ISG Index™: Managed Services Hits New High in Q2, But Overall IT, Business Services Market Down on Lower Cloud Spending

Managed services ACV reaches $10B for first time, up 6% versus prior-year quarter

XaaS down 18% in Q2, as demand weakens for cloud infrastructure services

ISG maintains managed services growth forecast at 5%, lowers XaaS forecast to 11.5%

Global demand for managed services hit a new peak in the second quarter, even as lower spending on cloud services pulled down the overall IT and business services market, 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 second-quarter ACV for the combined global market – both cloud-based as-a-service (XaaS) and managed services – was $22.7 billion, down 9 percent from the prior year – the third straight quarter the market has seen a year-over-year decline.

Managed services hit a new quarterly high of $10.0 billion, up 6 percent from the prior year – the tenth time in the last 11 quarters this segment has grown year-over-year. Yet the overall market was down as slowing demand for cloud-based services accelerated. ACV for this segment declined 18 percent, to $12.6 billion, after reaching a peak of more than $16 billion in the first quarter of 2022.

“Managed services continues to be resilient in the face of economic uncertainty,” said Steve Hall, president of ISG. “We are seeing continued strong demand in this segment as enterprises use managed services as a lever for cost optimization. Contract renewals and extensions remain robust, and mega-deal ACV also came in very strong for the quarter.”

During the second quarter, 10 mega-deals (managed services contracts with annual value of more than $100 million) were signed. The 10 contracts were worth a combined $1.7 billion of ACV, up 35 percent from the combined value of the 10 megadeals signed in the second quarter last year. In all, 703 managed services contracts were inked in the second quarter, up 6 percent from the prior year.

Within managed services, global ACV for IT outsourcing (ITO) in the quarter rose 19 percent, to a record $7.7 billion, fueled by growth in application development and maintenance (ADM) services, even as ACV for business process outsourcing (BPO) slid 24 percent, to $2.3 billion, due to a significant falloff in industry-specific services from the prior year.

Within XaaS, ACV for infrastructure as a service (IaaS) was down 22 percent, to $8.7 billion, as limits on discretionary spending slowed cloud migrations, while ACV for software as a service (SaaS) dropped 7 percent, to $3.9 billion, despite the top 10 SaaS providers outperforming the broader SaaS market for the second quarter in a row.

First-Half Results

For the first half, combined market ACV of $46.4 billion was down 9.5 percent over the prior year. Managed services, at a record $19.9 billion of ACV, was up 4 percent, while XaaS, at $26.5 billion, was off 17 percent versus the prior year. There were a record 1,409 managed services contracts signed in the half, up 2 percent from the prior year, including 18 mega-deals, the most since 2013.

Growth in managed services was fueled by strong demand for ITO, which established a first-half record at $14.6 billion of ACV, up 13 percent, even as BPO declined 16 percent, to $5.3 billion. Meanwhile, on the cloud side, the IaaS market slumped more than 21 percent, to $18.6 billion, while the SaaS market was down 6 percent, to $7.9 billion.

“Cost optimization has led to more deal restructuring in managed services than we’ve ever seen,” Hall said. “It’s also worth noting that BFSI, the largest market vertical, dropped 10 percent year-to-date, driven by weakness in BPO in the Americas.

“On the cloud side, the slowdown we’ve been seeing in China’s hyperscaler market is now spreading to the big three in the U.S. It was the first time we’ve seen a down market for cloud services in a first half. Overall, the drop in cloud spending was steeper than we anticipated.”

2023 Forecast

ISG lowered its forecast for XaaS revenue growth in 2023 to 11.5 percent, down 350 basis points from its March forecast, and maintained its growth forecast for managed services at 5 percent.

“In determining our forecast, we considered macro uncertainties that have delayed decision-making and tightened discretionary spending, thus slowing movement in the pipeline,” said Hall. “Digital transformation is not discretionary spending, but enterprises are more cautious about investments.

“We also noted that interest rates have risen more in the past year than in the previous 30, which may dampen big infrastructure investments. But the difficult comps will soon be behind us, and excitement is growing around generative AI. That could provide a much-needed tailwind for cloud services.”

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 83 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 2Q23 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.

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