Caution over an uncertain economy, weakness in BFSI impacted demand for outsourcing
Demand for IT and business services in the Americas fell sharply in the second quarter, reflecting softness in the banking, financial services and insurance (BFSI) sector and slackening demand for cloud-based services overall, 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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“In building our forecast, we considered macro uncertainties that have delayed decision-making and tightened discretionary spending”
The Americas ISG Index™, which measures commercial outsourcing contracts with annual contract value (ACV) of $5 million or more, shows first-quarter ACV for the combined market—including both cloud-based (XaaS) and managed services—was down 13 percent, to $10.9 billion, the steepest year-over-year drop for the region since ISG began tracking the combined market in 2015. The Americas market has been decelerating since peaking in the first quarter of 2022, and for the second quarter fell below $11 billion for the first time in two years.
“Enterprise IT spending was down from recent highs, as concern over an uncertain economy persisted last quarter,” said Todd Lavieri, ISG vice chairman and president of ISG Americas and Asia Pacific. “We’re seeing more contract restructuring as enterprises press for cost optimization. Spending on discretionary cloud projects was down, reflecting a global trend. Not surprisingly, discretionary spending in Banking, Financial Services and Insurance (BFSI) was down in reaction to market turmoil earlier this year. The impact was noticeable, as the BFSI industries together represent the largest market for IT spending.
“With signs of slowing inflation in the U.S., along with banking concerns abating, we expect the Americas market to slowly rebound over the next few quarters,” Lavieri said.
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Managed services ACV for the second quarter declined 6.5 percent, to $4.4 billion. A total of 358 managed services contracts were awarded during the quarter, up 9.5 percent, the second-best quarter ever for deal activity. Among the awards were three mega-deals (those with ACV of more than $100 million). Restructuring ACV was up 28 percent, while the annual value of new-scope awards was down 20 percent.
Within managed services, IT outsourcing (ITO) climbed 18.5 percent, to $3.5 billion of ACV, fueled by strong demand for application development and maintenance (ADM) and data center services, while business process outsourcing (BPO), at $941 million, was down 47 percent from the prior year, with most areas down, except for contact center and facilities management services.
Second-quarter demand for XaaS solutions was down 17 percent, to $6.5 billion, its sharpest quarterly drop ever. The market has declined sequentially for five straight quarters, and the rate of decline is accelerating, as clients focus on optimizing their existing cloud environments rather than add new workloads. Infrastructure-as-a-service (IaaS) declined 21 percent, to $4.1 billion, while software-as-a-service dropped 9 percent, to $2.4 billion.
First-Half Results
The Americas’ combined market was down 10 percent year to date, to $23.1 billion, the first time the region has had a down first half.
Managed services ACV declined 3.5 percent, to $9.7 billion, on 714 contracts – including nine mega-deals, the most awarded during the period since 2010. Within managed services, ITO rose 10 percent, to $6.7 billion, while BPO fell 24 percent, to $3.0 billion.
XaaS spending in the first half was down 14 percent, to US $13.5 billion, as IaaS slumped 18 percent, to $8.5 billion, and SaaS declined 7 percent, to $4.9 billion.
2023 Global Forecast
ISG lowered its global forecast for XaaS revenue growth in 2023 to 11.5 percent, down 350 basis points from its March forecast, and maintained its growth forecast for managed services at 5 percent.
“In building our forecast, we considered macro uncertainties that have delayed decision-making and tightened discretionary spending,” said Lavieri. “We also noted that interest rates have risen more in the past year than in the previous 30, which has dampened big infrastructure investments. But the difficult comps will soon be behind us, and excitement is growing around generative AI. That could provide a tailwind for cloud and ADM services.”
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