A Tale of Two Markets: Digital Spending Still Strong, But Cloud Demand Drops


The results are in for the first quarter of 2023, and there really are no surprises. Interest rates, inflation and a potential banking crisis remain at the top of the list of concerns for enterprise executives, and that is impacting spending on IT and business services.

This is really a tale of two markets. Our 1Q23 Global ISG Index™ shows record-high annual contract value (ACV) in the managed services sector this quarter, fueled by continuing demand for applications and engineering services – a clear sign that ongoing digital transformation is alive and well. On the other, the cloud services market has seen its blistering growth slow considerably in recent quarters as enterprises slow the pace of migrations and look to optimize existing workloads in response to the uncertain economic environment.

The decrease in bookings for software-as-a-service and infrastructure-as-a-service and layoffs in the tech sector reflect a rightsizing after some panic buying and over-hiring instigated by the pandemic. Organizations also are focusing on cost optimization as the specter of a recession lurks.

After peaking a year ago, the global combined market slowed throughout 2022. ACV of $24 billion in the first quarter edged up a point from the prior quarter, the first sequential rise in a year. But it dropped 8 percent against a record 1Q22.

Managed services inched up to reach a record high — just barely — of nearly $9.8 billion in ACV. Eight megadeals were signed in the quarter, a rarity. Restructuring (contract renewals and extensions) continued a pattern of being up one quarter, down the next. The first quarter was especially active for restructurings, with a new high of $4 billion in ACV generated from a record number of transactions. Much of the vigor comes from cybersecurity, application modernization and cloud-native application development. Contracts in these three areas tend to persist, even in an inflationary economy. The BPO market remained healthy, staying above $3 billion for the quarter, albeit down 10 percent compared with a record quarter last year. There’s often no financial investment up front by a client, leaving BPO initiatives less exposed to budgetary pressures.

As-a-service ACV dwindled over the course of the year, to $14 billion in Q1. After a frenzy of activity during the pandemic when so many enterprises sped up their digital transformation, demand for infrastructure-as-a-service has calmed. Cloud consumption seems to be slowing. Hyperscalers enjoyed exaggerated growth during COVID due to a “buy ahead” approach and aggressive workload transitions. Now businesses are shifting from expansion to optimization of existing cloud spend. Sales cycles in software-as-a-service have lengthened. Enterprise customers are playing it safe in this uncertain environment, giving their business to large, well-capitalized providers with broad platform capabilities, and curtailing investment in point solutions.

Regionally, the Americas’ combined market ACV landed at $12.5 billion in the first quarter after a year of steady deceleration, a 7 percent year-over-year drop that was the most dramatic decline yet. Managed services edged down a point from last year to $5.2 billion in ACV in the quarter. The number of contracts signed dropped 9 percent, but included a notable six megadeals. Restructuring deals contributed more than $2 billion in ACV, while new scope made up the remaining $3 billion. As-a-service ACV fell throughout 2022, and the rate of decline is accelerating. XaaS turned negative for the first time in the Americas.

Combined market ACV in EMEA dipped 5 percent against a record-setting 1Q22, to $7.4 billion, remaining in that range from quarter to quarter over the past year. A record number of managed services deals were signed in the quarter. Restructuring ACV came in at $1.5 billion, one of the strongest quarters since the height of the pandemic. New scope ACV of $2.2 billion was not nearly so robust, though the number of awards inked hit an all-time quarterly high. As-a-service ACV of $3.7 billion was down 6 percent from a year ago, the largest decline ever in EMEA.

Combined market ACV had been slipping in Asia Pacific over the last year, but pushed back up above $4 billion this quarter – yet still down 14 percent against last year’s strong Q1. Managed services ACV of $825 million rocketed 60 percent above the first quarter of 2022. Restructuring had its best quarter since before the pandemic, up triple digits year-over-year. As-a-service was down 23 percent versus a strong prior-year quarter, but was up 24 percent sequentially versus the fourth quarter. In China’s tech sector, we’re seeing more parity among providers.

With all this in mind, we’ve lowered our 2023 as-a-service growth forecast to 15 percent. But we’re holding firm on a 5 percent growth rate in managed services.

To get a fuller picture of current market dynamics, view the 1Q23 Global ISG Index™ webcast replay, presentation slides and press release on our website.

For a quick video summary, I encourage you to watch the latest edition of “The Big Three Takeaways” on this page. It’s also posted on our ISG Index page and on YouTube.

Finally, we invite you to sign up for our weekly ISG Index Insider briefing. We’ll host our second-quarter ISG Index™ call on July 13, and invite you to register today.

Have a safe and healthy spring.


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.