Combined market ACV in Q4 down 3% from prior year, to $23.4 billion

Managed services ACV flat, while XaaS declined 6 percent in Q4

Full-year managed services ACV hits record $40.7 billion

ISG forecasts 15% growth for XaaS, 4.25% growth for managed services in 2024

Global spending on IT and business services was down slightly in the fourth quarter amid early signs of a possible market rebound, 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 fourth-quarter ACV for the combined global market (both managed services and cloud-based as-a-service) was $23.4 billion, down 3 percent versus the prior year. Although it was the fifth straight quarter the combined market has declined year over year, the rate of decline continues to slow and the market may be poised for an upswing in 2024, ISG said.

“We’re seeing a sequential improvement over the last two quarters, indicating the market may have bottomed out and is ready to rise,” said Steve Hall, president of ISG. “Conditions are right for a turnaround. Inflation is cooling rapidly and central banks are planning interest rate cuts. That should create a more friendly environment for enterprise spending and capital deployment in 2024.”

Hall noted the rise of artificial intelligence also will have a positive impact on technology spending in the coming years. “As AI technology matures and new use cases are identified, it will have a massive impact on the IT and business services and software industries. AI is the next great leap forward.”

Q4 Results by Segment

Fourth-quarter ACV in the managed services segment was $10.0 billion, up less than 1 percent versus the prior year – the softest quarter for this segment in 2023. A total of 677 contracts were awarded in the quarter, down 5 percent. Although volume was down, there were eight mega-deals (contracts with ACV of $100 million or more) in the quarter, up 33 percent from the prior year, with a total ACV of $1.1 billion, up 51 percent.

Hall noted the number of smaller contracts (those between $5 million and $30 million of ACV) was down for the quarter, as was the ACV of new-scope awards. On the other hand, ACV for restructured contracts was up more than a third from the prior year. “We continue to see elevated levels of contract restructurings, as enterprises continue to focus on cost optimization,” he said.

Within managed services, IT outsourcing (ITO) ACV was up 12 percent, to $7.7 billion, while business process outsourcing (BPO) was down 25 percent, at $2.3 billion.

As-a-service (XaaS) spending dropped 6 percent in the fourth quarter, to $13.4 billion of ACV, but ISG noted the rate of decline slowed from double-digits in the previous three quarters, and ACV was up 3 percent sequentially from the third quarter. Infrastructure-as-a-service (IaaS) fell 10 percent, to $9.4 billion, while software-as-a-service (SaaS) rose 4 percent, to $4.0 billion.

Full-Year Results

Combined market ACV for the full year was a $94.3 billion, down 6 percent, its first down year since ISG added coverage of XaaS spending in 2015.

Managed services ACV advanced 5 percent, to a record $40.7 billion, including a record $15.4 billion of restructured ACV, up 19 percent. Deal volume was 2,770 contracts, down 1 percent versus the prior year. Among the contracts were 34 mega-deals, with total ACV of $5.9 billion, the highest number of such awards and ACV since 2014. Within managed services, ITO ACV climbed 13 percent, to $30.4 billion, fueled by growth in application development, while BPO slid 14 percent, to $10.3 billion.

XaaS generated $53.6 billion in ACV, down 12.5 percent – the first year it posted an annual decline. Within this segment, IaaS was down 16 percent, to $38.0 billion, while SaaS fell 3 percent, to $15.5 billion. XaaS accounted for 57 percent of combined market ACV, down from 61 percent a year ago.

2024 Forecast

ISG is forecasting 4.25 percent growth for managed services and 15 percent revenue growth for XaaS in 2024.

“We expect spending for application modernization and business transformation projects led by GenAI to continue at high levels in 2024. Public cloud spending should accelerate as optimizations phase out. We also expect small discretionary deals to recover, as well as financial services industry spending to rebound,” Hall 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 85 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 4Q23 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.

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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