Global demand for technology and business services continues to rise, reaching an all-time high in the first quarter, with a growing pipeline of deals signaling continued expansion in 2021 as the economy begins to emerge from the pandemic, the latest state-of-the industry report from Information Services Group (ISG) (Nasdaq: III), a leading global technology research and advisory firm, finds.
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) reached a record $17.1 billion, up 11 percent over last year and up 4 percent from the fourth quarter. It was the third consecutive quarter of global growth following the pandemic-related drop in the second quarter of 2020.
“The demand environment has improved steadily over the past three quarters,” said Steve Hall, partner and president, ISG. “Deals are filling the pipeline as economies loosen pandemic restrictions, and enterprises continue to make digital transformation a business imperative. Providers are focused on meeting that need by concentrating on cloud modernization, cost optimization, and helping customers create resilient and agile operations and personalized omnichannel experiences.”
The cloud-based as-a-service market rose 15 percent, to a record $9.9 billion, in the first quarter, but growth decelerated from the fourth quarter, when it was up 26 percent year over year. Managed services ACV, meanwhile, reached $7.2 billion in the first quarter, up 7 percent year over year, outperforming expectations due to a second consecutive quarter of strong growth in Europe.
Within the as-a-service segment, infrastructure-as-a-service (IaaS) generated a record $7.2 billion of ACV, up 18 percent versus the prior year, but slowing from its 36 percent growth rate in the fourth quarter. Software-as-a-service (SaaS) produced a record $2.7 billion of ACV, up 7 percent year over year and 10 percent quarter over quarter.
Within managed services, IT outsourcing (ITO) ACV was $5.8 billion, up 1 percent from last year and down slightly from the previous quarter, as strength in application development and maintenance (ADM) services—up 7 percent versus the prior year on a record number of deals and up 29 percent versus the prior quarter—was largely offset by a 6 percent year-over-year decline in infrastructure services. ITO contract volume, overall, reached a record 376 deals.
ACV for business process outsourcing (BPO), meanwhile, leaped 43 percent from the prior year, to $1.4 billion, but was down slightly from the prior quarter. The BPO market was driven by strength in industry-specific services and engineering and R&D services, even as two of the largest BPO segments, facilities management and contact center services, produced mixed results.
The Americas combined market, at $8.6 billion of ACV, continued to grow, up 6 percent from the prior year and up 18 percent from the fourth quarter. The as-a-service segment rose 11 percent versus the prior year, and 10 percent quarter over quarter, to a record $5.2 billion, fueled by strong demand for IaaS, up 14 percent to a record $3.5 billion, along with 5 percent growth in SaaS, to $1.7 billion. The managed services segment, meanwhile, dipped 1 percent from last year, to $3.4 billion, but was up 32 percent from the fourth quarter, helped by 11 awards with ACV in excess of $40 million. ITO for the quarter, at $2.5 billion, was down 8 percent from last year, but up 51 percent from the fourth quarter, while the BPO market rose 33 percent from the prior year, to $830 million.
Europe, Middle East and Africa (EMEA)
EMEA’s combined market reached $6.0 billion, up 20 percent from the prior year, but down 5 percent from its record fourth quarter. Both the as-a-service and managed services segments produced strong results. As-a-service rose 16 percent over the prior year, to a record $2.5 billion, on strong demand for IaaS, which produced record ACV of $1.8 billion, up 19 percent versus the prior year, and on 9 percent growth in SaaS, to $658 million. Managed services, meanwhile, generated $3.5 billion of ACV, up 23 percent year over year, its second straight quarter of sizeable results. ITO was up 17 percent year over year, to $3.0 billion, on strength in both ADM and infrastructure services. BPO surged 66 percent, to $521 million, with strong demand for industry-specific, finance and accounting, and engineering and R&D services.
Asia Pacific generated combined-market ACV of $2.6 billion, up 11 percent year over year, but down 9 percent from a record fourth quarter. Growth was propelled by the as-a-service segment, which rose 22 percent, to $2.2 billion, on strength in both IaaS (up 24 percent, to $1.9 billion) and SaaS (up 12 percent, to $292 million). Managed services, meanwhile, slumped 25 percent from the prior year, to $390 million, as ITO slid 36 percent, to $282 million, offsetting 29 percent growth in BPO, to $108 million.
ISG is forecasting the market for cloud-based services (IaaS and SaaS) will grow 18 percent globally in 2021, down slightly from its 20 percent forecast at the start of the year. ISG, meanwhile, has raised its growth forecast for managed services to 5 percent, up from 3 percent at the start of the year.
Commenting on ISG’s as-a-service forecast, Hall said: “Many of the large IaaS providers are focusing on growing the top line and winning share, but ultimately they will have to generate profits. Building scale via long-term agreements with G2000 enterprises may provide that path to better margins. SaaS firms will need to focus on their land-and-expand strategies inside the client footprint, so they can upsell new products and build scale while also expanding internationally to tap new and underpenetrated geographies.”
On the managed services side, Hall said ISG sees growth through large, transformation-focused deals this year. “These multi-tower transactions encompass infrastructure, applications, and cloud migration and modernization. As the pandemic begins to ebb, we see decision-making ramping up with a greater willingness on the part of enterprises to sign large deals. Megadeals are a prerequisite for solid industry growth. Even four or five megadeals in the next couple of quarters should boost ACV growth by an additional 200 basis points, to 7 percent for the year.”
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 74 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 1Q21 Global 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 additional ISG Index insights, view these three infographics.
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.