Hello. This is Alex Bakker with what’s important in the IT and business services industry this week. Please join me for the ISG Index 2Q26 call July 9 at 9am ET. You can register here.
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Sourcing Objectives
In the IT and business services industry, three major factors drive how enterprises and service providers work together: deal scope, shape and strategy. Those descriptors map to what work is being done, how it will be done and why it will be done. These ideas are interdependent. An enterprise’s strategy changes the way a provider designs and proposes the work. Technology transformation, cost savings and innovation each imply different skills, service levels, commercial models and provider shortlists.
Over the last several months, we’ve covered the ways enterprises are changing their provider ecosystems, an effect we’ve called a dumbbell-shaped market. Companies are consolidating service provider spend with their largest providers to reduce cost, while engaging smaller niche providers for specialized expertise and project agility. This is squeezing providers with mid-sized spend.
Data Watch
Impact on Managed Services
It’s easy to see how strategy and scope are related in the current market. Consolidation of scope into one provider supports cost reduction, while selective expansion of smaller providers supports narrower innovation agendas.
This pattern is also visible in the market activity data we track. Deal durations continue to lengthen, and these longer commitments are driving significant increases in aggregate total contract value (TCV), even when annual spend remains roughly flat.
In nearly all the longer consolidation-driven deals we’ve observed, the enterprise’s primary ROI metric is long-term reduction in total cost of ownership, aligned with the strategic motivations in the chart above. This finding is confirmed by our pricing research.
Two AI Deal Shapes
Total cost of ownership (TCO): AI is the forcing function for all this change. Enterprises and service providers expect AI to improve productivity, and providers are pricing those expected savings into deals. The savings depend largely on the potential for AI-enabled productivity, with consolidation adding scale economics and volume pricing. All this consolidation, modernization and automation takes time. To make the run rate palatable, providers often accelerate savings from the end of a deal to earlier in the term, smoothing annual costs and effectively pulling forward the savings from the modernization work. In 2026, the TCO deal shape is the one driving activity in the managed services market. The value comes from a lower long-term run rate, automation, modernization over time and provider-funded cost smoothing.
Internal rate of return (IRR): For small providers or small deals in the market, AI is creating a second deal shape. Outside of long-duration managed services contracts, project work and systems integration work are changing as well. In these deals, often with smaller providers, clients are buying agility and specialized expertise, usually for software development and systems integration. AI is affecting the timeline more than the price. Providers delivering this kind of work consistently describe timeline compression as their clients’ main source of value. Speed drives value, and the providers in these deals are delivering a higher return through faster value realization for clients. This is what we are calling the IRR deal shape: faster delivery, faster value realization and business return driven by speed to market.
What's Next
AI is changing deal scope, shape and strategy in the market, and enterprises are moving toward two different ways of working with providers to improve ROI on their investments. Large providers in dominant spend positions with their clients are seeing the upside in TCO deals, while smaller, specialized providers see opportunity in IRR deals. As we mentioned before, providers delivering mid-spend levels of undifferentiated capacity have the most difficult position as AI redefines the market.
The managed services market has long struggled to align providers and clients around outcome-driven pricing models, especially with AI involved. Enterprises may not always sign formal outcome-based pricing contracts, but their desired outcomes are already determining duration, pricing, provider selection and delivery models. Our research consistently shows that enterprises want savings and speed, and these deals are structured to deliver exactly those outcomes.
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