AI’s Impact on Technology Services Revealed in New ISG AI Index™

Geopolitical turmoil is rattling the world’s economies, but for the technology services sector, there’s no slowing down—not with the power of AI filling the industry’s sails.

Artificial intelligence is the name of the game these days, and every technology investment decision seems to revolve around it. The big hyperscalers are pouring hundreds of billions of dollars into new data center capacity to meet rising demand and software-as-a-service providers are trying to adapt to what many are calling the “SaaSpocalypse”—a fundamental disruption in the SaaS business model caused by AI. Enterprises are still buying core platforms, but the market is starting to question what these businesses look like in an AI-first world. That’s showing up more in valuations than in bookings, at least for now.

Managed services, meanwhile, is steady, but it’s still a defensive story. Enterprises are consolidating vendors, bundling towers and taking cost out to fund AI. Demand has shifted from small, discretionary spend, to large, cost-driven total cost of ownership (TCO) deals, with BPO a clear bright spot, particularly in industry-specific and back-office processes. These are among the first areas where AI and automation are starting to translate into tangible demand.

The proof of AI’s impact is in the numbers. This quarter, we launched the ISG AI Index™, a first-of-its-kind barometer of AI’s impact on the tech services industry. The inception point for the index is December 2022, just after ChatGPT 3.0 was released and put AI on the tip of everyone’s tongues. Since then, the composite ISG AI Index is up 77 percent, with infrastructure-as-a-service (IaaS), not surprisingly, leading the way, up 160 percent. SaaS, meanwhile, is up 53 percent and managed services up 0.3 percent.

The ISG AI Index takes a basket of component companies in the sector and evaluates them on a weighted average of revenue, profit and share price growth, along with one forward-looking AI indicator unique to each segment. For IaaS, that metric is CapEx, because it tells us how much capacity hyperscalers are building ahead of demand. In software, we use current remaining performance obligations, or cRPO, which is essentially backlog—revenue that’s been sold but not yet recognized, making it one of the best forward-looking indicators of demand. And in services, we use revenue per employee, because it gives us a simple view of productivity—how much output providers are generating from their workforce as AI starts to change how work is done.

It’s no surprise that managed services is trailing the pack. AI has started to improve productivity in services, but that has not yet translated into broad-based monetization or market confidence. The upshot here is that the positive impact of AI is yet to come.

The ISG AI Index is a great new complement to our longstanding and authoritative ISG Index™, which has been measuring the health of the tech services market for 94 consecutive quarters, or more than 23 years. Our most recent ISG Index, reporting on first-quarter results this week, shows a market at the peak of health—at least on the cloud side. Not that managed services isn’t doing well. It is. But it’s not firing like XaaS is at the moment.

Demand for cloud-based XaaS continues to skyrocket, fueled by AI demand. In the first quarter, it was up 44 percent, to a record $28.2 billion, its highest year-over-year growth rate in more than four years. XaaS has been riding a seven-quarter winning streak that has seen ACV grow by double-digits each quarter, averaging 30 percent growth in that span. For the first quarter, IaaS was up 57 percent, to a record $23.1 billion, while SaaS rose 5 percent, to a record $5.1 billion.

Managed services, meanwhile, returned to growth and had its second-best quarter ever, with ACV of $11.2 billion, up 3 percent versus the prior year after two straight quarters of year-over-year declines. Still, 18 of the last 21 quarters have trended positive, which is a good sign. ITO was down 7 percent year over year, while BPO soared 62 percent against a soft first quarter last year.

More than 70 percent of managed services ACV in the quarter, or some $8 billion, came from new-scope contracts, signaling enterprise concentration on consolidation and shifting wallet-share among providers. Managed services buyers inked six mega-deals, in line with the prior quarter and the first quarter of last year. Smaller deals, indicative of discretionary spend, pulled back but have not gone away. Some deals with small providers and for short-cycle projects may fall below our reporting threshold of $5 million in ACV. 

Put it all together, and you see a global combined market that reached nearly $40 billion, almost 30 percent higher than a year ago, and 13 percent higher than the previous quarter. Not too shabby.

Here's what we see for the rest of the year: XaaS will continue to be a growth engine, so we’ve raised our annual growth forecast to 25 percent, up from 21 percent in January. Managed services will increase gradually, even with an AI tailwind (or perhaps it’s still only a breeze). In this cost-focused, efficiency-driven environment, we’re holding our forecast at 2.1 percent. 

To get a fuller picture of current market dynamics, view the 1Q26 Global ISG Index™ webcast replay, presentation slides and press release on our website. You’ll also find more details about our new ISG AI Index there. And while you’re on the site, don’t forget to sign up for our weekly ISG Index Insider briefing and register for our second-quarter 2026 Global ISG Index™ call, set for July 9.