4Q19-ISG-Index

Global sourcing slows in Q4 from record Q3 highs, but digital demand remains robust

Perspective matters. I reminded myself of that last quarter when I saw some spectacular performances in the global sourcing market that I knew would be hard to beat. Sure enough, though we ended 2019 with strong numbers overall, many of the measures we track declined in 4Q19 compared with the prior quarter.

Still, the tailwinds of digital thus far are stronger than the headwinds of macro-economic forces. In the past year, the market has withstood volatile equity markets, the IMF’s prediction of downgraded world economic growth, and interest rate cuts in the U.S. and Europe. Then there was political unrest in the U.K., the U.S., Hong Kong, Barcelona and Latin America, and most recently, rising tensions in the Middle East. Not to mention foreign exchange volatility and trade and tariff turbulence. Falling unemployment rates seemed to be the lone bright spot.

Despite these headwinds, we still saw year-on-year market growth this quarter, as the digital tailwinds keep propelling the market forward. Digital is the default position of many successful companies in what is fast becoming a technology-driven world.

This week, we released the findings of our 4Q19 ISG Index, which showed continued strong demand for cloud-based services. The annual contract value (ACV) of the global combined market, made up of managed services and as-a-service components, totaled $13.9 billion, just shy of last quarter’s record-high $14.2 billion, but still up nearly 7 percent compared with the end of 2018.

The as-a-service market drove growth this quarter due to strong demand for cloud-based Infrastructure-as-a-Service (IaaS) and Software-as-a-Service (SaaS) solutions. Managed services, on the other hand, eked out a 0.1 percent increase this quarter from a year ago, but its full-year performance was its best ever.  

In the IT Outsourcing (ITO) space, Network Services performed well in all three regions, despite volume and pricing pressures in legacy network deals. More deals included SD-WAN and mobile-edge computing. Business Process Outsourcing (BPO) activity has been consistent over the past few years, and its ACV rose 9 percent from the like quarter last year. In facilities management, flexible office space providers are seeing strong demand, and more businesses are contracting for larger bundles of services.

The $20.4 billion in ACV for IaaS and the $7.5 billion for SaaS both represent record highs for the year. IaaS was boosted by a series of new product launches this quarter from the largest public cloud players — AWS, Microsoft Azure and Google Cloud Platform. SaaS is benefitting from products launched in the U.S. that can be growth levers when exported to other geographies and customized to specific industries. 

Managed services ACV took a tumble in the Americas, down 18 percent, to $3 billion, pulling the combined market down with it. However, both components of as-a-service registered double-digit growth this quarter year-on-year, and for the first time in a quarter, as-a-service ACV now comprises more than half the Americas’ combined market. SaaS bested its prior-year performance by a thin margin this quarter. Many SaaS firms are concentrating on making integration with different ecosystems easier and more accessible.

You’d think that the uncertainty in Europe and the U.K. would take its toll on EMEA, yet combined market ACV hit a record high of $5.2 billion this quarter. Three mega-deals of more than $100 million a year boosted managed services to $3.5 billion, its best quarter in almost three years. Indicative of the quarter-to-quarter variability that has characterized EMEA, SaaS rose considerably while IaaS ACV languished, turning in one of its lowest quarterly results.

The large growth potential looks rosy for SaaS due to cybersecurity and the different compliance and security mandates from the E.U. and individual countries. We chalk up the quarterly fluctuations in IaaS to the difficulty predicting sales cycles associated with enterprise migrations. We’re keeping a close eye on AWS and Microsoft Azure, which are in a dead heat for market share in Europe.

Combined market ACV in Asia Pacific edged up 2 percent this quarter over last to just over $2 billion, even in the face of China trade uncertainty and civil unrest in Hong Kong. Managed services slumped 41 percent quarter-on-quarter. As-a-service spiked to a record $1.64 billion this quarter and accounts for nearly 80 percent of the combined market.

In our Index call this week, we took a detailed looked at the challenges and trends in the Banking and Financial Services industry. Elevating customer service underpins many of the changes in the industry. Banks face flat-lining revenues, competition, regulatory pressures and a fierce battle for talent. They must balance customer demands for convenience, immediacy and intimacy without crossing privacy boundaries. Any new technologies must be seamlessly melded with the old, leading to the new profession of data scientist.

Wrapping up the fourth quarter of 2019 also wraps up the decade. What can we expect as we move into the 2020s? At ISG, we’re forecasting 23.5 percent year-on-year revenue growth for as-a-service in the coming year.

We’re taking a more conservative position with managed services — 3.2 percent growth for 2020. Much will depend on how the largest service providers rebalance their portfolios: Will they pivot toward digital solutions? Or defy the law of large numbers and pursue legacy deal flow?

To get a fuller picture of current market dynamics, view the 4Q19 Global ISG Index presentation replay, 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.