Managed services ACV at record high, up 1% versus prior year
XaaS down 13%, as demand declines sequentially for fourth straight quarter
ISG lowers 2023 industry growth forecast for XaaS to 15%, maintains managed services forecast at 5%
Global spending on IT and business services in the first quarter fell sharply from an all-time high in the prior year, as modest growth in managed services failed to overcome continuing weakness in cloud demand, 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 first-quarter ACV for the combined global market (both as-a-service and managed services) was $24.1 billion, down 8 percent from a market peak in the first quarter of 2022. Sequentially, the global combined market grew 1 percent, ending a streak of three consecutive quarters of decelerating results.
“This is really a tale of two markets,” said Steve Hall, president of ISG. “On the one hand, we saw record-high ACV in the managed services sector this quarter, fueled by continuing demand for applications and engineering services – a clear sign that ongoing digital transformation is alive and well. On the other, the cloud services market has seen its blistering growth slow considerably in recent quarters as enterprises slow the pace of migrations and look to optimize existing workloads in response to the uncertain economic environment.”
Results by Segment
Global managed services ACV reached an all-time quarterly high of $9.8 billion in the first quarter, up 1 percent versus the prior year and up 2 percent over the fourth quarter. During the first quarter, 703 contracts were signed, down 1.5 percent against record volume in the 2022 first quarter, but up 2 percent sequentially. The contracts included eight mega-deals, those valued at more than $100 million per year, and a record volume of 237 restructured contracts (renewals and extensions) worth a record $4.0 billion of ACV.
Within managed services, IT outsourcing (ITO) ACV rose 7 percent, to $6.8 billion, fueled by growth in application development and maintenance (ADM) services, which advanced 23 percent in the quarter and now represents more than 65 percent of ITO ACV. Meanwhile, business process outsourcing (BPO), at $3.0 billion, declined 10 percent against a record first quarter in 2022. The BPO segment saw growth in engineering, research and development (ER&D) services, up 36 percent year over year, along with growth in HR, finance and accounting, and facilities management services. Industry-specific BPO and contact center services, meanwhile, were both down for the quarter.
In the as-a-service (XaaS) space, ACV was $14.3 billion, down 13 percent, the fourth consecutive quarter of sequentially declining results following a record first quarter in 2022. Infrastructure-as-a-service (IaaS) fell 16 percent, to $10.4 billion, the second straight quarter of declining year-over-year ACV in this segment. The Big Three hyperscalers saw their combined ACV drop 12 percent in the quarter, the first time they have experienced declining quarterly ACV versus the prior year.
Software-as-a-service (SaaS), likewise, saw a drop in ACV in the first quarter, down 4 percent from the prior year, to $3.9 billion. ACV growth in enterprise resource planning (ERP), human capital management (HCM) and IT services management (ITSM) platforms slowed in the first quarter after supporting market growth through much of 2022.
“We see enterprises focusing on optimizing the cloud-based services they have already committed to, rather than adding new workloads to the cloud,” Hall said. “On the cost side, hyperscalers really over-hired during the pandemic, and now they’re adjusting their operational expenses to fit today’s macro conditions and declining demand. That’s one of the reasons we’re seeing layoffs in big tech.”
ISG lowered its forecast for XaaS revenue growth in 2023 to 15 percent, down 200 basis points from its January forecast, and maintained its growth forecast for managed services at 5 percent.
“The macro environment remains uncertain, with interest rates, inflation and trouble in the banking sector topping concerns for enterprise clients,” said Hall. “There continues to be more scrutiny on deal signings, especially in discretionary spending areas. Enterprises are revisiting cost optimization, efficiency gains and vendor consolidation deals.”
Hall said industry attrition has stabilized and ISG expects hiring to improve in the back half of the year. The decline in XaaS bookings is expected to last through the second quarter, with demand picking up again in the second half, he said.
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 82 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 1Q23 Global ISG Index results were presented during a webcast today. To view a replay of the webcast and download presentation slides, visit this webpage.
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.