Everyone wants a piece of GenAI, even if they don’t yet fully know what to do with it.
Generative AI is the kind of artificial intelligence that learns and improves with every serving of data it’s fed. As ISG’s newly minted chief AI officer, I noticed the significant boost in the AI market this past quarter. Energy and interest in the AI market is high, and service providers are scaling up operations to meet the growing demand. Beginning with our 1Q24 Global ISG Index™ webcast that aired yesterday, we’ll track the AI market every quarter.
The global broader market for managed services and as-a-service had its best quarter in nearly two years. Annual contract value (ACV) that had hovered around $23 billion per quarter throughout 2023 shot up to nearly $25 billion this period. After averaging a year-over-year decline of 6 percent throughout last year, this quarter’s 4 percent year-over-year increase and 5 percent increase from the prior quarter may signal the start of a turnaround.
After a very long, sustained period of growth, managed services ACV dipped 1.4 percent year-over-year, only the second time in the past 15 quarters the market posted a down number. There were only four mega-deals signed in the quarter, half the number signed a year ago, and corresponding ACV was down 54 percent. The number of small, discretionary deals between $5 million and $30 million shrank for the fifth consecutive quarter, declining 3 percent from the prior year.
ITO dropped to its lowest quarterly result in two years. Standalone ADM fell off its record-setting pace, but when applications were bundled with infrastructure, deals surged 130 percent. BPO posted a strong first quarter of $3.2 billion in ACV, increasing nearly 40 percent over the prior quarter. Contract activity was vigorous, indicating that the strength is not just from large awards.
As-a-service ACV has risen in the past two quarters and exceeded $14.6 billion in Q1. Its 7 percent gain in Q1 broke a five-quarter streak of year-over-year declines. The period of belt-tightening in infrastructure-as-a-service is nearing an end for hyperscalers. New AI workloads are emerging, and hyperscaler growth might signal a return of discretionary spending, which will benefit the IT services sector downstream.
The software-as-a-service market has grown complex over time with an abundance of apps and cloud services. In a competitive market, deals materialize when providers demonstrate cost savings, improved productivity and enhanced security. GenAI could spur the SaaS market’s next major investment cycle and drive significant spending as enterprises modernize legacy applications to seize new AI possibilities.
Each of the three regions we track performed differently. Combined market ACV in the Americas continued its five-quarter slide. Only two managed services mega-deals were awarded during this quarter, but the number of small deals, under $30 million in ACV, edged up 2.5 percent, bucking the trend in the global market. As-a-service ACV inched up just over 1 percent from 1Q23, which may not seem like much, but it stopped a four-quarter slide of double-digit declines.
Combined market ACV in EMEA rose just enough to end a four-quarter string of year-over-year declines. Managed services ACV rose once again, reaching $3.9 billion during the quarter. The Nordics had its best quarter since 1Q16, offsetting the sluggish pace of the U.K., DACH and France. As-a-service ACV has been steadily ascending since bottoming out in 2Q23. Its ACV of $3.6 billion interrupted a four-quarter year-over-year negative streak.
Combined market ACV in Asia Pacific rose above $5 billion this quarter. That 25 percent year-over-year increase snapped a five-quarter string of declines. Managed services generated a rare $1 billion quarter. The number of deals rose 12 percent from 1Q23; even small deals below $30 million were up a bit from a year ago. As-a-service has turned a corner and is on the rise. Its $4 billion in ACV this quarter marks a 27 percent year-over-year gain. It seems to be working through its bottoming-out process sooner than the other two regions.
In our 1Q24 Index webcast, ISG Distinguished Analyst Alex Bakker looked ahead to AI’s impact on markets. In the short term, he said, enterprises are investing in AI as a means of cost optimization. Long term, AI will be expected to drive revenue. Because IT budgets tend to be flat year-over-year, short-term AI investments will likely come from discretionary project work and SaaS tools. In the long run, AI investments may come from line-of-business budgets. We’ll keep you posted in upcoming Index webcasts.
With all this in mind, we’ve kept our 2024 as-a-service forecast at 15 percent growth. But we’re lowering our managed services projection to a 3 percent growth rate, down 125 basis points from our January forecast.
To get a fuller picture of current market dynamics, view the 1Q24 Global ISG Index™ webcast replay, presentation slides and press release on our website.
Finally, we invite you to sign up for our weekly ISG Index Insider briefing. We’ll host our second-quarter ISG Index call on July 11.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.
