Organizations are increasingly turning to Managed Service Providers (MSPs) to alleviate pressure on their IT departments. Managed services have emerged as a viable solution, allowing organizations to delegate day-to-day responsibilities to experts, thus freeing up valuable resources and time for core business functions.
Notably, managed services offer cost predictability and scalability, providing businesses the flexibility to adjust service levels according to evolving needs. Additionally, they enhance security, safeguard IT systems from threats and vulnerabilities, and assist organizations in meeting regulatory and compliance standards.
Cost optimization drove the surge in managed services
While various factors contribute to the popularity of managed services, cost optimization stands out as a driving force. According to a recent industry report by Information Services Group (ISG), a focus on cost optimization propelled the global managed services market to unprecedented heights in the third quarter, even as demand for cloud-based as-a-service offerings experienced a slowdown.
Data from the ISG Index™ reveals that the third-quarter Annual Contract Value (ACV) for the combined global market (including XaaS and managed services) was $23.1 billion, marking a 3% decline compared to the previous year. Despite this, the managed services sector saw substantial growth, advancing by 11% to a record $10.4 billion ACV.
This surge was driven by nine megadeals valued at $100 million or more annually, generating $1.8 billion of ACV, the highest since the fourth quarter of 2015. Although the total number of managed services contracts awarded in the third quarter decreased by 3.5% from the previous year, the spending on IT outsourcing (ITO) increased by an impressive 17% to reach $8.2 billion. This was fueled by a remarkable 28% growth in application development and maintenance services.
Conversely, business process outsourcing (BPO) experienced a 6% decline to $2.1 billion, as spending on customer engagement, procurement, and engineering, research, and development (ER&D) services slowed.
SaaS market grew as XaaS registered a decline
The XaaS market, however, saw a 13% drop compared to the prior year, amounting to $12.8 billion. This decline was primarily attributed to decreasing demand for infrastructure-as-a-service (IaaS), which fell by 19% to $9.0 billion in the quarter. In contrast, Software-as-a-Service (SaaS) demonstrated an 8% growth, totaling $3.8 billion.
The energy and healthcare sectors have emerged as significant pillars of growth within the managed services domain.
Future of managed services market
ISG has revised its projections for managed services, now anticipating a 5.4% growth for the year, a 40 basis points increase. Meanwhile, the forecast for XaaS revenue growth in 2023 remains steadfast at 11.5%.
In tandem, as clients forge ahead with restructuring their IT infrastructures to welcome multi-cloud environments and hybrid work arrangements, coupled with a burgeoning interest in cutting-edge GenAI applications, the applications market is poised for substantial expansion in 2024.
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