ISG Index™ Finds Global Sourcing Slowly Recovering

Q3 global combined ACV up 3%, reversing pandemic-related decline of previous quarter; Managed services up 10% versus Q2, down only 5% against 2019, as megadeals boost results; As-a-service up 11% versus prior year, on strength in IaaS, as shift to cloud continues; ISG sees improved full-year outlook for industry

Company Release - 10/8/2020 9:00 AM ET

STAMFORD, Conn., Oct. 08, 2020 (GLOBE NEWSWIRE) -- The global sourcing industry is slowly recovering from its pandemic-induced downturn, with the managed services sector picking up momentum in the third quarter, 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 as-a-service and managed services) was up 3 percent, to $14.6 billion, the second-best quarter ever behind only the first quarter of 2020.

Managed services ACV, though down 5 percent versus the prior year, was up 10 percent over the second quarter, to $6.6 billion, driven by an increase in megadeals (those exceeding $100 million annually), a rise in contract restructurings and strong showings by the banking industry, particularly in the U.S., and in industry-specific business process outsourcing (BPO).

The ACV of cloud-based services (as-a-service), though flat with the second quarter, advanced 10.5 percent over the prior year, to $8.0 billion, on strong demand for infrastructure-as-a-service (IaaS) as enterprises, in response to the pandemic, accelerate their digital transformations and shift more work to the cloud.

“COVID-19 remains an ongoing concern, but enterprises have shifted to virtual models that have pushed the acceleration of digital transformation,” said Steve Hall, president of ISG. “We are not seeing a V-shaped recovery, but transaction volume is robust even as some clients continue to delay decisions and sales cycles are lengthened.”

Within managed services, information technology outsourcing (ITO) increased 3 percent over the prior quarter, to $5.0 billion, though it still trailed the prior year by 7 percent. BPO advanced 38 percent quarter-over-quarter, to $1.6 billion, or 1 percent higher than 2019.

“In Q3, we saw a record number of restructurings, up 67 percent from last quarter, along with a 54 percent gain in banking industry ACV and a 91 percent spike in ACV for industry-specific BPO,” Hall said. “The five megadeals this quarter compared with only one last quarter.”

On the cloud side, IaaS advanced 14 percent against the prior year, to $5.9 billion, but only 1 percent versus the second quarter. Software-as-a-service (SaaS), meanwhile, rose 2 percent over the prior year, to $2.1 billion, but was down 3 percent from the prior quarter.

For the first nine months of 2020, the global combined market generated ACV of $43.9 billion, up more than 4 percent versus the prior year. The biggest increase came from IaaS, up nearly 20 percent, to $17.8 billon. Along with SaaS, up 3 percent, to $6.6 billion, total as-a-service ACV through three quarters was $24.4 billion, up nearly 15 percent. Managed services, due to weakness in the first half, was down 6 percent year-to-date, to $19.5 billion. Its component segments, ITO (at $15.7 billion) and BPO ($3.8 billion), were down 2 percent and 22 percent, respectively.

Americas

The Americas delivered a record quarter, albeit on modest 3 percent growth, to $8.0 billion, fueled primarily by strong demand for IaaS (up 15 percent, to $3.0 billion) and SaaS (up 8 percent, to $1.4 billion). Together the two as-a-service segments were up 13 percent, to $4.4 billion. On the managed services side (down 7 percent, to $3.6 billion), ITO slid 20 percent, to $2.6 billion, while BPO soared 55 percent, to more than $1.0 billion. Quarter-over-quarter, however, managed services rose 26 percent compared with its low-water mark in the second quarter.

Europe, Middle East and Africa (EMEA)

EMEA, at $4.6 billion of combined market ACV, advanced more than 9 percent over a weak third quarter last year. The biggest growth came in the ITO sector, up 36 percent year-on-year, to $2.1 billion. Despite a 40 percent slump in BPO, to $495 million, managed services rose 10 percent, to $2.6 billion, with the UK leading the region with $1 billion in managed services ACV. As-a-service, meanwhile, rose 9 percent, to $2.0 billion, on 16 percent growth in IaaS, to $1.5 billion, even as SaaS declined 7 percent, to $508 million. Sequentially, the region was flat against the second quarter.

Asia Pacific

Asia Pacific saw its combined market ACV drop 10 percent in the third quarter, to just below $2.0 billion. Most of the decline can be attributed to managed services, which suffered its weakest quarter in 14 years, with ACV of $338 million, down 48 percent from the prior year. The news was equally bad in ITO, down 50 percent, to $277 million, and BPO, down 32 percent, to $61 million. As-a-service, meanwhile, rose 6 percent, to $1.6 billion, with IaaS up 8 percent, to $1.4 billion, and SaaS down 8 percent, to $222 million.

Forecast

ISG is forecasting the managed services market will be down 6 percent for the full year, 150 basis points better than its July forecast. The firm is projecting the as-a-service market will grow by 15.5 percent in 2020, up from its 11 percent forecast in July.

“Managed Services was healthier than we anticipated in the third quarter. We see pipelines refilling and ACV growth could accelerate if some large deals come to award in the fourth quarter,” said Hall. “IaaS providers, such as AWS, Azure, GCP, Alibaba and Tencent, will continue to benefit from the rapid growth in video conferencing, gaming, remote learning and online entertainment, as well as the inexorable march of enterprises to the cloud. SaaS, however, could place a drag on growth, with midsize firms important to regaining momentum.”

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 72 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. 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 3Q 2020 ISG Index was presented during a conference call and webcast today. To listen to an audio replay of the call and view presentation slides, visit this webpage.

For a snapshot of the 3Q 2020 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 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 1,300 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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Will ThoretzInformation Services Group, Inc.
+1 203 517 3119
Will.Thoretz@isg-one.comJim BaptisteMatter Communications for ISG
+1 978 518 4527
jbaptiste@matternow.com

Source: Information Services Group, Inc.