

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

ISG (III) maintains its forecast for 2024 with 2% revenue growth for managed services and 14% revenue growth for XaaS.