Our 2Q20 ISG Index™ findings were released earlier this week. We had more than 1,500 participants on the call as we detailed the economic impact on the sourcing industry due to COVID-19. This pandemic is unlike anything the global markets have experienced before, with a complete shutdown of economies, massive disruption of supply chains and the real health risks we are feeling as a global society.
The global financial crisis of 2008 left us rattled, but it was primarily concentrated in the financial services sector, with residual impact on capital-intensive industries, such as the automotive sector. Unlike COVID-19, though, consumer spending did not stop, 50 million-plus people did not find themselves unemployed within a four-week period, and no single industry loss 90 percent of its revenue overnight, as we saw with the hospitality and travel & transportation sectors.
COVID-19 was almost the worst-case scenario—a global pandemic with high transmission and mortality rates. Businesses needed to shut down immediately and scramble to set up work-from-home operations, which forced a dramatic cut-back in managed services spending. Annual contract value (ACV) for the global combined market (managed services and as-a-service sourcing) dropped 5 percent this quarter, to $13.2 billion, due to a 16 percent decline in managed services.
Public Cloud Providers the Winners
The public cloud providers were the real winners over the last quarter; in many ways, we reached the tipping point in public cloud adoption. It will be hard to go back to a fixed-asset approach, such as internal data centers or private clouds, given the success of the public cloud infrastructure, which has stood up to the demands of remote working and increasing bandwidth demands.
The pandemic motivated many companies to accelerate their investment in digital transformation, resulting in a 7 percent increase in the as-as-service ACV. Almost all the growth came from infrastructure-as-a-service (IaaS) investments to facilitate remote operations. Whereas IaaS increased 10.5 percent, software-as-a-service (SaaS) fell 2 percent from this time last year and might have been worse had demand for SaaS-based collaboration tools not shored up the market.
The number of contracts valued at $50 million or more—what we would consider large—was half that of the second quarter of 2019. Given the disruption and uncertainty prompted by the pandemic, enterprises delayed large investments and decided not to make long-term commitments or switch vendors until they’d had a chance to think through their strategy. The good news is that we fully expect most of the deals that were delayed to come back in Q3 or Q4, and we do not see a systemic shift in the global delivery model.
Americas Up on Weak Compare
As we sorted through the numbers by region, we were surprised to see gains in the Americas. Most of those gains, though, were in the as-as-service space, with the managed service business up 1.2 percent against a very weak Q2 last year. When we calculated the five-year average for the quarter, ACV in the region declined 4 percent.
Combined market ACV in Europe, the Middle East and Africa (EMEA) pulled back 9 percent, marking its first back-to-back quarterly decline since 2018. The managed services segments of information technology outsourcing (ITO) and business process outsourcing (BPO) both saw double-digit declines against the prior year. The 23 percent surge in IaaS more than compensated for the 8 percent drop in SaaS ACV to put as-a-service 13 percent to the good.
Asia Pacific slumped 24 percent, to $1.9 billion. The news was bad across the board, as managed services plummeted 47 percent, with a 42 percent drop in ITO and 71 percent tumble in BPO. The decline in as-a-service was less severe, down 9 percent versus last year.
Spotlight on BPO
The highlight of the call this quarter was the spotlight on the BPO markets, led by Scott Furlong and Michael Fullwood. They provided great insights and stories on the impact COVID-19 is having on the contact center and facilities management sectors.
The stay-at-home orders forced contact centers to transition to work-from-home at the same time a tsunami of customer interactions hit. But it turns out work-from-home worked so well that some clients now want more than 40 percent of their workforce to continue working remotely.
In the short-term, facilities management capabilities shifted to workplace health and safety as facility management firms erected safe passages through campuses, cordoned off areas, and established safety checkpoints to ensure workers could return safely. Many organizations rethought their fixed facility costs, which should lead to more opportunities in the co-working and flex-space models, despite the challenges with WeWork and current liquidity issues with firms in the shared work environment space.
Flexible workspace will be critical as enterprise reduce their corporate footprints even as people continue to crave in-person engagement—as we’ve seen over the last 120 days. We will eventually return to offices and we will once again want to gather at the watercooler to discuss sports, politics, office politics or the latest Netflix series.
Stanton Jones, our lead researcher, provided a great analysis of the latest changes with the H-1B program that were recently announced by the Trump administration. An executive order signed in June dramatically restricted the number of visas issued. That, combined with travel restrictions, has caused concern among groups that rely on H-1B visas the most, such as the India-heritage firms, U.S. consulting companies and technology vendors.
Forecasting what’s ahead in the second half of this year remains a challenge given the unknowns of the pandemic and the impact of a potential second wave. Certainly, COVID-19 will continue to suppress global sourcing spend. Most industries will see increases in the third quarter as economies cautiously reopen, but we expect an overall decline in ACV for most industries on a year-over-year basis.
The global managed services market is forecasted to add about $200 million of ACV in the third quarter, which would bring total ACV up to $6.2 billion, a 3 percent increase from the second quarter. But that would still be 11 percent behind the third quarter last year.
To get a fuller picture of current market dynamics, including which industries saw an increase in business during the pandemic and which may not survive in their current form, view the 2Q20 Global ISG Index presentation slides, news release and infographic on our ISG Index page.
For a quick video summary, I encourage you to watch our ISG Index™ Headlines program.
Until we report again in October, enjoy the summer, stay safe and do your part to help others by wearing a mask.