Combined market ACV up 16% in Q4, to record $34 billion, driven by 26% XaaS growth

Managed services ACV essentially flat in Q4

ISG forecasts 20% growth for XaaS, 2.1% growth for managed services in 2026

Global spending on technology services and software reached a record high in the fourth quarter, as demand for AI continued to propel the market upward, according to the latest state-of-the industry report from Information Services Group (ISG) (Nasdaq: III), a global AI-centered 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 services) at a record $34.3 billion, up 16 percent versus the prior year. It was the sixth consecutive quarter the combined market posted double-digit growth year over year, averaging nearly 18 percent growth in that span. The pace of growth, however, has decelerated somewhat over the last four quarters, slowing from 21 percent year-over-year growth in the fourth quarter last year.

All the growth in this year’s fourth quarter came from record spending on cloud-based software and services (XaaS). The XaaS market had its best quarter ever, generating $23.4 billion of ACV, up 26 percent from the prior year, but down slightly from the 30 percent growth rate XaaS recorded in the third quarter. Within this segment, infrastructure-as-a-service (IaaS) soared 32 percent, to $18.5 billion, while software-as-a-service (SaaS) grew 6 percent, to $4.9 billion.

“Spending on cloud, software and consumption-based services continues to drive the overall market, with strong demand for AI at its core,” said Steve Hall, the firm’s chief AI officer. “Growth is particularly strong in infrastructure services, fueled by AI workloads, data platform expansion and enterprise cloud modernization. SaaS also delivered a solid performance in 2025, with growth across collaboration, IT service management, analytics and cybersecurity.”

The managed services market, meanwhile, was essentially flat in the fourth quarter, generating $10.9 billion of ACV, down 0.3 percent from the prior year. It was the second straight quarter that managed services ACV declined against the previous year, the first time that has happened since the first and second quarters of 2020. Within this segment, IT outsourcing (ITO) was down 6 percent, at $7.8 billion, while both business process outsourcing (BPO) and engineering, research and development (ER&D) services were up double-digits. BPO rose 13 percent, to $2.2 billion, and ER&D climbed 28 percent, to $918 million.

During the fourth quarter, 727 managed services contracts were awarded, down 2.5 percent from the prior year. Among them were 6 mega-deals (contracts with annual value of $100 million or more), down from 9 such awards in fourth quarter of 2024. New scope ACV was up by double digits in the quarter, while the ACV of restructured contracts was down by double digits. By industry, healthcare and pharma nearly doubled its managed services spending versus the prior year. Others that posted double-digit gains in the fourth quarter included energy, transportation and retail.

“While managed services growth was constrained in 2025, there are positive signals that bode well for the longer term,” Hall said. “Deal durations are up 14 percent while TCV (total contract value) is up 8 percent for the full year, as enterprises focus on hyper transformation aimed at delivering cost savings and greater efficiency through AI. Such broadscale transformation takes time.”

Full-Year Results

Combined market ACV for the full year was a record $127.4 billion, up 18 percent from the prior year, the highest annual growth rate since 2021.

The ACV of cloud-based services reached a record $84.0 billion, up 29 percent, with IaaS up 33 percent, to $64.7 billion, and SaaS up 16 percent, to $19.3 billion. XaaS now accounts for 66 percent of combined-market ACV, up from 60 percent in 2024.

Managed services ACV grew 1.3 percent, its slowest growth rate since 2020, to a record $43.4 billion. Demand slowed from the average 5 percent growth of the previous three years. ITO was up 2.4 percent, at $32.5 billion, and ER&D advanced 35 percent, to $3.6 billion, while BPO slumped 14 percent, to $7.3 billion.

A total of 2,954 managed services contracts were awarded in 2025, up slightly (0.5 percent) from the prior year. Among them were 28 mega-deals, down from 32 in 2024. Meanwhile, the number of new-scope awards (2,058) was up 6 percent and new-scope ACV ($29 billion) was up 7.5 percent from the prior year, each at record highs.

“Overall, 2025 was a solid year for the outsourcing market. Growth was concentrated in cloud, infrastructure, engineering and AI-related demand, while more traditional, labor-centric services remained under pressure,” Hall said.

2026 Forecast

For the full year, ISG is forecasting 2.1 percent revenue growth for managed services, and 20 percent revenue growth for cloud-based software and services (XaaS), the latter supported by continuing cloud migration, AI adoption, cybersecurity investment and platform-led consumption.

“As we look ahead to 2026, the market enters the year with both opportunity and constraint,” said Hall. “From a macro perspective, enterprises are navigating policy uncertainty around tariffs, continued weakness in Europe, and a leadership transition at the Federal Reserve. These factors are not stopping investment, but they are shaping behavior—favoring more deliberate, phased commitments over large, irreversible bets.

“At the same time, AI is reshaping demand faster than managed services economics are adapting. AI continues to accelerate growth in cloud, infrastructure and platforms, while putting pressure on traditional labor-based pricing and margin structures in managed 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 93 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 4Q25 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 (Nasdaq: III) is a global AI-centered technology research and advisory firm. A trusted partner to more than 900 clients, including 75 of the world’s top 100 enterprises, ISG is a long-time leader in technology and business services that is now at the forefront of leveraging AI to help organizations achieve operational excellence and faster growth. The firm, founded in 2006, is known for its proprietary market data, in-depth knowledge of provider ecosystems, and the expertise of its 1,600 professionals worldwide working together to help clients maximize the value of their technology investments.

View source version on businesswire.com: https://www.businesswire.com/news/home/20260115633375/en/

Spending on cloud, software and consumption-based services continues to drive the overall market, with strong demand for AI at its core.