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.”
2023 Forecast
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.
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.
View source
version on businesswire.com: https://www.businesswire.com/news/home/20230413005515/en/
Press: Will Thoretz, ISG +1 203 517 3119
will.thoretz@isg-one.com
Julianna Sheridan, Matter Communications for ISG +1 978-518-4520
isg@matternow.com
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