The global outsourcing market has a lot to contend with these days. Despite strong demand for IT and business services, and some pockets of near-record annual contract value (ACV) in the second quarter of 2022, we can’t ignore the storm clouds gathering on the horizon.
In our 2Q22 Global ISG Index™ webcast, we laid out the data and delved into the macro forces buffeting the market. Enterprises and service providers alike have weathered a persistent labor shortage and The Great Reshuffle; the outsized impact of foreign currency exchange with many currencies weakening against the U.S. dollar; unreliable or broken supply chains; inflation and soaring energy prices; and geopolitical turmoil, including the U.K. posting a “help wanted” sign for a new prime minister. And COVID lockdowns still aren’t over.
An Active Market
Yet with all these headwinds, the market remains very active, with 600 managed services contracts signed in the second quarter, among the highest volumes we have ever seen. Applications development and maintenance (ADM) services are in high demand, with six consecutive quarters of ACV north of $3 billion. Engineering Services was up more than 40 percent, and ACV for industry-specific BPO (business process outsourcing) doubled over the prior year.
From a broader perspective, the combined market (managed services and cloud-based XaaS) generated nearly $23 billion of ACV in the quarter, up 9 percent year over year, but down 7 percent from the first quarter – perhaps the proverbial canary in the coal mine for what lies ahead in the second half.
Dissecting the market further, managed services delivered nearly $9 billion of ACV, up 2 percent, a sluggish performance compared with recent average growth of 16 percent, yet surprisingly strong given that legacy infrastructure dragged down IT outsourcing and the data center business hasn’t climbed back after falling off a cliff during the pandemic. Fortunately, business process outsourcing (BPO) has found its footing.
Cloud Momentum Slows
XaaS, which typically powers the market, posted $14 billion of ACV this quarter, its lowest level in the past year, and up 13 percent, the slowest growth rate since we began tracking the metric. Indeed, in recent quarters, we were more accustomed to seeing growth between 40 and 50 percent. Most of the growth this last quarter came from the Big 3 hyperscalers — AWS, Azure and Google Cloud — deploying AI systems, a technology trend that’s not going to slow down. Conversely, China’s Big 4 tech firms struggled with extended lockdowns and tighter regulations.
The half-year view of the global broader market and all three regions smoothed out the quarterly choppiness. The combined market’s $47.3 billion in ACV in the first half was 19 percent higher than the same period a year ago. Two of the three regions followed a similar pattern.
At the half year, the Americas’ combined market ACV was 29 percent higher than 1H21. Managed services came in 11 percent higher, and XaaS posted a 42 percent increase compared with last year.
Similarly, EMEA posted 20 percent growth in combined market ACV through the half-way point; managed services grew at a slower 8 percent, whereas XaaS increased 35 percent over the prior year.
Asia Pacific, however, was another story. Its combined market ACV sagged 5 percent year-on-year for the first half. Managed services slid 4 percent during that period, and XaaS dipped 6 percent from the prior year.
Big Three Takeaways
The essence of the quarter can be summed up in three key takeaways. To see what they are, I invite you to watch the video on this page.
One of the key takeaways is the tight labor market. The talent supply-and-demand imbalance has led to extraordinarily high attrition rates, but we believe the worst is behind us. Companies have thrown themselves into hiring and retention efforts, to fill the talent bucket faster and to muffle The Great Reshuffle — experienced workers making lateral moves for more money or better work/life balance.
In addition, the number of new startups is slowing, which adds to the talent pool. Some companies are leveraging M&A to augment staffing and fill technology gaps. The M&A market is partly driven by decreasing valuations and increasing stashes of cash held by corporations and private equity firms.
Revised Global Growth Forecast
Give the current economic uncertainty and expected market volatility, we have tempered our forecasts for the year. We’ve lowered our growth forecast for managed services to 3.5 percent, from 5.1 percent previously, and our forecast for XaaS to 18 percent, from 22 percent in the first quarter.
For more details about the latest market trends, visit our ISG Index webpage to see a replay of our Q2 webcast, view the presentation slides or read the press release. And if you want a quick summary, again, take a look at our Big Three Takeaways video.
Our next ISG Index webcast is October 13, and we invite you to register today.
To stay on top of market trends until then, please sign up for our weekly ISG Index Insider briefing, delivered straight to your inbox every Friday.
Until next time, as my colleagues in the UK say, keep calm and carry on.