Global Market for Managed IT, Business Services Remains Sluggish Amid Growing Cloud Demand: Q2 ISG Index™

Rhea-AI Summary

The global market for managed IT and business services remains sluggish, despite increasing demand for cloud services, according to the Q2 ISG Index from Information Services Group (ISG). Combined market annual contract value (ACV) rose by 7% to $24.8 billion, marking the best quarter in two years. Cloud-based XaaS services grew by 11%, while managed services saw a modest 1.2% increase. However, revenue growth for the overall industry slowed to just over 1%, and provider margins declined for the second consecutive quarter. ISG has lowered its 2024 growth forecasts, expecting only 2% growth for managed services and 14% for XaaS. The report signals slow growth due to dampened discretionary spending and ongoing cost optimization efforts by enterprises.

Positive

• Combined market ACV increased by 7% to $24.8 billion, the highest since Q2 2022.
• XaaS segment grew by 11% to $14.7 billion, showing signs of cloud demand rebound.
• IaaS ACV advanced by 15% to $10.9 billion, its best quarter since Q3 2022.
• 723 managed services contracts were awarded, the second-highest ever, up 7.4%.

Negative

• Revenue growth for the industry slowed to just over 1%, compared to 3% in the previous year.
• Provider margins declined for the second consecutive quarter, impacting hiring.
• ISG lowered its 2024 managed services growth forecast to 2%, and XaaS to 14%.
• SaaS segment ACV remained flat at $3.8 billion, down 0.2% year-over-year.

Insights

Financial Analyst

The report from ISG highlights several key trends in the global IT and business services market that deserve attention. Firstly, the combined market is up 7% to $24.8 billion, which is promising, but this growth is tempered by the fact that the rate of increase has averaged only 1.4% quarter-over-quarter for the last five quarters. This reveals a market that is expanding, but not rapidly. Such slow growth, especially in managed services which is forecasted to grow only 2% in 2024, may point to potential risks for investors looking for quick returns. However, the 14% forecasted growth for XaaS (Anything-as-a-Service) is much more encouraging, driven by strong demand for IaaS (Infrastructure-as-a-Service), which grew 15% last quarter.

Moreover, the significant 31% growth in ACV (Annual Contract Value) for the Big Three hyperscalers (AWS, Microsoft Azure and Google Cloud) indicates that substantial investments in cloud infrastructure may yield long-term benefits. Investors should note that while cloud growth is rebounding, revenue growth overall slowed to just over 1% and provider margins are under pressure. This could mean tighter profit margins for companies involved, which is a critical consideration for stock valuation.

Investors should approach this sector with a focus on companies that offer innovative cloud solutions and have sound financial health to withstand the current low-growth environment. It is also wise to look out for any potential uptick in managed services growth, which may signal improving market conditions.

Market Research Analyst

The demand for cloud services, especially IaaS, is on a rebound, signaling a shift as companies move to optimize their cloud usage. The fact that nearly half of enterprises plan to renew or expand IaaS agreements, with 40% anticipating increased consumption, underscores this trend. This indicates a strong market potential for cloud services, which investors should monitor closely. However, the managed services segment shows slower growth, with only a 1.2% increase year-over-year and modest growth in IT outsourcing. This could reflect a cautious approach by companies towards discretionary spending, likely due to economic uncertainties and a focus on cost optimization.

The 66.5% surge in data center ACV, driven by large contracts, is noteworthy. It may reflect a strategic shift towards securing robust infrastructure deals. However, the decline in business process outsourcing (BPO) ACV and the mixed performance in different industry sectors, like the 11% decline in BFSI managed services, highlight the sector's vulnerability to economic fluctuations.

Investors should keep an eye on industry-specific performance and the evolving dynamics between managed services and XaaS. While the latter appears to be the growth driver, the former's sluggishness may limit overall market expansion prospects.

Tech Expert

The increasing ACV for IaaS and the stable growth of XaaS reflect a broader industry trend towards leveraging cloud technologies for scalable and flexible infrastructure solutions. The impressive 31% growth combined ACV for AWS, Microsoft Azure and Google Cloud signifies these platforms' dominance and their vital role in modern IT strategies. Companies are likely focusing on cloud optimization to streamline costs and improve efficiencies, which could explain the strong rebound in demand.

SaaS's stagnant growth, attributed to cost-saving measures and technical debt, is concerning. Technical debt refers to the implied cost of additional rework caused by choosing an easy, limited solution now instead of a better approach that might take longer. Enterprises trimming SaaS seats indicate a trend towards maximizing value from existing investments rather than expanding rapidly. This presents a challenge for SaaS providers who must demonstrate enhanced value propositions to justify renewals and expansions.

Investors should watch for how these cloud providers innovate and offer value-added services to maintain growth momentum. The rebound in cloud demand could signal opportunities for companies that can navigate cost optimization while enhancing service delivery.

Combined market ACV up 7%, to $24.8 billion, best quarter in two years

Market driven by cloud XaaS, up 11%, with managed services up only slightly

ISG sees slow growth environment continuing; lowers 2024 managed services growth forecast to 2%, XaaS forecast to 14%

STAMFORD, Conn.--(BUSINESS WIRE)-- The global market for managed IT and business services remains sluggish, even as demand for cloud-based services continues to rebound, according to the latest state-of-the industry report from Information Services Group (ISG) (Nasdaq: III), a leading global technology research and advisory firm.

Data from the global ISG Index™, which measures commercial outsourcing contracts with annual contract value (ACV) of $5 million or more, show second-quarter ACV for the combined global market (both managed services and cloud-based as-a-service) was up 7 percent versus the prior year, to $24.8 billion, its highest level since the second quarter of 2022. Although it was the fifth consecutive quarter the global combined market has risen sequentially, the rate of increase has averaged only 1.4 percent quarter over quarter during that span.

“The IT and business services industry continues to be in a low-single-digit growth environment as discretionary spending remains under pressure,” said Steve Hall, president and chief AI officer of ISG. “Revenue growth for the industry slowed in the second quarter to just over 1 percent, compared with just over 3 percent growth in the second quarter last year. Provider margins are also under pressure and margin growth declined for the second quarter in a row, resulting in slower hiring as topline growth stalls.”

Second-Quarter Results by Segment

The as-a-service (XaaS) segment climbed 11 percent versus the prior year, to $14.7 billion, the second straight quarter XaaS turned in year-over-year growth of 11 percent. This latest growth streak comes after five straight quarters of year-over-year declines, as cloud demand appears to be on the rebound.

Within the XaaS segment, infrastructure-as-a-service (IaaS) ACV advanced 15 percent versus the prior year, to $10.9 billion, its best quarter since the third quarter of 2022. The Big Three hyperscalers (AWS, Microsoft Azure and Google Cloud), which together account for nearly 75 percent of IaaS ACV, saw their combined ACV grow 31 percent in the last quarter.

“Our buyer behavior research shows nearly half of enterprises plan to renew or expand an existing IaaS agreement in the next 12 months, and 40 percent expect to increase their IaaS consumption in that timeframe,” Hall said. “This could signal that the cloud optimization cycle we’ve been in over the last 18 months could finally be coming to an end.”

Software-as-a-service (SaaS), meanwhile, came in at $3.8 billion, essentially even with the prior year (down 0.2 percent) and off 5 percent sequentially. Hall attributed the decline to enterprises trimming SaaS “seats” as a cost-saving measure, and to technical debt.

The managed services segment produced second-quarter ACV of $10.1 billion, up 1.2 percent versus the prior year, and up 1 percent quarter over quarter. A total of 723 managed services contracts were awarded during the quarter, the second-most ever and up 7.4 percent over the prior year. Among the contracts were 10 mega-deals (contracts with ACV of $100 million or more), even with the prior year, but down 28 percent in total ACV.

Within managed services, IT outsourcing (ITO) generated ACV of $7.7 billion, up 2 percent compared with the prior year, and up 14 percent from the first quarter, one of its slowest quarters in the last two years. Applications development and maintenance (ADM) ACV declined 16 percent versus a strong prior year, while data center ACV surged 66.5 percent, to top $1 billion of ACV for the first time in the last 10 years, driven by large awards in the quarter.

Business process outsourcing (BPO) declined 1 percent, to $2.4 billion, but was off 26 percent compared with a strong first quarter, even as the number of BPO awards rose more than 12 percent year over year. This segment saw growth in industry-specific BPO and engineering, research and development (ER&D) services, offsetting declines in finance and accounting (F&A) and customer engagement services.

First-Half Results

In the first half, combined market ACV of $49.3 billion rose 6.3 percent over the prior year. Managed services, at $20.1 billion of ACV, was flat (up 0.1 percent), while XaaS, at $29.2 billion, was up 11 percent versus the prior year. There were a record 1,435 managed services contracts signed in the first half, up 3 percent from the prior year, including 14 mega-deals, down from 18 in the prior-year period due to a slow first quarter in 2024.

Within managed services, both ITO ($14.5 billion of ACV, up 0.2 percent) and BPO ($5.6 billion, down 0.3 percent) were even with the prior year, while on the cloud side, the IaaS market rose nearly 15 percent, to $21.4 billion, and the SaaS market was up 1.7 percent, to $7.7 billion.

Among industries, combined ACV in the banking, financial services and insurance (BFSI) sector was down 1 percent in the first half, with an 11 percent increase in XaaS spending not enough to offset an 11 percent decline in managed services ACV. The energy sector, meanwhile, saw its combined ACV drop 7 percent, with managed services off 19 percent and XaaS up 11 percent.

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.

“Uncertainty persists in the IT and business services market, with no clear catalyst at the moment to push discretionary spending higher,” Hall said. “Activity in the important BFSI sector remains dampened, due to the higher-for-longer interest rate environment, impacting the overall growth of the market. 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.

The 2Q24 Global ISG Index results were presented during a webcast today. 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.

View source version on businesswire.com: https://www.businesswire.com/news/home/20240711634712/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 market ACV in Q2 as reported by ISG?

The combined market ACV in Q2 was $24.8 billion, a 7% increase from the previous year.

How did the XaaS segment perform in Q2 according to the ISG Index?

The XaaS segment grew by 11% to $14.7 billion in Q2.

What is the 2024 growth forecast for managed services by ISG?

ISG has lowered its 2024 growth forecast for managed services to 2%.

How did the SaaS segment perform in Q2?

The SaaS segment ACV was flat at $3.8 billion, down 0.2% from the previous year.

What was the performance of the IaaS segment in Q2 as per ISG?

The IaaS segment ACV advanced by 15% to $10.9 billion, its best quarter since Q3 2022.