2Q19-ISG-Index

Despite Macro Risks, Demand for Digital Drives Global Market Forward

Macro risks looming over the global economy have yet to land their punch on the global market for IT and business services. Despite lingering Brexit concerns, tariffs and trade wars, even worries of a recession in Europe can’t seem to slow down the accelerated technology spending of the world’s major corporations.

No wonder. Digital transformation is all around us, as businesses of all kinds embrace digital technology to meet changing customer demands, seek new ways to grow and fend off intense competition.

Our 2Q19 ISG Index shows annual contract value (ACV) for the combined global market for managed services and as-a-service solutions increased a respectable 5 percent, to $13.7 billion, just shy of the record $13.9 billion in the previous quarter. The combined global market has now stayed above $13 billion for back-to-back-to-back quarters, though this quarter was the first of those three that did not set an ACV record.

Though most gains in the global commercial market this quarter were in the single digits, the market as a whole appears stable and healthy. As-a-service continued to lead the way in all three regions we cover—the Americas, EMEA and Asia Pacific—and more than made up for any softness in managed services. Infrastructure-as-a-service (IaaS), which historically has grown faster than software-as-a-service (SaaS), eased up a bit this quarter. Some sluggishness in Asia Pacific, particularly in China, slowed down IaaS, but SaaS reached its fourth consecutive quarterly high for ACV.

Though managed services ACV dipped 3 percent year-on-year against an exceptionally strong 2018 second quarter, it continued to show vigorous activity, a sign of both strong demand and market fragmentation.

You may have noticed, as we have, an interesting relationship between IT outsourcing (ITO) and IaaS. As ITO declines, IaaS grows. That makes sense in the context of the shift in spending we’re seeing in these two closely related functions, as more work and data center infrastructure shifts to the cloud.

Likewise, we have to unpack business process outsourcing (BPO) a bit to understand its performance over time. We can list many fast-growing providers offering a broad range of services, yet the ACV for BPO has stayed in a fairly limited range. Why? Because all it takes is a poor performance by one large provider to cover up the successes of the rest.

Looking at regional performance, combined market ACV in the Americas set a new high for the half-year. A healthy as-a-service market compensated for a slowdown in managed services. The hybrid model has become mainstream, with enterprises choosing cloud for specific workloads but retaining some workload components in their own data centers.  

EMEA may be returning to the strength it enjoyed prior to 2015. This quarter marked the second consecutive quarter over $3 billion in combined market ACV, and the third such quarter in the last five. Gains in the Nordics, Benelux and Southern Europe came through when the largest markets of the region — the U.K., DACH and France — each declined to some degree. Europe, a digital laggard compared with other regions, continues to shift to as-a-service, which now makes up 36 percent of the combined market.

In Asia Pacific, managed services produced its best quarter in five years, its ACV up 15 percent, helped by some large awards. China, South Korea and India had the largest gains, buffering the weaker performances of Japan, Australia and New Zealand. The as-a-service market was somewhat flat, due in part to an uneven IaaS result in China. Software-as-a-service ACV, on the other hand, surged 18 percent.

When we parse the performance of industries, we notice some are further along the digital transformation curve than others. But even the most reluctant are now using IoT, analytics and other digital solutions to modernize. BFSI has invested heavily in core technologies like AI and blockchain. In the half-year comparison to last year, ACV in this vertical grew 5 percent, held back by tight budget constraints in the U.S. but boosted by digital and integrated software platform services in EMEA. Business Services has grown rapidly over the past five years, driven by IaaS, particularly as offered by public cloud providers.

So what do we think the rest of the year holds? We’re forecasting a 22 percent year-on-year increase in as-a-service revenue. That factors in our optimistic view of SaaS and our more cautious view of IaaS due to some lingering uncertainty in China.

We’ve nudged up our growth forecast for the entire IT and business services market to 3.5 percent through the end of the year. Should the economy soften, we expect companies will push all the harder for operational efficiency and cost optimization, which often means they’ll turn to digital solutions. Any macro-risk headwinds coming our way will be tempered by digital tailwinds that are far stronger. However, we’ll keep alert to any developments that could signal a downward trend. 

To get a fuller picture of current market dynamics, including the growing demand for the as-a-service model, view the 2Q19 Global ISG Index presentation slides, news release and infographic on our ISG Index webpage.

For a quick video summary, I encourage you to watch our new ISG Index™ Headlines program.

About the author

Steve Hall is responsible for the firm’s Europe, Middle East & Africa region, as well as its global Digital Advisory Services business. During his time with ISG, Mr. Hall has led some of the company’s largest and most complex engagements with clients as diverse as United Airlines, Symantec, BP, World Bank, CEMEX and Motorola. He is a seasoned professional who brings considerable experience in emerging technologies to ISG clients. Prior to his position at ISG, Mr. Hall held senior roles at a number of renowned IT services companies, including Unisys and MCI. He also led large-scale eBusiness initiatives for technology solutions providers C-Bridge and CBSI and gained deep outsourcing and offshore software development experience as a delivery executive with Covansys. Mr. Hall co-authored Managing Global Development Risk: A Guide to Managing Global Software Development. He earned his degree in Computer Science from Regis University.