ISG Index™: Record-Breaking 2021 Ends With Signs of Slowdown

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2021 was a record-shattering year for the technology and business services industry. Annual contract value (ACV) for managed services, XaaS and many other segment “acronyms” soared to new heights. Each region signed more contracts than ever. This market vigor persisted despite a pandemic that won’t fade away – a crisis exacerbated by inflation, supply chain disruptions, labor shortages and rising wages.

However, we shouldn’t take this abundance for granted. The recent 4Q21 Global ISG Index™ showed signs the markets are slowing. Growth rates for the quarter were strong, especially compared with a Covid-weakened fourth quarter of 2020. But they weren’t quite as high as the year-on-year comparisons we saw in the third quarter, and in many areas, 4Q21 barely edged out 3Q21 performances.

Global Performance

The global combined market ACV of $84 billion for the full year was nearly 30 percent higher than 2020, the highest ACV and annual growth rate since we added XaaS coverage in 2014. For the fourth quarter, combined ACV was $23 billion, 32 percent higher than a year ago, but barely 1 percent more than the prior quarter.

Managed services’ full-year ACV hit a record $33 billion, up 16 percent over the prior year. ITO reached $25.1 billion for the first time, led by record-breaking ADM, though infrastructure services dropped 11 percent. Full-year XaaS ACV topped $51 billion for a new record, a stunning 61 percent increase over pre-pandemic 2019 and up 38 percent over 2020. Both IaaS and SaaS hit new highs.

Regional Performance

The Americas hit a record high for combined ACV in 2021, but growth flattened out sequentially in the fourth quarter. EMEA also hit a record high for combined ACV for the year, but like the Americas, showed signs of slowing demand in the fourth quarter. Asia Pacific followed suit, growing at its fastest past ever in 2021 and establishing a new high for combined ACV. But ACV for cloud-based infrastructure services slowed sequentially in the fourth quarter, principally due to lower demand in China. You can read the details in the regional press releases posted on our ISG Index webpage.

M&A Activity Up

We see providers embracing the opportunity to bolster their digital capabilities in the current market. M&A activity smashed records, both in the number of transactions, up 47 percent year-over-year, and in value, up 63 percent over last year. IT and engineering services companies were prime acquisition targets.

Providers are in the mood for deals, possessing higher cash reserves from pandemic cost-savings measures and with cheaper borrowing available in a still-low interest rate environment. The private-equity sector also targeted IT services in a big way in 2021. Advent International acquired digital engineering firm Encora; KKR acquired provider Ensono, and I Squared Capital acquired KIO Networks, Mexico’s largest data center operator.

Other Market Trends

Megadeals may make headlines, but small deals drive the market. Roughly 80 percent of managed service deals in 2021 were below $20 million, compared with 85 percent in 2020, an indication deal size is edging up slightly. Still, we expect the trend toward smaller deals to continue. To feed their need for speed, firms are breaking transformation-related work into smaller chunks that can be done quickly, which creates opportunities for midsized providers.

Attrition from the Great Resignation that began two years ago had less of an impact during the pandemic when businesses slowed or shut down. But now that demand is strong, and attrition is at an all-time high, providers are feeling the pressure. They’re relying more on subcontractors and lateral hires and scooping up junior resources from college campuses.

During our ISG Index™ call, Kathy Rudy, chief data and analytics officer for ISG, explained inflation and rising wages have had little effect on contract pricing thus far. Providers are back-loading projects for profitability in their final years, maximizing off-shore capabilities, and reaping benefits of reduced travel expenses and overall cost of sales. Pricing on time-and-materials contracts, however, is increasing an average of 4 to 7 percent, reflecting the higher costs of adding and retaining talent with in-demand skills.

Manufacturing Spotlight

Christian Decker, ISG EMEA partner for smart manufacturing, joined our 4Q21 Index™ call for a rundown of key industry-specific trends. Among them was the speed with which corporate boards are jumping on ESG — Environmental, Social and Governance — to drive energy efficiency and monetization opportunities. He gave the example of the Maersk shipping line that set a goal of zero-carbon by 2050. To do that, its ships will have to be carbon-neutral by 2030, so it is investing in technology to change ship engines to run on clean energy.  

2022 Forecast

Despite the apparent slowdown in market demand in the fourth quarter, we’re still forecasting solid growth for 2022 — 5.1 percent for managed services and 20 percent for the XaaS market — as enterprises continue to invest in digital in response to the pandemic and despite current economic challenges.

To get a fuller picture of current market dynamics, view the 4Q21 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 “ISG Index™ Headlines” on the same page or on YouTube.

Finally, we invite you to sign up for our weekly ISG Index Insider briefing. We’ll host our first-quarter ISG Index call on April 6.

Until then, stay safe, healthy and masked.

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.

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