In last quarter’s ISG Index™, we incorporated the as-a-service segment—including activity related to cloud-based software and infrastructure—into our analysis of the global sourcing market for the first time. It was clear then and it is clear now: adding these numbers to our quarterly industry report card offers a compelling view of where the market is headed. Indeed, when the third-quarter numbers came in, they revealed a growth so strong that we’ve adjusted upward our forecast for the year.
Instead of a relatively flat market in 2016, we now expect the as-a-service market to achieve annual growth well in excess of 30 percent. The traditional sourcing market, while growing at a much slower rate, is still likely to increase by mid-single digits for the year.
The findings of the 3Q16 ISG Index™ show no slowdown in the as-a-service market, which continues to reach all-time highs after spiking by about 40 percent since this period last year. With services increasingly becoming cloud-based and automated, we’re seeing definite market shifts. In the Asia Pacific region, as-a-service annual contract value (ACV) has overtaken that of traditional sourcing, and, in the Americas, the two markets are nearly equal. Infrastructure-as-a-service (IaaS), in particular, has barreled ahead in all regions, growing about twice the rate of software-as-a-service (SaaS).
That’s not to take anything away from traditional sourcing, which, in the global market registered gains over last quarter and last year. Even so, traditional sourcing this quarter fell just shy of the $6 billion level we use as a measure of a solid market. A high number of small deals continue to drive traditional sourcing, with customers opting for lower-value contracts of shorter duration as they adjust to the changing dynamics of the marketplace.
Geographically speaking, both the Americas and EMEA have shown laudable consistency. We consider a good market in the Americas to register at least $2 billion in traditional sourcing ACV, and this period marked the 11th consecutive quarter over $2 billion.
But all eyes were on the rocketing as-a-service sector this quarter. It saw such fast growth, in fact, that we questioned whether that growth was coming at the expense of traditional sourcing. We’re pleased to report that we don’t see any cannibalization. More services are simply being created in the cloud. These platforms and applications in the as-a-service market would never have existed without this new cloud infrastructure, and clearly, the appetite for on-demand services that go above and beyond traditional IT services is heathy and growing.
Such prolific growth often leads to a spate of consolidation, and, sure enough, we found considerable merger and acquisition (M&A) activity in the SaaS arena. Since 2014, nearly 15 percent of the firms we track have been acquired. In fact, buyers shelled out more than $120 billion on these acquisitions with a full third of the activity spurred by private equity firms. This round of disruption will happen much faster than it did in the previous five years, given that it is being driven by digital technology rather than human capital.
Most conversations we have with clients are cloud- and digital-oriented. Clients want greater cost-efficiency so they can redeploy funds into digital and cloud initiatives. The rallying cry for digital transformation continues, with a clear focus on creating a customer-first environment that is both intelligent and mobile. The market has room for multiple winners, and those will likely be providers that combine high-quality delivery and fast-paced innovation with a robust and adaptable platform and an extensive partner ecosystem.
To get a fuller picture of current market dynamics and the growth in demand for the as-a-service model, view the 3Q16 Global ISG Index® presentation slides and press release and listen to the replay of yesterday’s call on the ISG Index™ page. For a quick snapshot of the headlines and results, click on the infographic on this page.
About the author
John is a proven executive leader with strategic, transaction and post-transaction experience. John has helped many large, global enterprises introduce and cultivate innovation as a part of the transformation process. Many of John’s projects have led to groundbreaking transactions, particularly in the UK Life and Pensions market, where John is a sought after C-suite advisor in the strategic sourcing of insurance operations. John has also conducted significant transactions in both IT infrastructure and applications environments. As a Partner and President, he sits on the ISG Executive Board and leads ISG EMEA and Asia.