World events have been unpredictable recently, roiling global financial markets. One market, however, that appears unaffected by the turmoil is the global outsourcing market. Propelled forward by an enterprise imperative for digital transformation, the sourcing market hit all-time highs in both the fourth quarter of 2018 and the full year, according to our recently released ISG Index™.
The impetus for digital transformation is so strong, in fact, that we believe digital tailwinds this year will be more powerful than the headwinds of global macro-economic forces. We project strong double-digit growth for the cloud-based as-a-service sector, and a growth rate for traditional sourcing that is more than double that of 2018.
Why this momentum in global sourcing? Simply put, we’re at a tipping point for digital. Virtually every significant business has begun its digital transformation journey and to stop now would be next to impossible. Enterprises must forge ahead, or they will be left behind – or worse.
Growth in the as-a-service sector is accelerating. The fourth quarter saw yet another record broken, with annual contract value (ACV) for as-a-service sourcing reaching a new quarterly high of $5.9 billion, up 44 percent over the prior year. Growth was equally impressive in both segments of as-a-service: Infrastructure-as-a-Service (IaaS) was up 45 percent, to $4.3 billion, and Software-as-a-Service (SaaS) was up 40 percent, to $1.6 billion.
The robust fourth quarter capped a year that saw as-a-service soar 43 percent, to $21.8 billion – fueled by 47 percent growth in IaaS, to $15.8 billion, and 34 percent growth in SaaS, to $6.0 billion.
The growth numbers aren’t nearly so heady in the traditional sourcing space. From the standpoint of ACV, traditional sourcing was up a modest 2 percent, to $6.4 billion, in the fourth quarter, and rose a like percentage for the full year, to $26 billion.
What really stands out, however, is the number of traditional sourcing contracts awarded in 2018. Providers inked a record 1,827 deals last year – including a record 1,332 in information technology outsourcing (ITO) and a record 495 in business process outsourcing (BPO). It was the first time the total number of contracts broke through the 1,700 mark.
Traditional sourcing’s steady performance, even as many industries are going through digital transformation, underscores our observation that the outsourcing pie is growing, rather than simply shifting from one market to the other. A 30 percent bump in the applications development and maintenance (ADM) space supported traditional sourcing, as did a late rally in BPO, which pushed fourth-quarter ACV up 22 percent.
The Americas ignored political turmoil and turned in its strongest quarter and year ever. Its nearly $7 billion in combined market ACV in the fourth quarter reflected sustained interest in both traditional sourcing (up 9 percent, to $3.6 billion) and a continued surge in cloud adoption, with as-a-service up 45 percent, to a record $3.2 billion. Records also were set for the full year, with combined ACV reaching $25 billion, up 21 percent, and both the traditional market – up 10 percent, to $13.6 billion – and the as-a-service market – up 37 percent, to $11.5 billion – at all-time highs.
While the U.K. Parliament and prime minister negotiate Brexit with leaders of European countries, the combined market ACV in EMEA settled into business as usual in the fourth quarter. Over the course of the year, companies seem to have accepted the need for digital transformation and have grown more comfortable with as-a-service solutions, which helped overcome a dip in traditional sourcing. Combined market ACV rose 9 percent this year, on strong demand for cloud-based services. As-a-service ACV leaped 47 percent, to a record $6.1 billion, more than offsetting a slumping traditional market, which dropped 7 percent, to $9.9 billion.
When it comes to cloud adoption, European enterprises are working through how to manage data privacy and security in multi-cloud situations. Their diligence shows: software-as-a-service and infrastructure-as-a-service each grew by more than 40 percent in 2018.
The relatively small market of Asia Pacific posted its third consecutive quarter above $1.5 billion in ACV. Traditional sourcing, which long has followed an up-again-down-again pattern, had an upswing in both contract value and volume. As is true in all regions this quarter, vigorous demand for ADM services contributed to ITO’s strength in the traditional sourcing realm.
As-a-service dominates the combined market in Asia Pacific, making up more than 60 percent of the total market now. For the year, surging demand for cloud services pushed as-a-service ACV to a record $4.2 billion, up 55 percent. Infrastructure-as-a-service ACV soared to about two-and-a-half times what it was a couple of years ago as companies shift business processes and apps to the cloud.
A look at individual industries gives us insight into why we see the sourcing numbers come in where they did. Banking and insurance have adopted digital transformation aggressively to address issues of cybersecurity and intelligent automation. In the retail sector, enterprises are strengthening their digital business channels to create personalized shopping experiences and respond to supply chain systems.
In the life sciences vertical, businesses are opting for smaller and shorter deals to maintain flexibility. A recent wave of consolidation could result in a temporary pause in digital investments during the transition phase, but if the scenario plays out as it has in other industries that have consolidated, such as in telecommunications not long ago, expect to see renewed vitality around innovation to increase efficiencies once the dust settles.
Looking ahead, we expect to see public cloud infrastructure growth of 42 percent, and software-as-a-service to increase by 17 percent in 2019. We forecast traditional sourcing to grow by 4.5 percent this year, pushed forward by the tailwinds of digital.
To get a fuller picture of current market dynamics, including the growing demand for the as-a-service model, view the 4Q18 Global ISG Index presentation slides, press release and infographic on our ISG Index webpage.
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.
