Despite recent words of caution from within and from outside the AI industry, demand for this groundbreaking technology shows no signs of abating. Indeed, it’s accelerating.
Data from our 3Q26 ISG Index™ reveals the growing momentum of AI as it changes the shape of the market, the pace of growth across segments, and the economics behind it.
That momentum starts with cloud infrastructure, where demand is just skyrocketing. Our data show that spending on infrastructure-as-a-services (IaaS), as measured by annual contract value (ACV), more than doubled in the third quarter from the prior year. ACV was up an unprecedented 115 percent, to $35.5 billion. IaaS was by far the biggest contributor to the growth of the overall technology services market, which soared 63 percent in Q3 to a record $52.5 billion.
Supply, to be sure, is rising. Hyperscalers continue to build out the data center capacity needed to run the AI models of frontier providers and to meet the growing needs of enterprise customers.
The scale of compute companies like OpenAI and Anthropic are committing to is extraordinary. We are talking multi-year, multi-gigawatt commitments, custom silicon and very large capacity reservations. Some of that is supported by circular financing, with cloud providers investing in model companies that commit significant portions of that capital back into cloud infrastructure. That’s what makes the growth of this market difficult to forecast.
Still, much of the demand for AI is coming from enterprises. Microsoft is a good example. Nearly 90 percent of its cloud revenue is coming from customers outside the frontier-model companies, and this quarter all the sequential growth in its commercial backlog came from non-frontier customers.
The biggest driver of growth, however, may be coming from the impact AI is having on the broader technology market. AI is pulling traditional cloud consumption with it. When companies move AI workloads into production, they do not just consume GPUs. They consume CPU, storage, databases, networking, security and all the other services around those workloads. Enterprises also are accelerating their cloud migrations because they want their applications and data closer to their AI workloads. So, AI is effectively creating a second catalyst for the cloud migration cycle.
And it’s not just infrastructure demand that’s growing. Demand for software-as-a-service (SaaS) is also on the rise—up 21 percent in the third quarter, our ISG Index data show. The predicted “SaaSpocalypse” from AI has not materialized. To be sure, AI is changing software economics, product design, user interaction and the role of the application itself. But SaaS demand remains resilient.
Indeed, software platforms are becoming one of the primary distribution layers for enterprise AI. The providers that already own workflows, data and user relationships are embedding AI directly into those environments. They will be the winners in this market.
AI’s impact on managed services is more complicated. Provider revenue has grown only modestly, and profitability is still under pressure. Enterprises expect lower prices, even while providers spend heavily on platforms, tools and skills. Productivity is improving, but margins remain flat. Can providers keep enough value to improve the economics of their business?
For the first time since 2019, global ITO dipped slightly year to date, pulled down by the Americas. ADM proved to be a weak spot. Until businesses have a better understanding of how AI is affecting applications, they may be waiting to see what works before signing deals.
BPO continued to surge, posting its fourth consecutive quarter of double-digit growth. The growth in GCCs and data center expansion boosted facilities management ACV. Clients report that their BPO contracts are infused significantly with AI automation, and BPO providers must continually reinvent themselves.
Data from our ISG AI Index, launched earlier this year, show a changing attitude toward AI. In 2025 and early 2026, enterprise confidence in AI waned due to skepticism about near-term economics. But now confidence has begun to rebound as businesses shift from the initial wave of experimentation into the new phase of adoption. I call that a move from AI enthusiasm to AI accountability. To learn more about AI adoption trends, and how companies are looking to close the AI value gap, I encourage you to download our recently published 2026 State of Enterprise AI report.
For the balance of 2026, we are maintaining our full-year forecast for managed services growth at 2.1 percent, but we are raising our XaaS growth forecast to 60 percent, from 30 percent last quarter. That reflects anticipated growth in IaaS of 80 percent (the current IaaS market is almost too volatile to predict accurately), and 12.5 percent growth in SaaS.
To get a fuller picture of current market dynamics, view our 3Q26 Global ISG Index™ webcast replay, presentation slides and press release on our website. While you’re there, we invite you to sign up for our weekly ISG Index Insider briefing and register for our fourth-quarter ISG Index call, set for January 14, 2027.
