Global Sourcing Hits Record High in Q4, ISG Index™ Finds
Global demand for technology and business services reached a record high in the fourth quarter, as the sourcing industry continues to recover from its pandemic-related downturn, according to the latest state-of-the industry report from Information Services Group (ISG) (Nasdaq: III), a leading global technology research and advisory firm.
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) reached $16.0 billion, up 13 percent over last year and up 9 percent from the third quarter.
"Demand is picking up and deals are moving forward as businesses adjust to the pandemic and look ahead to the economy reopening more fully now that vaccines have arrived," said Steve Hall, president of ISG. "But the recovery will be hit-or-miss in the short term because of how the virus has affected different countries and industries. Enterprises continue to focus on cost takeout and applying savings to digital initiatives. Agility, resiliency and transformation are common themes."
In the fourth quarter, managed services ACV was $7.2 billion, the segment's first quarter above $7 billion since the fourth quarter of 2019. Large deals in the manufacturing sector and in the DACH region produced better-than-expected growth of 3 percent. Within managed services, IT outsourcing (ITO) advanced 14 percent, to $5.7 billion, while business process outsourcing (BPO) slumped 27 percent, to $1.4 billion. A total of 455 contracts were signed in the quarter, up 6 percent over last year. That figure includes five mega deals (contracts with ACV of more than $100 million) totaling $1.7 billion.
Fourth-quarter ACV for cloud-based services (as-a-service) climbed 24 percent, to a record $8.8 billion, as enterprises signed larger and longer-term contracts with major technology providers. Much of the growth came from infrastructure-as-a-service (IaaS), up 32 percent, to a record $6.5 billion. Software-as-a-service (SaaS (News - Alert)) rose 5 percent, to $2.3 billion.
ISG is forecasting the market for cloud-based services will grow 20 percent globally in 2021, and the market for managed services will grow 3 percent.
"2021 looks to be another year of robust growth for the hyperscalers, as they continue to push into the enterprise space with long-term agreements, especially in Europe," said Hall. "Growing contract backlogs will provide a sustainable and steady source of revenue for many years down the line and enable the industry leaders to target underpenetrated markets."
The managed services market, meanwhile, is in recovery mode, Hall said, and is likely to feel the continued impact of the pandemic in the first half. "Despite the great news on vaccines, optimism and spending are still being impacted by the pandemic. Lockdowns are hurting economies and companie are dealing with ongoing supply chain disruptions and spending caps."
For 2020, the combined global market reached a record $59.8 billion, up 7 percent over the prior year. Full-year results were driven by a 17 percent increase in as-a-service ACV, to a record $33.2 billion. That beat ISG's previous forecast of 15.5 percent growth for the year. As-a-service growth was paced by a 23 percent jump in IaaS, to a record $24.3 billion, while SaaS grew 4 percent, to a record $8.9 billion.
Managed services, at $26.6 billion, was down 4 percent, slightly better than the 6 percent decline ISG forecast last quarter, as large deals propped up the market in the fourth quarter. For the year, ITO was up 2 percent, to a record $21.4 billion, while BPO slid 23 percent, to $5.2 billion.
The Americas pulled back from a strong third quarter to generate $7.2 billion of ACV in the fourth quarter, up 4 percent over the prior year but down 11 percent sequentially. Managed services fell 17 percent, to $2.5 billion, with ITO slumping 32 percent, to $1.6 billion, even as BPO advanced 38 percent, to $858 million. It was the region's softest quarter for managed services since the third quarter of 2016. As-a-service, meanwhile, jumped 21 percent, to a record $4.7 billion, on a 30 percent increase in IaaS, to $3.2 billion, and a 4 percent rise in SaaS, to $1.5 billion.
For the year, the Americas delivered a record $30.4 billion in combined market ACV, up 8 percent, with as-a-service up 18.5 percent, to a record $17.9 billion, and managed services down 4 percent, to $12.5 billion.
Europe, Middle East and Africa (EMEA)
EMEA delivered its best quarterly performance ever, with the combined market at a record $6.2 billion, up 18 percent. On the strength of five mega deals in EMEA, including contracts with Siemens (News - Alert) and Daimler, managed services rose 14 percent, to $4.0 billion, with ITO soaring 55 percent, to $3.6 billion, offsetting a 66 percent slump in BPO, to only $400 million. As-a-service also grew strongly, up 25 percent, to a record $2.2 billion, with 34 percent growth in IaaS, to $1.6 billion, and 5 percent growth in SaaS, to $578 million.
Full-year combined ACV was a record $20.5 billion, up 7 percent, boosted by an as-a-service market that rose 15 percent, to a record $8.3 billion. Managed services grew 2 percent, to $12.1 billion.
Asia Pacific generated a record $2.6 billion in combined-market ACV in the fourth quarter, up 35 percent over the prior year. The region produced strong, double-digit growth across all segments. As-a-service was up 30 percent, to $1.9 billion, a new record, on 33 percent growth in IaaS, to a record $1.7 billion, and 12 percent growth in SaaS, to $257 million. Managed services, against a soft quarter a year ago, soared 55 percent, to $641 million, with ITO up 76 percent, to $473 million, and BPO up 16 percent, to $168 million.
For all of 2020, the combined market produced a record $9.0 billion of ACV, up 2 percent, boosted by a record $6.9 billion of as-a-service ACV, up 16 percent over the prior year. Managed services, however, slumped 27 percent, to $2.0 billion.
About the ISG Index™
The ISG Index™ is recognized as the authoritative source for marketplace intelligence on the global technology and business services industry. For 73 consecutive quarters, it has detailed the latest industry data and trends for financial analysts, enterprise buyers, software and service providers, law firms, universities and the media. In 2016, the ISG Index was expanded to include coverage of the fast-growing as-a-service market, measuring the significant impact cloud-based services are having on digital business transformation. ISG also provides ongoing analysis of automation and other digital technologies in its quarterly ISG Index presentations.
The 4Q 2020 ISG Index was presented during a conference call and webcast today. To listen to an audio replay of the call and view presentation slides, visit this webpage.
For a snapshot of fourth-quarter and full-year 2020 ISG Index results, view this infographic.
ISG (Information Services Group) (Nasdaq: III) is a leading global technology research and advisory firm. A trusted business partner to more than 700 clients, including more than 75 of the world's top 100 enterprises, ISG is committed to helping corporations, public sector organizations, and service and technology providers achieve operational excellence and faster growth. The firm specializes in digital transformation services, including automation, cloud and data analytics; sourcing advisory; managed governance and risk services; network carrier services; strategy and operations design; change management; market intelligence and technology research and analysis. Founded in 2006, and based in Stamford, Conn., ISG employs more than 1,300 digital-ready professionals operating in more than 20 countries-a global team known for its innovative thinking, market influence, deep industry and technology expertise, and world-class research and analytical capabilities based on the industry's most comprehensive marketplace data. For more information, visit www.isg-one.com.