Index Insider | 1H26 ISG Index Recap

Hello. This is Stanton Jones with a special recap of the second quarter and first half 2026 ISG Index call. You can download the slides here, and watch a replay here.

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1H26 Recap

Annual Contract Value (ACV) in the technology services industry was up 35% in the first half of 2026, primarily driven by exceptionally strong growth in infrastructure-as-a-service, which was up 66% in 1H26. Managed services growth was muted at 2.7%; enterprises continue to consolidate providers through larger, longer cost-takeout deals and engage with smaller, niche providers to gain speed and specialization for project-based work. The expectations around AI continue to be positive in the as-a-service segment but negative in managed services due to concerns around how AI will impact labor-centric tech services.

Managed Services 1H ACV Results

• Service Lines: ITO down 6%; Engineering down 3%; BPO up 47%
• Regions: Americas down 6%; EMEA up 13%; Asia Pacific up 10%
• Industries: BFSI up 2%; Energy up 11%; Manufacturing down 8%

As-a-Service 1H ACV Results

• Software-as-a-Service: Up 14%
• Infrastructure-as-a-Service: Up 66%

Call Q&A

Here’s a quick recap of some of the key questions from the call:

Will the surge in as-a-service demand eventually flow into managed services? Some of it yes, but the timing and shape of the return will vary. AI infrastructure growth is already creating services work around cloud management, data-center architecture, AI strategy, prompt routing, platform design, governance and systems integration. But AI is also compressing parts of the work itself, especially in software development and other labor-intensive activities.

Will the GCC wave continue? Enterprises are building more internal delivery capacity, especially in areas like product engineering, AI, data and analytics. For more mature companies, the language is shifting away from “GCC” as a separate construct and toward the location being just another extension of HQ. Work is moving to where talent is and where cost scales.

What’s driving the strong M&A activity in the market? Large acquisitions are partly about being able to take on broader scopes of work as clients consolidate providers. Smaller acquisitions are more likely to focus on AI, cyber and engineering capabilities. Scale still has value in cost-transformation deals, but specialization is also becoming more important as buyers use smaller projects to move faster.

Why are so few AI use cases making it to production? AI can create more output, but that output still has to be checked by people with the right expertise given the probabilistic nature of these models. If those experts are already the scarce resource, AI can add work before it removes work. This is creating what we’re calling the “validation bottleneck.” 

How is AI impacting deal economics? Service providers are pricing around the assumption that AI will help them deliver significant cost or headcount reductions. We also see significant levels of financial engineering happening on deals to bring these savings forward faster. The challenge is that neither providers nor enterprises have full visibility into how the savings will be achieved – or if more savings could be achieved as frontier models improve. This is why new AI pricing constructs like autonomy level pricing (ALP) will be critical for the market going forward.

2026 Growth Forecast

Managed services: Holding the forecast at 2.1%. The services segment remains resilient, but it's also becoming more competitive and delivery options outside of the IT services sector are increasing.

As-a-Service: Increasing the forecast to 30%, a 500-basis point increase from Q1. The XaaS segment will continue to be very strong, primarily due to unprecedented demand for AI infrastructure.

You can get more detail on the AI Index here, catch a replay of the call here, download the slides from the call here and get a copy of our newly published 2026 State of BPO here.