1Q21-ISG-Index

Global Services Sector Remains on a Roll, Following Q2 Pandemic Dip

Technology and Business Services Expand in First Quarter 2021

The inexorable march to digital transformation continues. It may have slowed at the outset of the pandemic last year, as companies stalled major technology investments in favor of cost reduction and cash preservation, but it has since picked up steam. Indeed, enterprise appetite for digitization has never been stronger.

There’s no truer indication of that than the global growth of the technology and business services market. The latest ISG Index™ shows global demand for such services has never been higher, with the first quarter producing a record $17.1 billion of annual contract value (ACV) for the global combined market, up 11 percent. It’s the third straight quarter the global market has grown after the pandemic-induced dip in the second quarter of 2020.

Both sides of the market are growing, an encouraging sign for the industry. Traditional managed services (ITO and BPO) grew 7 percent in the first quarter, thanks to a stronger-than-expected performance out of Europe. The cloud-based as-a-service segment, meanwhile, rose 15 percent, with both IaaS and SaaS hitting record-highs in ACV.

As-a-service Market Sees Record Growth

IaaS, topping $7 billion for the quarter, was up 18 percent over last year, normally considered heady growth, but less than the 36 percent increase it saw in the fourth quarter. Indeed, the year-on-year growth in the as-a-service markets globally and regionally, when measured on a trailing 12-month basis, is not quite as strong as it has been in years past. As-a-service continues to add about $10 billion of ACV per quarter, and enterprise clients continue to shift workloads to the cloud at a record pace, but the SaaS business has slowed. SaaS providers are feeling downward pressure from hyperscalers.

Hyperscalers, themselves, might not experience the meteoric growth rates of the past going forward. They have been focused on top-line growth in the name of market share, but that will likely change at some point as profitability becomes more of a concern.

A Look at Regional Results

Spinning the globe, the Americas combined market grew 6 percent, to $8.6 billion in ACV, with all the growth coming from the as-a-service sector. Both IaaS and SaaS contributed equally as companies continue to work remotely. Competition among the hyperscalers AWS, Azure and Google Cloud heated up in the automotive vertical with the push for driverless cars and in-vehicle connectivity.

Managed services in the Americas has returned to pre-pandemic levels, but continues its roller-coaster ride of up one quarter, down the next. ITO’s ACV fell 13 percent from 1Q20 but soared 51 percent over a weak 4Q20. BPO posted a 33 percent gain from the prior year, boosted by strength in industry-specific BPO and engineering and R&D. Enterprises are reimaging contact centers, a distressed sector during the pandemic.

EMEA has started the year on a high note. The region’s combined market ACV rose 20 percent from a year ago, and it has logged back-to-back quarters of at least $6 billion and four megadeals each. Managed services grew 23 percent over last year, aided by strong performances in France, the U.K. and DACH. As-a-service rebounded and now accounts for 41 percent of the region’s combined market. ISG advised one of the biggest landmark cloud deals in the region this quarter with the signed agreement between Amadeus and Microsoft Azure.

As for Asia Pacific, we’re almost ready to declare total victory for as-a-service. IaaS and SaaS together now make up 85 percent of the region’s ACV. For the quarter, its combined market ACV grew 11 percent, to $2.16 billion. Large deals have essentially disappeared from the region. The infrastructure-as-a-service race for market share in financial services continues.

Oil and Gas Industry Prepares for the Future

We invite industry experts to our ISG Index call each quarter, and this time we took a closer look at the Oil & Gas and Chemicals industry. Dale Hearn, ISG partner in Energy, and Robert Stapleton, an ISG director in the vertical, teamed up to share opportunities and pitfalls they see in the sector.

Not only did COVID dry up demand for oil and gas, because nobody went anywhere, but Russia and Saudi Arabia engaged in a price war that disrupted the industry. For the first time ever, the price of a barrel of oil went negative; producers nervous about maxing out on storage capacity were paying buyers to take oil off their hands. A number of bankruptcies in the industry sparked some mergers and acquisitions, which may lead to renegotiating or modifying agreements, especially in ITO and BPO, as these newly combined companies look for synergies and ways to reduce spend.

Chemical companies fared better as many pivoted production to products to fend off COVID, such as PPE devices. Many took the opportunity to upgrade to the S4HANA platform and are accelerating digitization, tapping AI and adopting the cloud. 

Demand for Cybersecurity Services on the Rise

Stanton Jones, a regular on our ISG Index™ calls, recapped five themes of interest to our industry that he’s detailed in his weekly ISG Index Insider email (you can sign up for it on ISG’s website). The most important theme, he said, was cybersecurity. The scope and scale of security breaches in the first quarter was unprecedented. The Solar Winds breach alone impacted more than 18,000 organizations worldwide, and the Microsoft exchange breach compromised some 30,000 systems over the past decade before it was discovered this quarter.

The volume and sophistication of these exponentially increasing attacks will create strong demand for managed cybersecurity services. Providers are not immune to these attacks. And as Stanton said, all it takes is one highly public breach to seriously damage a firm’s reputation.

In Q2, we’ll see which industries are recovering and which are still struggling coming out of the pandemic. Join us for our second-quarter ISG Index call on July 7.

In the meantime, if you get the opportunity for a vaccine, please take your shot, or as my colleagues in the UK would say, your “jab.”

To get a fuller picture of current market dynamics, view the 1Q21 Global ISG Index presentation slides, news release and infographics on our ISG Index website.

For a quick video summary, I encourage you to watch our new “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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