Global market negatively impacted by lower IaaS demand, fueled by China lockdowns
Managed services sees robust contracting activity, with strength in BPO
ISG forecasts 17% growth for XaaS, 5% growth for managed services in 2023
Global spending on IT and business services declined in the fourth quarter, with particular weakness in cloud-based infrastructure services, according to the latest state-of-the industry report from Information Services Group (ISG) a leading global technology research and advisory firm.
“Managed services ended the year strong, with record bookings in 2022 implying healthy revenues on a constant-currency basis in 2023”
Data from the ISG Index, which measures commercial outsourcing contracts with annual contract value (ACV) of $5 million or more, show fourth-quarter ACV for the combined global market (both as-a-service and managed services) was $22.9 billion, down 7 percent versus the prior year. It was the lowest combined ACV in a quarter since the second quarter of 2021, when the market was beginning to emerge from a pandemic-induced slowdown.
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“The global market was negatively impacted in the fourth quarter primarily by lower demand for infrastructure-as-a-service, largely the result of lockdowns in China that affected the nation’s large hyperscalers,” said Steve Hall, president of ISG. “When we normalize for the China dip, the overall combined market was flat quarter over quarter and up 1.4 percent over the prior year.”
Hall said economic headwinds are causing a shift in tech spending. “Some organizations are focusing on cost optimization and limiting discretionary spend. We still see major transformation projects in the market, but most need to be self-funded or have a stronger near-term ROI than in past years.”
Results by Segment
Fourth-quarter ACV in the managed services segment was $9.3 billion, up 2 percent versus the prior year, with 655 contracts signed in the quarter, up 14 percent from the year-ago quarter, including six mega-deals (contracts with ACV of $100 million or more). IT outsourcing (ITO) ACV was $6.4 billion, down 9 percent, while business process outsourcing (BPO) was $2.9 billion, up 37 percent.
The as-a-service (XaaS) market saw ACV of $13.6 billion, down 12 percent versus the prior year – the largest quarterly year-over-year decline for this segment since ISG began tracking it in 2014. It was only the third time XaaS saw a quarterly decline, and the second quarter in a row that demand dropped for cloud-based services. Infrastructure-as-a-service (IaaS) fell 14 percent, to $9.8 billion, while software-as-a-service (SaaS) declined 5 percent, to $3.9 billion.
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Full-Year Results
Combined market ACV for the full year reached a record $94.6 billion, up 6.5 percent over 2021 and 39 percent higher than 2020.
Managed services ACV advanced 6 percent, to a record $37.0 billion, on record deal volume of 2,645 contracts, up 11 percent. Among the contracts were 25 mega-deals, the highest number of $100-million-plus agreements since 2019.
“Managed services ended the year strong, with record bookings in 2022 implying healthy revenues on a constant-currency basis in 2023,” Hall said.
ITO spending came in at $25.7 billion, down 4 percent for the year, while BPO spending rose 36 percent, to $11.3 billion, fueled by growth in industry-specific services and engineering services.
XaaS generated record full-year ACV of $57.6 billion, up 7 percent over the prior year, its lowest annual growth rate since 2015.
IaaS was up 8 percent, to $42.2 billion, but would have been up 28 percent if not for the negative impact from China’s top five hyperscalers. SaaS, meanwhile, was up 5 percent, to $15.4 billion.
2022 Forecast
ISG sees several potential positive developments for the market heading into 2023, including interest rate hikes coming to an end, inflation lessening, China reopening, supply chains beginning to normalize, and the U.S. dollar coming off recent highs.
“Enterprise spending has not been significantly cut,” Hall said, “and most foresee improvement in the macro environment by the second half of the year.”
Hall said XaaS providers are still dealing with “tech excess” and compensating for softening demand by reducing the size of their work forces after a period of significant hiring the last few years. Given this, ISG is forecasting annual ACV growth of 17 percent for the XaaS market in 2023, lower than in prior years.
As for managed services, the shift toward cost optimization “should provide favorable tailwinds for this market,” Hall said. ISG is forecasting 5 percent ACV growth for managed services in 2023.
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