You Don’t See This Too Often: A Down Market for IT and Business Services


It’s something we haven’t seen in nearly six years. The global combined market for IT and business services actually declined versus the prior year in the third quarter. The last time that happened was the fourth quarter of 2016.

That’s not to say demand is down. But spending is.

Data from the 3Q22 Global ISG Index™ released this week confirms demand remains strong, but rising interest rates, energy shortages, supply chain disruptions and continuing inflation are injecting some caution in the market right now.

Enterprises are as committed as ever to their digital transformations, but they are going at it a bit slower these days. Cost optimization is back in vogue.

The demand is certainly there. The volume of managed services contacts signed in the third quarter – 661 – is still near all-time quarterly highs. It was the second most contracts ever signed in a quarter and the fourth time in the last five quarters deal volume exceeded 600 contracts.

Spending is another matter. The global combined market – both managed services and XaaS – generated $23.2 billion of annual contract value, or ACV, in the third quarter. While that’s still robust, it was down 3 percent from last year. Again, it’s the first year-over-year down market we’ve seen in quite some time, and quite a departure from the 19 percent year-over-year growth we’ve seen over the last five years.

Cloud Demand Hits the Brakes

The cloud-based XaaS segment has definitely hit the brakes. This market has been growing at a quarterly clip of 40 to 50 percent of late – no surprise, considering how much work shifted to the cloud during the pandemic – but in the third quarter, ACV declined 4 percent versus the prior year. It was the first time since the beginning of 2015 we have seen a down quarter for XaaS.

Much of the softness can be attributed to lower demand for the cloud services offered by China’s big four hyperscalers, which continue to be impacted by COVID-related lockdowns and now a stronger U.S. dollar. The big three hyperscalers in the U.S. – AWS, Azure and Google Cloud – continue to carry this segment, although we’re seeing growth slow slightly there as well.

Managed services was not immune either. ACV in the third quarter for this segment was off 1 percent versus the prior year. IT outsourcing was up 2 percent, thanks to demand for infrastructure and ADM services, but spending on business services tailed off after a strong first half.

The picture looks a bit rosier from a year-to-date perspective. Through nine months, global combined market ACV was up 11.5 percent, to nearly $72 billion, in line with pre-pandemic growth rates. Managed Services ACV, year to date, reached a record high of $27.6 billion, up 6 percent. XaaS generated $44 billion of ACV for the year to date, up 15 percent compared to the like period in 2021.

Still, one can’t ignore the obvious slowing of the market in the latest quarter. It’s the economy, stupid, as one political pundit used to say. Rising energy costs and continued supply chain disruptions are driving up inflation, and banks are responding by raising interest rates, which raises borrowing costs, which suppresses demand.  

Global Forecast

We’re holding to our growth forecast of 3.5 percent for managed services in 2022. But we’re buckling up for quite a bit of turbulence in the XaaS market in the coming six to nine months. More lockdowns loom in China, and that will take a toll on growth for hyperscalers in that region. The yuan is also weakening. Given those headwinds, we’re lowering our growth forecast for XaaS from 18 percent to 10.5 percent for 2022. 

On a positive note, the third quarter marked a special milestone for the ISG Index – our 20th anniversary as “the authoritative source for marketplace intelligence on the global technology and business services industry,” as we like to say.

We’ve been at it now for 80 consecutive quarters. Just to give you a sense of how much this research program has grown over the years, we had 45 attendees on our first Index call all the way back in the fall of 2002. When we hosted the 3Q22 call this week, we passed more than 30,000 total attendees, in total, over the past two decades.

I'd like to recognize our incredible ISG Index team. That includes my fellow presenters, who you'll see in action when you watch a replay of this quarter’s webcast, but especially those that have worked tirelessly behind the scenes to make this event happen, rain or shine, for 20 years now. Quite an accomplishment!

Until we meet again, check out the replay, the presentation slides, the press releases and our “Big Three Takeaways” video on our website. You can also sign up for the weekly ISG Index Insider briefing while you’re there.

See you on our next call, when we’ll present fourth-quarter market results, on January 12.


About the author

Steve Hall

Steve Hall

What he does at ISG

As the leader of ISG’s business in EMEA and an Executive Board Member, Steve provides strategic insight and advice to help ISG’s clients solve their most critical business challenges, helping them adopt and optimize the technology and operating models they need to compete successfully. In particular, he uses his long experience and broad expertise to challenge and inspire them to think about their risks and opportunities in new and unexpected ways.

Past achievements for clients

Steve leads his team’s engagement with clients with an industry-recognized and highly valued perspective on the most important trends in business and technology. He asks and answers the big questions: Why do you need to transform? What’s your best way forward? What do you need to accelerate? And where should you invest your technology dollars to make it all happen?

Among his many client success stories, his ability to take in the big picture, define the problem and connect the dots to the right solutions helped one legacy postal and shipping giant transform itself into a modern logistics powerhouse. He also guided a global energy industry leader through a complex operating model and IT provider transition, helping them see past the obvious cost cutting measures to identify the root causes of their challenges—and delivering savings far beyond what they had imagined.