Managed services ACV climbs 11%, driven by 9 megadeals

Global combined market down for 5th straight quarter vs. prior year, as XaaS declines 13%

ISG raises full-year growth forecast for managed services, maintains XaaS forecast

A focus on cost optimization propelled the global managed services market to a new high in the third quarter, even as demand continued to slow for cloud-based as-a-service (XaaS) offerings, 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 third-quarter ACV for the combined global market (both XaaS and managed services) at $23.1 billion, down 3 percent versus the prior year. It was the fifth straight quarter the combined market has declined year over year, although the rate of decline slowed this quarter.

Managed services advanced 11 percent, to a record $10.4 billion of ACV, on the strength of nine megadeals (contracts worth $100 million or more annually), which produced $1.8 billion of ACV, the most since the fourth quarter of 2015. A total of 659 managed services contracts were awarded in the third quarter, down 3.5 percent from the previous year.

“We continue to see very strong demand for cost optimization, both in the awards ISG is advising and in the broader market,” said Steve Hall, president of ISG. “This is reflected both in the number and size of the megadeals we saw this quarter, as well as in the surge of mid-sized deals, those with ACV in the range of $30 million to $60 million. Smaller deals, those in the $5 million to $20 million range, were down 8 percent, as enterprises delayed discretionary projects in favor of those with more immediate cost benefit.”

Within managed services, spending on IT outsourcing (ITO) climbed 17 percent, to $8.2 billion, fueled by 28 percent growth in application development and maintenance services. Business process outsourcing (BPO), meanwhile, fell 6 percent, to $2.1 billion, as spending slowed on customer engagement, procurement and engineering, research and development (ER&D) services.

The XaaS market fell by 13 percent versus the prior year, to $12.8 billion, driven lower by declining demand for infrastructure-as-a-service (IaaS), down 19 percent, to $9.0 billion in the quarter. Software-as-a-service (SaaS), meanwhile, grew 8 percent, to $3.8 billion.

“IaaS bookings continue to be under pressure as enterprises focus on using what they bought post-pandemic, rather than buying more,” Hall said, noting that the big three U.S. hyperscalers (AWS, Azure and Google Cloud) have seen bookings decline by a combined 22 percent year to date, part of a general downward trend for the IaaS sector.

“It will likely be one or two more quarters before we start to see the bottom of this cycle for infrastructure-as-a-service. That said, it’s important to reinforce that we still see significant cloud activity happening – especially around application modernization,” Hall said.

Hall added that the SaaS market has likely bottomed out this quarter. “The top 10 SaaS providers actually grew bookings by 7 percent year to date, as enterprises continue to favor platform-based consolidation as opposed to best-of-breed solutions. On a quarterly basis, areas like collaboration, HCM and ERP were up year over year.”

During today’s third-quarter briefing on ISG Index results, the firm also spotlighted the increasing demand for global capability centers (GCCs) and discussed the expanding market for Generative AI solutions, based on a previously released study.

Year-to-Date Results

Combined market ACV for the first nine months was down 7 percent, to $70.0 billion, the first down market for this period since 2015, after averaging 21 percent growth over the previous five years.

Managed services ACV was up 6 percent, to $30.3 billion, fueled by 14 percent growth in ITO, to $22.8 billion, even as BPO dropped 12 percent, to $7.5 billion. A total of 2,068 managed services contracts were signed year to date, including 27 megadeals worth a combined $4.9 billion, the highest volume and value since 2014.

By industry, managed services growth was particularly strong in the energy and healthcare sectors.

ACV for XaaS declined 15.5 percent, to $39.7 billion, reflecting softness in both the IaaS segment (down 19 percent, to $28.2 billion) and the SaaS segment (down 6 percent, to $11.5 billion).

2023 Forecast

ISG raised its forecast for managed services growth by 40 basis points, to 5.4 percent for the year, and maintained its forecast for XaaS revenue growth in 2023 at 11.5 percent.

“From a macroeconomic perspective, we've seen modest improvement in decision making and increased spend, but global interest rates remain high and concerns persist with energy prices, a strong dollar, and the expectation of a prolonged period of high interest rates,” Hall said.

“Clients continue to restructure their IT landscape to adopt to multi-cloud environments and hybrid work arrangements, and are beginning to experiment with enterprise-grade GenAI use cases. We expect the applications market to continue to expand in 2024.”

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 84 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 3Q23 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.

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