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%

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.

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