The global market for IT and business services is on the rebound, thanks to a new wave of cloud spending to support AI adoption.
Our ISG Index™ this week reported demand for cloud services, as measured by annual contract value (ACV), was up 33 percent in the fourth quarter and rose 19 percent for the full year. That’s a complete turnaround from the 15 percent decline this market saw in 2023.
Growth was particularly strong for infrastructure-as-a-service (IaaS), up 42 percent in Q4 and up 25 percent for the full year, as companies reaccelerated their cloud migrations and looked to the cloud to achieve their AI ambitions.
The IaaS recovery is great news for the IT services sector. Our research shows that 6 percent of provider revenues in the last 12 months can be attributed directly to AI. And that percentage is likely to grow in 2025, as providers build more AI apps for their clients on hyperscaler platforms.
Providers also are ramping up their use of generative AI to support both project work and managed services contracts, which will drive massive productivity improvements, especially in areas like application migration and modernization. This will create opportunities for challengers to disrupt incumbents but will also drive down contract values for commodity work.
Speaking of managed services, we saw bookings in this area growing at a slower pace in 2024 compared with the previous two years, primarily due to continued pressure on discretionary spending, especially in the banking and manufacturing sectors, which make up nearly 50 percent of the contract value in the market.
That cost pressure, however, did lead to a second consecutive year of strong mega-deal activity (deals worth at least $100 million of ACV) as enterprises looked to move the needle on their cost profile through large-scale transformations. This also had an impact on deal durations, which are up across the board.
Enterprise decision-making accelerated in the second half of 2024, as provider contract-to-conversion rates improved. We also saw smaller deals – in the $5 million to $9 million ACV range – increase, which could be an indication that discretionary spending is beginning to loosen up.
As we head into 2025, we believe spending in the Banking, Financial Services and Insurance (BFSI) sector will increase, even as the overall market continues to focus on cost optimization, vendor consolidation and AI. We expect a slowdown in manufacturing, specifically in the automotive sector, and the European geopolitical situation will impact technology spending in the first half of 2025 for many enterprises in the EU.
Alex Bakker, an ISG distinguished analyst who leads our Primary Research Team, joined this week’s ISG Index™ webcast to share results of our 2025 technology budget and spending study. In 2024, enterprises spent 5.5 percent of revenue on technology and expect to grow that spending by 1.8 percent this year.
Enterprises are prioritizing AI and security in 2025, as they seek to manage risk and pursue additional technology innovation. In addition, businesses say they want to reduce the number of providers and the overall complexity of their provider ecosystems, while retaining and growing their relationships with specialist providers. Their intent to consolidate spending with their largest providers, as well as add smaller, differentiated providers, may squeeze out midsize providers.
Given all these factors, we are forecasting stronger growth for the IT and business services sector this year, but the recovery will be gradual. Specifically, we are forecasting 18 percent revenue growth in cloud services, in line with 2024 results, and 4.5 percent revenue growth in managed services, up from 1.8 percent growth last year.
To get a fuller picture of current market dynamics, view the 4Q24 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 first-quarter 2025 ISG Index call, set for April 10. By then, a new U.S. administration will be in place and election results from Germany will be in, and we’ll assess how markets respond to the changes.
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.
