As the demand for cloud-based as-a-service (XaaS) offerings continued to slow, a focus on cost optimization drove the global managed services market to a new high in the third quarter, according to the most recent state-of-the-industry report from Information Services Group (ISG), a global technology research and advisory firm.
The third-quarter annual contract value (ACV) for the combined worldwide market (XaaS and managed services) was $23.1 billion, down 3% from the previous year, according to data from the ISG Index, which tracks commercial outsourcing contracts with ACV of $5 million or more. Although the pace of fall reduced this quarter, it was the sixth consecutive quarter that the combined market has decreased year over year.
On the strength of nine megadeals (contracts worth $100 million or more annually), managed services climbed 11% to a record $10.4 billion of ACV. This created $1.8 billion of ACV, the biggest since the fourth quarter of 2015. In the third quarter, 659 managed services contracts were granted, which is 3.5 percent less than the same period last year.
ISG President Steve Hall said, "We continue to see very strong demand for cost optimization, both in the awards ISG is advising and in the broader market. This is shown by the rise in mid-sized agreements, or those with an ACV between $30 million and $60 million, as well as the quantity and magnitude of megadeals we saw this quarter. Smaller transactions, defined as those between $5 million and $20 million, decreased by 8% as businesses postponed investments that did not have as much immediate financial advantage.”
IaaS and SaaS Demand
Spending on IT outsourcing (ITO) increased by 17% to $8.2 billion in managed services, driven mostly by a 28% increase in application development and maintenance services. On the other hand, business process outsourcing (BPO) had a 6% decline to $2.1 billion as expenditure on ER&D, procurement, and customer engagement services decreased.
Infrastructure-as-a-Service (IaaS) demand declined by 19% to $9.0 billion in the quarter, causing the XaaS market to decline by 13% from the previous year to $12.8 billion. In contrast, software-as-a-service (SaaS) increased 8% to reach $3.8 billion.
According to Mr. Hall, "IaaS bookings continue to be under pressure as enterprises focus on using what they bought post-pandemic, rather than buying more." He also pointed out that, in line with an overall downward trend for the IaaS sector, bookings at the three major U.S. hyperscalers - AWS, Azure, and Google Cloud - have decreased by a combined 22 percent year to date.
"It will probably take another quarter or two before the infrastructure-as-a-service cycle bottoms out,” added Mr. Hall. “Nevertheless, it's important to emphasize that there is still a lot of activity in the cloud, particularly in the area of application modernization.”
The SaaS market has probably peaked this quarter, Hall said. "Bookings at the top 10 SaaS providers have increased by 7% year-to-date, indicating that businesses still prefer platform-based consolidation over best-of-breed solutions. Areas including ERP, HCM, and collaboration saw quarterly increases over the previous year.”
Based on a previously published report, ISG also highlighted the growing market for generative AI solutions and the growing need for global capability centers (GCCs) at today's third-quarter briefing on ISG Index findings.
Year-to-Date Results
After growing at a rate of 21% over the preceding five years, the combined market ACV for the first nine months decreased by 7% to $70.0 billion, marking the first down market for this period since 2015.
Managed services ACV increased by 6% to $30.3 billion, driven by a 14% increase in ITO to $22.8 billion, despite a 12% decline in BPO to $7.5 billion. Thus far this year, 2,068 managed services contracts have been signed, with 27 of them being megadeals totaling $4.9 billion, the greatest amount and value since 2014.
The energy and healthcare industries saw especially rapid development in managed services.
The ACV for XaaS fell 15.5% to $39.7 billion, which was a result of weakness in the SaaS (down 6% to $11.5 billion) and IaaS (down 19% to $28.2 billion) segments.
2023 Forecast
ISG kept its prediction for XaaS revenue growth in 2023 at 11.5 percent, but increased it by 40 basis points to 5.4 percent for managed services growth for the year.
From a macroeconomic standpoint, Mr. Hall said, "We've seen a modest improvement in decision making and increased spend, but concerns about energy prices, a strong dollar, and the expectation of a prolonged period of high interest rates persist and global interest rates remain high."
"Clients are starting to experiment with enterprise-grade GenAI use cases and are continuing to reorganize their IT architecture to accommodate multi-cloud setups and hybrid work arrangements,” added Mr. Hall. “In 2024, we anticipate that the applications market would still be growing.”
