The global market for IT and business services is back and (almost) better than ever.
After a 27-month downturn, which hit bottom in Q2 last year, the market has come all the way back in the third quarter to deliver a new record for annual contract value (ACV) – and appears poised for accelerated growth in the coming year.
However, before we schedule a parade, let’s be cautious. Uncertainty over what will happen in the U.S. presidential election has markets around the world feeling uneasy. The U.S. economy is strong now, having made a remarkable recovery from the pandemic, but uncertainty persists in the banking, financial services and insurance (BFSI) sector.
That’s significant, because BFSI is the largest industry for outsourcing, making up 25 percent of global spending on managed IT and business services.
We took a deeper look at the BFSI market in our 3Q24 Global ISG Index™ webcast this week. Year to date, BFSI spending, as measured by ACV, is down slightly from the prior year, but it’s a mixed bag. Spending on cloud-based services is up 11 percent, powered by investments in customer experience, cybersecurity, regulatory compliance and infrastructure. Spending on managed services, on the other hand, is down 10.5 percent, with weakness in both the Americas and Europe.
As we all know, the U.S. Federal Reserve and the European Central Bank cut interest rates in the third quarter. While lower interest rates typically stimulate the economy and rate hikes suppress it, the effects often aren’t felt for 12 to 18 months.
We analyzed the impact of interest rates on the market one year and two years out – going back to 2000 – and found some interesting trends. Learn more about what’s likely to happen next year in the ISG Index Insider in the coming weeks.
Despite the uncertainty in the BFSI sector, the global combined market generated a record $26.7 billion of ACV in the third quarter, while managed services also hit a record with nearly $11 billion of ACV. The number of mega-deals (those with annual value of $100 million-plus) signed in the quarter increased, as did new-scope contracts.
Year to date, the ITO market was flat, with a decline in the Americas undercutting gains in Europe and Asia. BPO rose during the same period, mainly due to strength in EMEA and Asia Pacific.
The managed services market performed differently in each of the three regions. In the Americas, ACV of $15 billion year to date was down more than 7 percent from 2023. ACV from mega-deals was half that of the prior like period. Much of the sluggishness can be blamed on BFSI.
EMEA racked up $12.8 billion in ACV year to date, up 8 percent from the prior year. Strength came in the third quarter from mega-deals and from more deals in the smallest band of $5 million to $10 million. As in the Americas, BFSI struggled in the first three quarters of the year.
In Asia Pacific year to date, ACV was more than $3.2 billion, which is 24 percent higher than the same period last year. Small markets of China and Japan grew by triple digits, while the largest markets of ANZ and India sagged. Unlike in the Americas and EMEA, BFSI surged 46 percent through the first nine months.
On the cloud side of the ledger, global XaaS ACV has steadily gained ground over the past year, reaching $15.8 billion this quarter, up 23 percent, suggesting the era of cost optimization may be coming to a close and companies are becoming more open to discretionary cloud investments.
Infrastructure-as-a-service has accelerated faster than software-as-a-service. Year to date, IaaS ACV was up 19 percent over the prior year, largely due to rapid advances in AI boosting spending on cloud-based AI platforms. The Big 3 hyperscalers (AWS, Azure, Google) have benefited from this trend, with their year-to-date ACV up 26 percent.
SaaS ACV rose a mere 2 percent year to date. The shift toward AI has led to budget reallocations and spending pauses as boards reassess AI strategies. SaaS providers are encountering headwinds from GenAI as enterprises move from seat-based to consumption-based models.
Interest in AI shows no sign of waning. ISG’s buyer behavior research suggests GenAI spend will increase by 50 percent in 2025, translating into nearly 7 percent of IT spending by the end of next year. Almost 80 percent of GenAI initiatives are still in testing or pilot mode, with many enterprises not yet data-ready enough to scale. The ISG Provider Lens™ report on analytics and AI services, coming out soon, will have more information.
Despite a great comeback – more than a year in the making – that resulted in record performance in Q3, we’re not changing our revenue forecast for 2024. We’re holding to 14 percent growth for the XaaS market and a 2 percent increase for managed services, though we anticipate stronger growth in 2025.
To get a more complete picture of current market dynamics, view the 3Q24 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 and register for our fourth-quarter ISG Index call, set for January 16. The election in the U.S. will be decided, and we’ll assess the state of the markets then.
About the author
Steve Hall
As the leader of ISG’s business in EMEA and an Executive Board Member, Steve provides strategic insight and advice to help ISG’s clients solve their most critical business challenges, helping them adopt and optimize the technology and operating models they need to compete successfully. In particular, he uses his long experience and broad expertise to challenge and inspire them to think about their risks and opportunities in new and unexpected ways.
Past achievements for clients
Steve leads his team’s engagement with clients with an industry-recognized and highly valued perspective on the most important trends in business and technology. He asks and answers the big questions: Why do you need to transform? What’s your best way forward? What do you need to accelerate? And where should you invest your technology dollars to make it all happen?
Among his many client success stories, his ability to take in the big picture, define the problem and connect the dots to the right solutions helped one legacy postal and shipping giant transform itself into a modern logistics powerhouse. He also guided a global energy industry leader through a complex operating model and IT provider transition, helping them see past the obvious cost cutting measures to identify the root causes of their challenges—and delivering savings far beyond what they had imagined.
