Beancounters at ISG have noticed that global demand for technology and business services continues to rise, reaching an all-time high in the first quarter, with a growing pipeline of deals signalling continued expansion in 2021 as the economy begins to emerge from the pandemic.
Data from the ISG Index, which measures commercial outsourcing contracts with annual contract value (ACV) of $5 million or more, show first-quarter ACV for the combined global market (both as-a-service and managed services) reached a record $17.1 billion, up 11 percent over last year and up four percent from the fourth quarter.
This was the third consecutive quarter of global growth following the pandemic-related drop in the second quarter of 2020.
ISG partner and president Steve Hall said that the demand environment had improved steadily over the past three quarters.
“Deals are filling the pipeline as economies loosen pandemic restrictions, and enterprises continue to make digital transformation a business imperative. Providers are focused on meeting that need by concentrating on cloud modernisation, cost optimisation, and helping customers create resilient and agile operations and personalised omnichannel experiences.”
The report said that the cloud-based as-a-service market rose 15 percent, to a record $9.9 billion, in the first quarter, but growth decelerated from the fourth quarter when it was up 26 percent year over year.
Meanwhile, managed services ACV reached $7.2 billion in the first quarter, up seven percent year over year, outperforming expectations due to a second consecutive quarter of strong growth in Europe.
Within the as-a-service segment, infrastructure-as-a-service (IaaS) generated a record $7.2 billion of ACV, up 18 percent versus the prior year but slowing from its 36 percent growth rate in the fourth quarter. Software-as-a-service (SaaS) produced a record $2.7 billion of ACV, up seven percent year over year and 10 percent quarter over quarter.
Within managed services, IT outsourcing (ITO) ACV was $5.8 billion, up a percent from last year and down slightly from the previous quarter, as strength in application development and maintenance (ADM) services—up to seven per cent versus the prior year on a record number of deals and up 29 percent versus the prior quarter—was largely offset by six percent year-over-year decline in infrastructure services. ITO contract volume, overall, reached a record 376 deals.
Meanwhile, ACV for business process outsourcing (BPO) leapt 43 percent from the prior year to $1.4 billion but was down slightly from the prior quarter. The BPO market was driven by strength in industry-specific services and engineering and R&D services, even as two of the largest BPO segments, facilities management and contact centre services, produced mixed results.
EMEA’s combined market reached $6.0 billion, up 20 per cent from the prior year but down five per cent from its record fourth quarter. Both the as-a-service and managed services segments produced strong results.
As-a-service rose 16 percent over the prior year, to a record $2.5 billion, on strong demand for IaaS, which produced record ACV of $1.8 billion, up 19 per cent versus the prior year nine per cent growth in SaaS, to $658 million.
Managed services, meanwhile, generated $3.5 billion of ACV, up 23 percent year over year, its second straight quarter of sizeable results. ITO was up 17 per cent year over year, to $3.0 billion, on strength in both ADM and infrastructure services. BPO surged 66 percent, to $521 million, with strong demand for industry-specific, finance and accounting, and engineering and R&D services.
ISG forecasts the market for cloud-based services (IaaS and SaaS) will grow 18 per cent globally in 2021, down slightly from its 20 percent forecast at the start of the year. ISG, meanwhile, has raised its growth forecast for managed services to five per cent, up from three per cent at the start of the year.
Hall said: “Many of the large IaaS providers are focusing on growing the top line and winning share, but ultimately they will have to generate profits. Building scale via long-term agreements with G2000 enterprises may provide that path to better margins. SaaS firms will need to focus on their land-and-expand strategies inside the client footprint, so they can upsell new products and build scale while also expanding internationally to tap new and underpenetrated geographies.”
On the managed services side, Hall said ISG sees growth through large, transformation-focused deals this year.
“These multi-tower transactions encompass infrastructure, applications, and cloud migration and modernisation. As the pandemic begins to ebb, we see decision-making ramping up with a greater willingness on enterprises to sign large deals. Megadeals are a prerequisite for solid industry growth. Even four or five megadeals in the next couple of quarters should boost ACV growth by an additional 200 basis points, to seven percent for the year,” Hall said.
