The shift is on.
During our 3Q25 global ISG Index webcast this week, we demonstrated how artificial intelligence is radically changing the way companies invest in technology and software services.
The third quarter reinforced what we’ve seen throughout the year: enterprise priorities have shifted. Cloud infrastructure and AI-first strategies are now central to where—and how—clients are investing.
That’s borne out in the numbers. As-a-Service (XaaS) spending once again carried the market, up 31 percent in Q3 and 29 percent year to date. Spending was particularly strong in infrastructure-as-a-Service (IaaS), up 35 percent (33 percent year to date), as companies look to the clouds in pursuit of their AI dreams.
Software-as-a-Service (SaaS), enhanced with AI, is also performing well, up 18 percent in Q3 and 16 percent year to date, with growth across IT service management, collaboration and analytics.
Meanwhile, managed services was down 2 percent in the latest quarter, and rose only 1.5 percent year to date—its lowest growth rate in five years. This divergence speaks volumes. XaaS now accounts for 65 percent of total annual contract value (ACV), and its share continues to grow quarter after quarter.
As AI adoption accelerates, we see it disrupting one segment of managed services in particular—business process outsourcing (BPO). We’re seeing real efficiency gains—around 30 percent—in software engineering and customer support. But it’s coming at the expense of traditional BPO volumes. Spend is moving to AI-infused, data-driven platforms, and providers who haven’t adapted are seeing softness in both bookings and renewals.
The picture isn’t all bad for managed services. Growth was strong in the Americas (up 22 percent in the quarter and 15 percent year to date), with solid results coming from Banking, Financial Services and Insurance (BFSI)—a welcome return to growth in that sector—and from ITO and Engineering.
We’re seeing a healthy mix of large-scale renewals and smaller, outcome-based awards coming back into the market—particularly in the U.S., where confidence is returning and budgets are starting to move.
But that strength is not yet global. EMEA and Asia Pacific remain soft, with deal flow weighed down by delayed decision-making and reduced discretionary investment. In Europe, energy costs, tariff concerns and escalating geopolitical tensions—especially around Ukraine, NATO and the political volatility we’ve seen in France—are having a negative impact on demand. In Asia, decision cycles remain cautious, especially in sectors still recovering from last year’s budget constraints.
Beyond discussing the broader market metrics, this quarter we also drilled down on the new H1-B policy. The $100,000 visa fee introduced last month is reshaping how firms think about labor-based delivery. It raises the cost floor for offshore resources and will likely accelerate moves toward automation, particularly in software development, testing, and support—where automation is already proving effective.
Going forward, we expect H-1B sponsorship to be concentrated on high-value, senior roles where the ROI still holds up. The lottery system has been modified to favor this.
Speaking of cost, we also took a look this quarter at the impact AI is having on client pricing. Price productivity (the degree to which prices are declining) has improved significantly over the past year within the ITO and ADM space.
We think this is a combination of two things. Number one, the market is incredibly competitive right now, and providers are being very aggressive with their pricing. Second, providers are driving AI into their solutions and service delivery at an incredibly rapid pace, with the goal of being profitable at lower price points within two years.
As we work with clients on BPO deals, we’ve developed a framework for a new kind of pricing—ALP, or Autonomy Level Pricing—that we believe will set the standard for next-generation AI delivery. There is a lot more detail on our proposed approach in our recently released State of Enterprise AI Report. We encourage you to download it.
To get a fuller picture of current market dynamics and to see our full-year forecast for XaaS and managed services, take a look at the 3Q25 Global ISG Index™ webcast replay, presentation slides and press release on our website.
While you’re there, we invite you to sign up for our weekly ISG Index Insider briefing to stay up to speed on what’s happening in the market.
About the author
Steve Hall
Steve is President, ISG EMEA, providing strategic insight and advice to help ISG clients in the region solve their most critical business challenges and adopt and optimize the technology and operating models they need to compete successfully.
Steve was named Chief AI Officer in 2024. He leads the firm’s work to help clients create an AI strategy, establish a business case for investment and select the right business partners. His industry-leading expertise in navigating the complexities of adopting technology at scale is helping clients drive value into every aspect of their operations.
Steve joined ISG in 2005 and has led ISG Digital Advisory Services, Emerging Technology Services, Global Product Engineering and Application Development & Maintenance. He is trained as a software engineer and holds a bachelor’s degree in computer science from Regis University.
