Global Spending on IT, Business Services Down in Q4 Amid Signs of a Rebound: ISG Index™

Rhea-AI Summary

Global spending on IT and business services was down slightly in the fourth quarter, with the combined market ACV reaching $23.4 billion, down 3% from the prior year. Managed services ACV remained flat, while XaaS declined 6% in Q4. Full-year managed services ACV reached a record $40.7 billion. ISG forecasts 15% growth for XaaS and 4.25% growth for managed services in 2024.

Insights

Market Research Analyst

The reported decline in the combined market Annual Contract Value (ACV) by 3% in Q4, as well as the flat performance of managed services, juxtaposed with the 6% decrease in XaaS, suggests a period of market consolidation or a response to macroeconomic conditions. The deceleration in decline rate and the forecasted growth for both managed services and XaaS in 2024 indicate a potential market correction and subsequent rebound. It's important to note that the shift in spending patterns, with a record $40.7 billion in managed services ACV and a downturn in XaaS, reflects evolving enterprise priorities, possibly towards more traditional IT outsourcing models or an adjustment after a period of rapid cloud adoption.

Investors should be aware that while the short-term decline may affect market sentiment and the stock prices of companies within the IT and business services sectors, the forecasted growth suggests optimism for recovery. The emphasis on artificial intelligence and its expected positive impact on technology spending could signal investment opportunities in AI-driven sectors. Additionally, the significant increase in restructured contracts indicates a focus on cost optimization, which may improve margins and profitability for service providers in the long term.

Financial Analyst

From a financial perspective, the 5% increase in managed services ACV to a record high, despite the overall market contraction, is a strong indicator of the resilience and potential for profitability in this segment. The contrast between the growth in IT outsourcing (ITO) and the decline in business process outsourcing (BPO) suggests a strategic shift towards digital and technology-driven solutions over traditional process-driven services. The increase in mega-deals, with their higher ACV, bodes well for large service providers and could lead to increased market concentration.

For stakeholders, the projected growth rates for 2024—4.25% for managed services and 15% for XaaS—should be considered with cautious optimism. These forecasts may influence investment decisions, as they suggest a recovery trajectory that could benefit companies in the sector. However, the accuracy of these projections is contingent upon macroeconomic stability and enterprise confidence in increasing technology investments, which are currently uncertain variables.

Technology Industry Analyst

Within the technology sector, the data points to a nuanced landscape where infrastructure-as-a-service (IaaS) and software-as-a-service (SaaS) experienced divergent trends in Q4. The 10% decline in IaaS ACV might reflect market saturation or a transition to more efficient cloud models, while the 4% rise in SaaS ACV aligns with the growing need for specialized software solutions across industries. This split underscores the importance of service diversification and the potential for SaaS providers to capture more market share.

The emphasis on GenAI and public cloud spending as drivers for 2024 growth indicates that companies investing in these areas may be well-positioned for the anticipated market upswing. The expectation for increased spending in application modernization and business transformation projects suggests that companies offering these services could experience higher demand, supporting a bullish outlook for the sector. The recovery of small discretionary deals and financial services industry spending could further catalyze growth, particularly for firms that cater to these market segments.

Combined market ACV in Q4 down 3% from prior year, to $23.4 billion

Managed services ACV flat, while XaaS declined 6 percent in Q4

Full-year managed services ACV hits record $40.7 billion

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

STAMFORD, Conn.--(BUSINESS WIRE)-- Global spending on IT and business services was down slightly in the fourth quarter amid early signs of a possible market 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 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 managed services and cloud-based as-a-service) was $23.4 billion, down 3 percent versus the prior year. Although it was the fifth straight quarter the combined market has declined year over year, the rate of decline continues to slow and the market may be poised for an upswing in 2024, ISG said.

“We’re seeing a sequential improvement over the last two quarters, indicating the market may have bottomed out and is ready to rise,” said Steve Hall, president of ISG. “Conditions are right for a turnaround. Inflation is cooling rapidly and central banks are planning interest rate cuts. That should create a more friendly environment for enterprise spending and capital deployment in 2024.”

Hall 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. AI is the next great leap forward.”

Q4 Results by Segment

Fourth-quarter ACV in the managed services segment was $10.0 billion, up less than 1 percent versus the prior year – the softest quarter for this segment in 2023. A total of 677 contracts were awarded in the quarter, down 5 percent. Although volume was down, there were eight mega-deals (contracts with ACV of $100 million or more) in the quarter, up 33 percent from the prior year, with a total ACV of $1.1 billion, up 51 percent.

Hall noted the number of smaller contracts (those between $5 million and $30 million of ACV) was down for the quarter, as was the ACV of new-scope awards. On the other hand, ACV for restructured contracts was up more than a third from the prior year. “We continue to see elevated levels of contract restructurings, as enterprises continue to focus on cost optimization,” he said.

Within managed services, IT outsourcing (ITO) ACV was up 12 percent, to $7.7 billion, while business process outsourcing (BPO) was down 25 percent, at $2.3 billion.

As-a-service (XaaS) spending dropped 6 percent in the fourth quarter, to $13.4 billion of ACV, but ISG noted the rate of decline slowed from double-digits in the previous three quarters, and ACV was up 3 percent sequentially from the third quarter. Infrastructure-as-a-service (IaaS) fell 10 percent, to $9.4 billion, while software-as-a-service (SaaS) rose 4 percent, to $4.0 billion.

Full-Year Results

Combined market ACV for the full year was a $94.3 billion, down 6 percent, its first down year since ISG added coverage of XaaS spending in 2015.

Managed services ACV advanced 5 percent, to a record $40.7 billion, including a record $15.4 billion of restructured ACV, up 19 percent. Deal volume was 2,770 contracts, down 1 percent versus the prior year. Among the contracts were 34 mega-deals, with total ACV of $5.9 billion, the highest number of such awards and ACV since 2014. Within managed services, ITO ACV climbed 13 percent, to $30.4 billion, fueled by growth in application development, while BPO slid 14 percent, to $10.3 billion.

XaaS generated $53.6 billion in ACV, down 12.5 percent – the first year it posted an annual decline. Within this segment, IaaS was down 16 percent, to $38.0 billion, while SaaS fell 3 percent, to $15.5 billion. XaaS accounted for 57 percent of combined market ACV, down from 61 percent a year ago.

2024 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,” Hall 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 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 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/20240118343006/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 combined market ACV in Q4?

The combined market ACV in Q4 was $23.4 billion, down 3% from the prior year.

What are the growth forecasts for XaaS and managed services in 2024?

ISG forecasts 15% growth for XaaS and 4.25% growth for managed services in 2024.

How did managed services ACV perform in Q4?

Managed services ACV remained flat in Q4, reaching $40.7 billion for the full year.

What was the full-year ACV for XaaS and managed services?

Full-year managed services ACV reached a record $40.7 billion, while XaaS generated $53.6 billion in ACV.

What were the results for ITO and BPO within managed services in Q4?

ITO ACV was up 12% to $7.7 billion, while BPO was down 25% at $2.3 billion.