Global Spending on IT and Business Services Declined in Q4, ISG Index™ Finds

Rhea-AI Summary

The global IT and business services market faced challenges in Q4, primarily due to decreased demand for infrastructure-as-a-service driven by lockdowns in China. According to ISG, the total annual contract value (ACV) for Q4 reached $22.9 billion, down 7% year-over-year. Managed services saw a slight growth of 2% to $9.3 billion, while the as-a-service market experienced a notable decline of 12%. Despite these setbacks, ISG forecasts a growth rate of 17% for XaaS and 5% for managed services in 2023, citing potential improvements in the economic landscape.

Positive

• Managed services ACV rose 2% to $9.3 billion in Q4, indicating a positive trend.
• Record full-year ACV reached $94.6 billion, a 6.5% increase from 2021.
• BPO spending surged 36% to $11.3 billion, suggesting strong demand.

Negative

• Overall market ACV in Q4 fell 7% compared to the previous year, indicating a downturn.
• XaaS market ACV dropped 12%, marking the largest quarterly decline since tracking began in 2014.
• IaaS declined 14% to $9.8 billion, showing significant weakness in cloud services.

Global market negatively impacted by lower IaaS demand, fueled by China lockdowns

Managed services sees robust contracting activity, with strength in BPO

ISG forecasts 17% growth for XaaS, 5% growth for managed services in 2023

STAMFORD, Conn.--(BUSINESS WIRE)-- Global spending on IT and business services declined in the fourth quarter, with particular weakness in cloud-based infrastructure services, 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 ISG Index™, which measures commercial outsourcing contracts with annual contract value (ACV) of $5 million or more, show fourth-quarter ACV for the combined global market (both as-a-service and managed services) was $22.9 billion, down 7 percent versus the prior year. It was the lowest combined ACV in a quarter since the second quarter of 2021, when the market was beginning to emerge from a pandemic-induced slowdown.

“The global market was negatively impacted in the fourth quarter primarily by lower demand for infrastructure-as-a-service, largely the result of lockdowns in China that affected the nation’s large hyperscalers,” said Steve Hall, president of ISG. “When we normalize for the China dip, the overall combined market was flat quarter over quarter and up 1.4 percent over the prior year.”

Hall said economic headwinds are causing a shift in tech spending. “Some organizations are focusing on cost optimization and limiting discretionary spend. We still see major transformation projects in the market, but most need to be self-funded or have a stronger near-term ROI than in past years.”

Results by Segment

Fourth-quarter ACV in the managed services segment was $9.3 billion, up 2 percent versus the prior year, with 655 contracts signed in the quarter, up 14 percent from the year-ago quarter, including six mega-deals (contracts with ACV of $100 million or more). IT outsourcing (ITO) ACV was $6.4 billion, down 9 percent, while business process outsourcing (BPO) was $2.9 billion, up 37 percent.

The as-a-service (XaaS) market saw ACV of $13.6 billion, down 12 percent versus the prior year – the largest quarterly year-over-year decline for this segment since ISG began tracking it in 2014. It was only the third time XaaS saw a quarterly decline, and the second quarter in a row that demand dropped for cloud-based services. Infrastructure-as-a-service (IaaS) fell 14 percent, to $9.8 billion, while software-as-a-service (SaaS) declined 5 percent, to $3.9 billion.

Full-Year Results

Combined market ACV for the full year reached a record $94.6 billion, up 6.5 percent over 2021 and 39 percent higher than 2020.

Managed services ACV advanced 6 percent, to a record $37.0 billion, on record deal volume of 2,645 contracts, up 11 percent. Among the contracts were 25 mega-deals, the highest number of $100-million-plus agreements since 2019.

“Managed services ended the year strong, with record bookings in 2022 implying healthy revenues on a constant-currency basis in 2023,” Hall said.

ITO spending came in at $25.7 billion, down 4 percent for the year, while BPO spending rose 36 percent, to $11.3 billion, fueled by growth in industry-specific services and engineering services.

XaaS generated record full-year ACV of $57.6 billion, up 7 percent over the prior year, its lowest annual growth rate since 2015.

IaaS was up 8 percent, to $42.2 billion, but would have been up 28 percent if not for the negative impact from China’s top five hyperscalers. SaaS, meanwhile, was up 5 percent, to $15.4 billion.

2022 Forecast

ISG sees several potential positive developments for the market heading into 2023, including interest rate hikes coming to an end, inflation lessening, China reopening, supply chains beginning to normalize, and the U.S. dollar coming off recent highs.

“Enterprise spending has not been significantly cut,” Hall said, “and most foresee improvement in the macro environment by the second half of the year.”

Hall said XaaS providers are still dealing with “tech excess” and compensating for softening demand by reducing the size of their work forces after a period of significant hiring the last few years. Given this, ISG is forecasting annual ACV growth of 17 percent for the XaaS market in 2023, lower than in prior years.

As for managed services, the shift toward cost optimization “should provide favorable tailwinds for this market,” Hall said. ISG is forecasting 5 percent ACV growth for managed services in 2023.

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 81 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 4Q22 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 800 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 1,300 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/20230112005511/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 were the key findings in ISG's Q4 report for 2022 regarding the market performance of III?

ISG reported a 7% decline in Q4 total annual contract value (ACV) to $22.9 billion, with managed services growing 2% but XaaS declining 12%.

How did ISG forecast the growth for XaaS and managed services in 2023?

ISG predicts a 17% growth rate for the XaaS market and 5% growth for managed services in 2023.

What factors contributed to the decline in infrastructure-as-a-service (IaaS) demand for III in Q4 2022?

The decline in IaaS demand was primarily driven by lockdowns in China affecting major hyperscalers.

How did the managed services sector perform in Q4 2022 according to ISG?

Managed services had an ACV of $9.3 billion in Q4 2022, growing 2% year-over-year with 655 contracts signed.

What was the overall trend in the IT and business services market for 2022?

The overall market faced challenges but still achieved a record combined ACV of $94.6 billion for the full year, up 6.5% from 2021.