Sourcing Market Turning Its Sights to Recovery and Growth

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Our recent ISG Index™ report shows the global market for technology and business services appears to be shrugging off the worst effects of the pandemic and is turning its sights to post-pandemic recovery and growth.

Indeed, records abound in our latest state-of-the-industry report, covering the fourth quarter and full year of 2020:

  • The combined market (managed services and as-a-service solutions) in the fourth quarter reached a record $16 billion of annual contract value (ACV), up 13 percent.

  • As-a-service, at $8 billion, up 24 percent, and IaaS, at $6.5 billion, up 32 percent, also reached quarterly highs.

  • For the full year, records were established for the combined market ($59.8 billion, up 7 percent), as well as for the as-a-service market ($33.2 billion, up 17 percent) and its components: IaaS ($24.3 billion, up 23 percent) and SaaS ($8.9 billion, up 4 percent).

What do these results tell us? Hyperscalers are moving the market as enterprises the world over continue to shift workloads to the public cloud. Work from home, the rise of apps, custom centricity, data and analytics—all are accelerating cloud demand.

Somewhat surprisingly, managed services also finished the year with a bang, climbing above $7 billion of ACV for the first time in a year, with five mega-deals (deals worth more than $100 million) in the fourth quarter boosting this end of the market. That level of activity is likely not sustainable, but it does provide an optimistic sign for a stronger 2021. Indeed, the deal pipeline we track looks pretty robust for the first half.

Amid the pandemic, we’ve been telling our clients to consider monetizing their captive operations, to free up cash for continued investment in digital transformation. In line with that recommendation, three of the five European mega-deals in the fourth quarter involved the sale of large IT captives to generate cashflow and accelerate innovation. We would expect to see more of these in the market during 2021 as multiple industries recover from the pandemic.

Overall, we see a rising market for technology and business services.

The combined market has grown from about $42 billion four years ago to almost $60 billion of ACV in 2020. That’s a 9.5 percent CAGR, or almost 42 percent during that period. The growth is all led by as-a-service firms, which are fueling a broader ecosystem of capabilities and a strong M&A environment.

While the ITO sector had its best year ever in 2020, much of its success was fueled by applications and full ITO deals. Dig a little deeper, and you see a downward trend in infrastructure deals (read data centers), with average quarterly spend down from $1.5 billion five years ago, to barely $1 billion currently. We’ll see this trend accelerate as demand shifts to the public cloud.

Managed services providers, though, are creating new offerings to compete, such as cloud management platforms and support for multi-cloud environments. They should have several years of growth ahead, helping organizations transform their apps portfolio, managing cloud sprawl, and offering security and multi-cloud solutions. There’s also work to be had in the engineering space with IoT and IT/OT integration. Software tools have made all this easier, but overall, the rise of the public cloud will continue to erode the traditional data center outsourcing space.

This trend is vividly illustrated in the following chart.

4Q20-Index-1

Regardless of where the spending comes from, the combined market added $18 billion of additional ACV to a big pie over the last four years, and that’s certainly good news for the industry.

Looking ahead, we’re forecasting 3 percent growth in managed services and 20 percent growth in as-a-service for 2021. That may be a bit conservative, but our caution is due to the uncertainty of how the pandemic may impact the first quarter. If we start off strong, say with something close to $7 billion of managed services ACV in Q1, we’re likely to revise our forecast upward.

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 4Q20 Global ISG Index presentation slides, press release and infographic on our ISG Index website.

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.

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