Q1 global combined ACV hits record $24 billion, up 31%
XaaS up 43%, fueled by double-digit growth in both IaaS and SaaS
Managed services up 13% year over year, flat against prior quarter
ISG forecasts 22% XaaS growth and 5.1% managed services growth for 2022
Surging demand for cloud-based XaaS solutions continues to pace a growing global market for IT and business services, according to the latest state-of-the-industry report from Information Services Group (ISG) (Nasdaq: III), a leading global technology research and advisory firm.
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Data from the ISG Index™, which measures commercial outsourcing contracts with annual contract value (ACV) of $5 million or more, show first-quarter ACV for the combined global market (both XaaS and managed services) grew by 31 percent, to a record $24.2 billion, versus the prior year.
The global XaaS market broke through the $15 billion mark for the first time ever in a quarter, reaching a record $15.6 billion, up 43 percent versus the prior year and up 9 percent sequentially. The managed services market, meanwhile, continued its recent string of $8 billion-plus quarters (four in a row), reaching $8.6 billion of ACV, up 13 percent year over year, although flat against the fourth quarter of 2021.
“Overall, the global market for IT and business services remains robust, but could face some headwinds going forward,” said Steve Hall, president of ISG. “The industry has cycled through a period of easy comparisons with pandemic-impacted quarters and likely will face additional hurdles for the remainder of the year, in the form of geopolitical uncertainty, supply chain imbalances, and inflationary pressures that may impact enterprise spending.”
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Hall noted an industry talent shortage is affecting pricing on time-and-materials projects, with pricing up by 15 percent or more. “Attrition is at an all-time high, and providers are having trouble finding people to handle both new projects and the backlog of existing work,” he said.
With demand outstripping supply, both the buy and the sell side are feeling the impact, he said. “Ultimately, it could mean performance degradation, or bookings not turning into revenue. This, in turn, could cause demand to slow down. Enterprise budgets are going up, but they’re not growing at a rate that will offset wage inflation and other headwinds. This will drive a reprioritization of core activities, major programs and technology spend over the next several quarters.”
Results by Segment
In the XaaS market, infrastructure-as-a-service (IaaS) spending soared 51 percent, to a record $11.7 billion, in the first quarter. The three largest global hyperscalers – AWS, Microsoft Azure, and Google Cloud Platform – together outpaced the growth of the broader market and continued to add to their backlogs. Meanwhile, the four major Chinese hyperscalers – Alibaba, Tencent, JD.com and Baidu – which together account for 16 percent of global IaaS spending, were a drag on the market, with their combined ACV falling by 15 percent sequentially in the quarter, as they struggle to recover their pre-pandemic growth levels.
Software-as-a-Service (SaaS) spending for the quarter also advanced by double-digits, up 22 percent, to a record $3.9 billion, with particularly strong growth in CX and ITSM applications. The growth comes amid signs of uncertainty for the segment: the 10 largest SaaS providers underperformed the broader market during the quarter, with a number of providers adjusting their growth targets downward for the balance of the year.
On the managed services side, IT outsourcing (ITO) slumped 6 percent versus the prior year, to $5.6 billion, due to weakness in Europe, a double-digit decline in infrastructure services, and a sequential slowdown in application development and maintenance (ADM), a red-hot area coming off a record high in the fourth quarter.
The ever-unpredictable business process outsourcing (BPO) segment, meanwhile, surged 86 percent, to a record $3.0 billion of ACV, fueled by strong demand for industry-specific services.
A total of 602 managed services contracts were awarded in the first quarter, up 14 percent versus the prior year, with a majority – nearly 60 percent – falling within the smallest range of $5 million to $10 million of ACV. The industry also saw a jump in contract restructurings, up 19 percent in the quarter, and surpassing $3 billion of ACV for the first time since before the pandemic. Six mega-deals – contracts with annual value of $100 million or more – were awarded in the quarter, versus four such contracts in the prior year. Combined, they were worth more than $820 million of ACV.
Demand for managed services was strongest in the telecommunications and manufacturing sectors, as well as in the financial services industry, which saw record ACV in the quarter.
2022 Forecast
ISG is forecasting the global market for cloud-based XaaS (IaaS and SaaS) will grow 22 percent for the year, up from its 20 percent forecast last quarter, while the global market for managed services is expected to grow 5.1 percent, unchanged from last quarter’s forecast.
“Going forward, the technology and business services industry is anticipating an uneven performance this year,” said Hall. “On the plus side, we’re at the start of a multiyear demand cycle of heightened investment. Activity is the highest we’ve seen, and budgets are rising. On the other hand, enterprise costs are also rising, due to inflation, higher energy costs and a shortage of IT talent, and this is in injecting some uncertainty into the market.”
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