Global Spending on IT, Business Services Up in Q1 As Cloud Demand Rebounds: ISG Index™
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Insights
The reported increase in the annual contract value (ACV) of 4% in the combined global market for IT and business services is a reflection of the industry's resilience and adaptability. The shift towards cloud-based services, particularly infrastructure-as-a-service (IaaS), which saw an 11% year-over-year growth, underscores the ongoing digital transformation across various sectors. Telecom, energy and travel industries are notable for their increased cloud spending, which aligns with global trends of digital infrastructure expansion. However, the software-as-a-service (SaaS) segment's slight decline suggests a potential saturation or shift in enterprise software investment strategies.
On the other hand, the managed services sector's slight dip, while not alarming, could indicate a cautious approach by businesses in response to economic uncertainties. The decline in IT outsourcing (ITO) and the mixed results within application development and maintenance (ADM) services highlight the complexity of the market dynamics. Companies appear to be more selective in their outsourcing choices, possibly favoring integrated solutions over standalone services.
The forecast for 2024, with XaaS expected to grow by 15% and managed services by 3%, signals a continued confidence in the scalability and flexibility of cloud services. This is particularly relevant as businesses navigate economic headwinds and look to leverage technology such as generative AI for efficiency and innovation. Service providers that can integrate AI capabilities into their offerings are likely to capture new growth opportunities.
The data presented indicates a nuanced landscape for investors in the IT and business services sectors. The growth in XaaS, especially IaaS, could be a promising indicator for companies operating within this space, as higher ACV often correlates with increased revenue potential. The market's positive response to generative AI technologies suggests that firms investing in these capabilities may have a competitive edge.
However, the slight decline in managed services ACV and the reduction in the number of mega deals may raise concerns about the sector's growth prospects. Investors should monitor these trends closely, as they could affect the market valuation and investment attractiveness of companies heavily reliant on managed services contracts.
The downward adjustment of the growth forecast for managed services could also reflect a more conservative market outlook, potentially impacting future earnings projections for companies in this segment. Conversely, the maintained growth forecast for XaaS indicates a sector with robust demand, which could attract investor interest in companies with strong cloud service portfolios.
The reported figures and forecasts within the IT and business services market can be interpreted within the broader context of the global economy. The uptick in cloud-based services investment, particularly in IaaS, may be indicative of a broader economic shift towards more scalable and cost-effective business models. This trend is likely to continue as companies seek to optimize operations amidst economic uncertainty and inflationary pressures.
The decline in managed services growth, albeit slight, could be symptomatic of a cautious business spending environment, where companies are re-evaluating their long-term commitments and seeking more flexible service arrangements. The emphasis on XaaS growth reflects an industry trend towards services that offer agility and scalability, which are important in a potentially slowing global economy.
Overall, the IT and business services market appears to be at an inflection point, with generative AI poised to play a significant role in shaping future demand. Service providers that can effectively harness this technology may find themselves well-positioned to capitalize on emerging opportunities, even in a challenging economic landscape.
Combined market ACV up
XaaS ACV up
ISG maintains
Data from the global ISG Index™, which measures commercial outsourcing contracts with annual contract value (ACV) of
“The market overall appears to be on an upswing, in line with our observations last quarter,” said Steve Hall, president and chief AI officer of ISG. “The as-a-service market drove the growth in Q1, led by a rebound in infrastructure-as-a-service, as enterprises increased cloud spending and GenAI began to increase cloud usage. Managed services, meanwhile, slightly underperformed forecasts, with a rare dip that we see as more an anomaly than a trend.”
Q1 Results by Segment
The as-a-service (XaaS) segment advanced 7 percent versus the prior year, to
Within the XaaS segment, infrastructure-as-a-service (IaaS) broke through the
Software-as-a-service (SaaS), meanwhile, was down 2 percent versus the prior year, to
The managed services segment generated first-quarter ACV of
Within managed services, IT outsourcing (ITO) declined 2 percent versus the prior year, to
Business process outsourcing (BPO), meanwhile, rose 1 percent compared with last year, to
A total of 710 managed services deals were signed in the first quarter, down 1 percent. There were four mega deals (contracts with ACV of
“Large deal activity was muted in the first quarter,” Hall said. “Smaller deals also were impacted by a slowdown in discretionary spending; we saw a 3 percent decline in deals valued at between
2024 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,” Hall said. “The global economy is expected to slow down, impacted by monetary policies to combat inflation, which is expected to decline.
“In this environment, outsourcing could see a boost as companies seek to balance cost management and service quality. Generative AI, 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 1Q24 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
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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.
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