Global combined market down for first time in a quarter since 2016

Global spending on IT and business services pulled back slightly in the third quarter amid rising economic concerns, though the volume of contracts signed in the quarter remained near all-time highs, according to the latest state-of-the industry report from Information Services Group (ISG), 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 third-quarter ACV for the combined global market (both XaaS and managed services) at $23.2 billion, down 3 percent versus the prior year. It was the first year-over-year decline in a quarter for the broader market since the fourth quarter of 2016.

“Demand remains at an all-time high, but we are seeing some pullback in spending, as enterprises delay decision-making due to concerns about the economy,” said Steve Hall, president of ISG. “Companies are still invested in ongoing digital transformation but are going slower for now.”

Hall said ACV growth also was impacted by the strengthening U.S. dollar and difficult comparisons with the prior year as the market comes off record highs.

“We saw a period of sustained growth from the end of 2020 through the first quarter of 2022, but the comps are much tougher now,” said Hall. “There are definitely some headwinds in the market, but we remain optimistic on the overall deal flow.”

The ISG Index found a total of 661 managed services contracts were signed in the third quarter, up 3 percent versus the prior year. It was the second most contracts ever signed in a quarter and the fourth time in the last five quarters award volume has surpassed 600 contracts.

Among the awards this past quarter were three mega-deals – contracts worth more than $100 million per year – the lowest such quarterly volume in the last five years, which ISG attributes to timing issues.

Hall said providers are feeling pressure on their margins, due to rising inflation and higher labor costs in a tight labor market. “We do see pricing power for the most in-demand skill sets, but margins are falling for more commoditized services. This can be beneficial to enterprises looking to optimize their costs,” he said. “We see providers responding with more automation, more innovation and other productivity measures.”

Results by Segment

The cloud-based XaaS market saw its first down quarter since the beginning of 2015, with third-quarter ACV declining 4 percent versus the prior year, to $14.1 billion. At $10.5 billion, infrastructure-as-a-service (IaaS) was flat versus the prior year, while software-as-a-service (SaaS) declined 12 percent, to $3.6 billion.

Managed services spending, meanwhile, declined 1 percent, to $9.0 billion of ACV. This segment was buoyed by IT outsourcing (ITO), up 2 percent, to $6.8 billion, while business process outsourcing (BPO) slumped 10 percent, to $2.3 billion.

Year-to-Date Results

Combined market ACV for the first nine months rose 11.5 percent, to $71.8 billion. Managed services ACV reached $27.7 billion, up 6 percent, on record deal volume for the period – 1,992 contracts, up 11 percent. XaaS ACV came in at $44.1 billion, up 15 percent – the slowest growth rate for this period since ISG began tracking the market for cloud-based services in 2015.

“The slowdown in XaaS spending comes down to weaker demand for infrastructure services provided by China’s big four hyperscalers, which have been impacted by continuing lockdowns and the stronger U.S. dollar,” Hall said. “The big three hyperscalers in the U.S. – AWS, Azure and Google Cloud – continue to carry this segment, although we’re seeing growth slow slightly there as well.”

Hall said growth in SaaS spending has also slowed, despite strong demand in such areas as IT service management, HCM, analytics and business intelligence. ISG, he said, sees the potential for even more slowing, as companies grow more cautious about spending on big, complex implementations.

Managed services continues to be paced by record demand for application development and maintenance services, even as demand for infrastructure services remains down for the year. BPO recorded it best nine-month performance ever, led by industry-specific services, and demand for engineering services remained robust, particularly in Europe.

2022 Forecast

ISG sees economic uncertainty caused by rising interest rates, energy shortages, supply chain disruptions and continuing inflation dampening enterprise demand in the near term.

“Given current demand, we are maintaining our growth forecast for managed services at 3.5 percent for the year, but lowering our growth forecast for XaaS to 10.5 percent, from 18 percent last quarter,” Hall said.