The global sourcing industry appears to be on the road to recovery, based on the results of our recent 3Q20 ISG Index™. One thing’s clear from our latest analysis of the market: Enterprise customers are focused on operational resiliency, especially in the face of a potential second wave of COVID-19, and are turning to technology and service providers to ensure business continuity. The industry certainly appears to be in much better shape than it was in March.
Our third-quarter findings indicate that a recovery from the pandemic-induced decline of the past two quarters is underway. Global combined market ACV rose 3 percent versus the prior year, to $14.6 billion, its second-best quarter ever, trailing only the first quarter of 2020. Sequentially, the market was up 4 percent versus Q2.
The especially good news was that quarterly ACV for the managed services sector rose 10 percent over its low-water mark in the second quarter – thanks to five megadeals (those worth $100 million or more annually), a slew of contract restructurings, a rise in banking industry deals, and an increase in industry-specific BPO.
ACV for cloud-based services, or as-a-service, was up 11 percent compared with the third quarter of 2019, although marginally down versus the previous quarter this year.
Given the push to go digital, we were surprised as-a-service ACV wasn’t greater this quarter. But change, especially for large organizations, takes time. We’re seeing quite a flurry of deals that indicate this work is ongoing, but it may take a couple of quarters to see that reflected in ACV growth.
The Americas’ 3 percent year-on-year gain this quarter may seem modest, but the region’s ACV actually outperformed the pre-COVID first quarter (and reached an all-time quarterly high). Some 15 deals over $40 million were inked in Q3, propelling the region to a 26 percent increase in managed services ACV over the second quarter. Infrastructure-as-a-service (IaaS), meanwhile, drove the as-a-service sector’s 13 percent year-on-year growth. Software-as-a-service (SaaS), the other side of the as-a-service coin, didn’t fare quite as well, but still scored several notable deals in the quarter.
Combined market ACV in EMEA essentially held steady from last quarter, dipping almost imperceptibly, but was up 9 percent against a weak year-ago quarter. The U.K., despite its ongoing turmoil over Brexit, turned in a strong quarter with more than $1 billion in managed services ACV. Region-wide, managed services ACV edged up 2 percent from the prior quarter, despite vigorous activity. Nearly 85 percent of the deals were $20 million or less, and EMEA added only half the number of large deals (over $40 million) it did at the start of the year. IaaS came in flat from the prior quarter, and SaaS had its lightest quarter in nearly three years.
Because Asia Pacific is small, it tends to be the most volatile. Every big deal matters, and this quarter the region had virtually none. Managed services had its lowest quarterly ACV in 14 years. As-a-service grew 6 percent, driven by IaaS.
On every ISG Index™ call, we focus on a different industry. This time we looked at smart manufacturing, also known as Industry 4.0. The term describes applying digital technology to production and operations to create a connected ecosystem for manufacturing and supply chain management. COVID-19 opened manufacturers eyes to their need for greater resiliency to react to new situations. We expect to see them invest heavily in digital technology to move more workloads to the cloud and become less location dependent. Right now the adoption rate is only about 25 percent, leaving plenty of opportunity for growth.
As digital technology becomes ubiquitous, and the number of devices, applications and remote/mobile users continues to grow, cybersecurity risks abound. The pandemic has stoked fears and made phishing and ransomware attacks more common. Data breaches are expensive — about $4 million apiece, on average — and there aren’t enough cybersecurity experts to fill the expected 3.5 million talent vacancies expected in 2021. Cybersecurity software and services are both rapidly growing sectors.
COVID-19 brought us a couple of rough quarters, and the pandemic has by no means gone away. Businesses are adapting, maybe faster than we anticipated. The third quarter managed services market beat our forecast by 150 basis points. We’ve seen vigor in the number of transactions and in restructurings of existing contracts. We also see the deal pipeline refilling, including with some megadeals that, if signed by the end of the year, could bring ACV in the fourth quarter back above $7 billion.
All of this points to a more hopeful scenario for the full year than we had in July. We now forecast managed services to be down 6 percent in 2020 instead of the 7.5 percent drop we expected three months ago. And we forecast as-a-service to grow 15.5 percent instead of the 11 percent we anticipated in July.
So far, 2020 has been an eventful year, and it’s not over yet. Keep your mask on, and maybe we’ll see less turmoil as economies reopen. Whatever happens, we’ll be here to report it in January.
To get a fuller picture of current market dynamics, including which industries saw an increase in business during the pandemic and which may not survive in their current form, view the 3Q20 Global ISG Index™ presentation slides, news release and infographic on our ISG Index™ webpage.
For a quick video summary, I encourage you to watch our latest ISG Index™ Headlines program on this page.
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.
