The global demand for managed services has skyrocketed to unparalleled heights in the second quarter of this year, according to the latest state-of-the-industry report from Information Services Group (ISG). This surge in managed services came at a time when the overall IT and business services market experienced a decline due to reduced spending on cloud services.
The ISG Index™ data revealed that in the second quarter, annual contract value (ACV) for the combined global market, including both cloud-based as-a-service (XaaS) and managed services, amounted to $22.7 billion. This represents a 9% decline compared to the previous year, marking the third consecutive quarter of a year-over-year decline.
However, managed services defied the market trend and achieved significant growth in the second quarter. The segment reached a new quarterly high with an ACV of $10.0 billion, reflecting a 6% increase compared to the previous year. Impressively, this marks the tenth time in the last 11 quarters that managed services have shown year-over-year growth.
“Managed services continues to be resilient in the face of economic uncertainty,” said Steve Hall, president of ISG. “We are seeing continued strong demand in this segment as enterprises use managed services as a lever for cost optimization. Contract renewals and extensions remain robust, and mega-deal ACV also came in very strong for the quarter.”
Mega-deals and increased contracts drive managed services expansion
Despite the overall market decline, the managed services sector witnessed the signing of 10 mega-deals during the second quarter. These mega-deals represent managed services contracts with an annual value surpassing $100 million. Collectively, these contracts were worth a combined ACV of $1.7 billion, showing a significant 35% increase compared to the value of the 10 mega-deals signed in the second quarter of the previous year. Moreover, a total of 703 managed services contracts were inked during the quarter, reflecting a 6% year-over-year growth.
While managed services experienced robust growth, the overall market contraction was primarily due to declining spending on cloud services. Within the XaaS segment, ACV for infrastructure as a service (IaaS) declined by 22% to $8.7 billion. This decline can be attributed to limitations on discretionary spending, which led to a slowdown in cloud migrations. Additionally, ACV for software as a service (SaaS) dropped by 7% to $3.9 billion.
Managed services remain resilient in the first half of 2023
Analyzing the first half of 2023, the combined market ACV of $46.4 billion reflected a 9.5% decline compared to the previous year. Despite the market challenges, managed services showcased resilience by achieving a record ACV of $19.9 billion, representing a 4% increase.
In contrast, XaaS experienced a decline of 17%, amounting to $26.5 billion. The first half of the year witnessed a record number of 1,409 managed services contracts signed, indicating a 2% increase from the previous year, including 18 mega-deals, the highest number since 2013.
Within the managed services sector, IT outsourcing (ITO) saw significant growth, with a first-half record ACV of $14.6 billion, reflecting a 13% increase. Conversely, business process outsourcing (BPO) declined by 16% to $5.3 billion. On the cloud services side, the IaaS market slumped by more than 21%, amounting to $18.6 billion, while the SaaS market decreased by 6% to $7.9 billion.
Forecast for 2023
ISG has adjusted its forecast for XaaS revenue growth in 2023, lowering it to 11.5% from its previous projection in March. This revision represents a reduction of 350 basis points, reflecting cautiousness amidst macro uncertainties. However, the growth forecast for managed services remains at 5%.
The forecast takes into consideration the impact of delayed decision-making and tightened discretionary spending, which have resulted in a slowdown in the pipeline. While digital transformation remains a priority, enterprises have become more cautious about their investments.
Generative AI holds promise for cloud services boost
Despite the challenges faced by the cloud services market, there is growing excitement around the potential impact of generative AI. This emerging technology could provide a much-needed tailwind for cloud services, offering new opportunities for growth and innovation. As enterprises become increasingly aware of the potential benefits of generative AI, it may help to rejuvenate the demand for cloud services in the coming months.