3Q19-ISG-Index

Digital Demand Remains Robust, Even as Broader Market Shows Signs of Slowing

From my vantage point in the UK, I see heat maps of uncertainty all around: the continued uncertainty around Brexit; political turmoil in the U.S.; ever more virulent protests in Asia; trade and tariff wars; a bull economy that has outlived its life expectancy.  

And yet, companies are continuing to spend money on modernizing their infrastructure and creating digital products. Even as they ready for a recession, businesses recognize digital is now mainstream in our cloud-first world and crucial to long-term success.

Our 3Q19 ISG Index™ showed record global demand for cloud-based services. In a quarter where the annual contract value (ACV) of the global combined market, comprising managed services and as-a-service, increased by 13 percent, to $13.8 billion, the cloud-based as-a-service sector reached a new high of $7.1 billion, up 19 percent, the first time ever it crossed the $7 billion threshold.

Infrastructure-as-a-service (IaaS), the main driver of as-a-service growth, surged 22 percent to a new quarterly high, while software-as-a-service (SaaS) advanced 11 percent over the prior year.

Though ACV of IT outsourcing (ITO) dipped 2 percent globally this quarter, the applications space has been active as companies dismantle their legacy IT systems and providers bring new technology to the market. We expect that to continue. We also saw strong demand for business processing outsourcing (BPO), with ACV up 53 percent in the quarter.

The Americas, in particular, claimed bragging rights, passing the $7 billion mark in quarterly combined ACV for the first time ever.  Records were broken almost across the board, with as-a-service, managed services, IaaS, SaaS and ITO all up double digits to new highs.

EMEA, on the other hand, struggled amid recession fears. Its combined market declined 7 percent, dragged down by a 17 percent drop in managed services, even as enterprises continued to invest in the future, with as-a-service spending up 10 percent. Europe is still playing catchup in the as-a-service space; cloud adoption has been slower there than in other regions due to security and privacy concerns.

Asia Pacific, though a much smaller market, is enjoying some sustained success. The region’s combined market ACV stayed above $2 billion for the third quarter in a row and, year to date, it saw strong double-digit growth in both managed services and as-a-service.

For some time now, we’ve watched the as-a-service market soar, especially IaaS. This quarter, we parsed out the digital component of managed services. First, we had to come up with a definition for “digital” because everyone’s is different. For our purposes, we focused on contracts that had some form of cloud computing, along with analytics or AI. That let us see trends. In 3Q19, nearly half – 48 percent – of the contracts awarded in the broader market had a digital-based scope. That’s an all-time high, and we see strong potential for growth going forward.  

Those of you in the U.S. likely are acutely aware of the dynamics of the health-care industry. Changing regulations have sparked some disruption, and a consortium featuring Amazon entered the market. Providers are seeking out partnerships as they brace for the expected entry of big-tech companies like Microsoft, Google and Apple. All of this has increased digital adoption and has coined a new term: the Internet of Medical Things.   

With three quarters of the year in the rear-view mirror, providers are watchful of external factors that could impact customers’ spending decisions but remain cautiously optimistic about demand overall.

As are we at ISG. We are projecting 2019 as-a-service revenue growth of 22 percent as digital demand remains robust. The broader IT and business services market, however, is more sensitive to global economic conditions and geopolitical unrest. We’re watching the news closely, particularly to see how U.S. trade talks with China unfold and how technology firms prepare for demand issues should China become more restrictive with U.S. businesses.

In light of the uncertainty in so many areas that could impact spending decisions, along with the FX impact of a stronger U.S. dollar, we have lowered our growth forecast for IT and business services by about 50 basis points, to 2.6 percent for the year.

To get a fuller picture of current market dynamics, including the growing demand for the as-a-service model, view the 3Q19 Global ISG Index presentation slides, news release and infographic on our ISG Index webpage.

For a quick video summary, watch our 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.