Press Release

ISG Index™: Cloud-Based Services Keep Global Sourcing Market on Growth Trajectory

As-a-service ACV up 14%, even as managed services market dips 3%

Company Release - 7/10/2019 9:05 AM ET

STAMFORD, Conn., July 10, 2019 /PRNewswire/ -- The global sourcing market maintained its growth trajectory in the second quarter, boosted by growing demand for cloud-based as-a-service solutions, 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 second-quarter ACV for the combined global market (both as-a-service and managed services) rose 5 percent, to $13.7 billion. It was the third consecutive quarter the combined global market surpassed $13 billion in ACV, but the first time in the last three quarters it did not establish a new quarterly ACV record, falling just shy of last quarter's record $13.9 billion.

As-a-service sourcing registered its second-best quarterly ACV ever, at $6.7 billion, up 14 percent over the prior year. Both Infrastructure-as-a-Service (IaaS), at $4.9 billion, and Software-as-a-Service (SaaS), at $1.8 billion, were up 14 percent. IaaS, long the growth engine of this segment, trailed off sequentially this quarter due to slowness in Asia Pacific, particularly China, while SaaS recorded its fourth consecutive record ACV quarter as it climbs toward the $2 billion mark.

Managed services, at $7 billion of ACV, achieved only the seventh quarter this decade at or above that level, but nonetheless dipped 3 percent versus an exceptionally strong second quarter last year. The 491 contract awards in the latest quarter, up 1 percent, kept alive a string of six consecutive quarters above 400 awards – a sign of both strong demand and continuing market fragmentation.

Within managed services, IT outsourcing (ITO), at $5.3 billion, was down 7 percent in the second quarter, reflecting the continuing shift of data center infrastructure to the cloud. Business process outsourcing (BPO), meanwhile, climbed 14 percent, to $1.7 billion, on strong demand for horizontal back-office functions such as finance and accounting and procurement, as well as in the facilities management space.

"The global commercial outsourcing market is stable and healthy," said Steve Hall, partner and president of ISG. "Despite macro-economic and geopolitical risks, technology spend continues to increase. With the rapid changes in digital business, shifting consumer demands and increased competition, enterprises can't afford to hit pause. We likely will see some macro-economic headwinds before the year is out, but the technology tailwinds are far stronger."

For the first half, ISG reported combined market ACV of $27.6 billion, up 10 percent. The growth was driven entirely by as-a-service, which, at $13.7 billion, climbed 23 percent, with IaaS up 28 percent, to $10.1 billion, and SaaS up 9 percent, to $3.6 billion. Managed services overall was flat, at $14 billion, with ITO also flat at $10.9 billion. BPO was down 1 percent, to $3.1 billion. As-a-service in the first half represented 49 percent of the combined market, versus 44 percent in the same period last year.

Americas

In the second quarter, combined ACV in the Americas rose 6 percent, to $6.5 billion, on the strength of robust demand for as-a-service, which now represents a record 57 percent of the market. As-a-service ACV climbed 23 percent in the quarter, to $3.7 billion, including $2.6 billion for IaaS, up 29 percent, and $1.1 billion for SaaS, up 12 percent. Managed services, meanwhile, declined 10 percent, to $2.8 billion, as ITO slumped 22 percent, to $1.8 billion, even as BPO surged 25 percent, to $1 billion.

Europe, Middle East and Africa (EMEA)

EMEA's combined market ACV of $5 billion was up 3 percent versus last year. In the managed services segment, ACV was $3.2 billion, about even with the first quarter, but down 1 percent versus a year ago. The two consecutive quarters above $3 billion may signal a return to sourcing levels last seen in 2015. The bulk of managed services ACV came from ITO ($2.7 billion, up 2 percent). Europe continued its shift to as-a-service, now 36 percent of the combined market, with ACV of $1.8 billion, up 9 percent. IaaS, at $1.3 billion, was up 7 percent, while SaaS, at $491million, was up 16 percent. Growth in the Nordics, Benelux and Southern Europe offset slight declines in DACH (Germany, Austria and Switzerland), France and the U.K., as Brexit uncertainty persists.

Asia Pacific

Combined market ACV in Asia Pacific reached a record $2.2 billion, up 6 percent. On the strength of larger awards, managed services produced its best quarter in five years, with ACV of $967 million, up 15 percent. China, South Korea and India had the largest gains, offsetting weakness in Japan and Australia/New Zealand. As-a-service, flat at $1.3 billion, eclipsed the $1 billion ACV level for the sixth straight quarter, amid uneven IaaS results in China, which pushed regional IaaS down 3 percent, to $1.1 billion. SaaS, meanwhile, rose 18 percent, to $206 million.

Forecast

"We are projecting 22 percent year-on-year revenue growth for the remainder of 2019 in the as-a-service market," said Hall. "This takes into account a slightly more optimistic view of the SaaS segment and factors in some uncertainty in IaaS, particularly in China and elsewhere in Asia Pacific.

"In the overall IT and business services market, we are raising our growth forecast slightly, to 3.5 percent, through the end of the year. However, given some of the macro-level trends, we will remain alert to any negative developments that could signal an overall downward trend."

About the ISG Index™

Now in its 67th consecutive quarter, the ISG Index™ provides a quarterly review of the latest sourcing industry data and trends for financial analysts, enterprise buyers, software and service providers, law firms, academia and the media. For more than 15 years, it has been the authoritative source for marketplace intelligence related to outsourcing transaction structures and terms, industry adoption, geographic prevalence and service provider performance. In 2016, the ISG Index was expanded to include coverage of the fast-growing as-a-service market, measuring the significant impact cloud-based services are having on digital business transformation. ISG also provides ongoing analysis of automation and other digital technologies in its quarterly ISG Index presentations.

The 2Q 2019 ISG Index was presented during a conference call and webcast for media and analysts today. To listen to an audio replay of the call and view presentation slides, please visit this webpage.

For a snapshot of the 2Q19 ISG Index results, view this infographic.

About ISG

ISG (Information Services Group) (Nasdaq: III) is a leading global technology research and advisory firm. A trusted business partner to more than 700 clients, including more than 70 of the top 100 enterprises in the world, 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 1,300 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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SOURCE Information Services Group, Inc.