The latest ISG Index™ research shows the As-a-Service market, which includes IaaS and SaaS activity, now represents more than one-third of the combined global market for sourcing services – nearly double its share from early 2014. ISG predicts accelerated growth from the As-a-Service segment in the years ahead, both in absolute terms and in relative terms against traditional sourcing activity, as more and more work is automated and moved to the cloud.
Data from the ISG Index™, which measures commercial outsourcing contracts with annual contract value (ACV) of $5 million or more, show second-quarter ACV for the combined global market – representing both traditional and As-a-Service sourcing activity – was $7.9 billion, down 2 percent from the prior year. Traditional sourcing was down 17 percent, to $5.1 billion, while As-a-Service sourcing climbed 45 percent, to $2.8 billion. ISG attributed the sluggish performance of the traditional sourcing market to weakness in new scope contract awards, particularly in the information technology outsourcing (ITO) space, which saw its ACV decline 24 percent from the prior year. As-a-Service growth, meanwhile, was paced by a 70 percent increase in IaaS ACV.
For the first half of 2016, the combined market, with ACV of $16.6 billion, was up 10 percent from the first six months of 2015. Traditional sourcing, with ACV of $11.1 billion, was relatively steady (down 1 percent), while As-a-Service ACV, at $5.5 billion, was 44 percent higher than the previous-year period, fueled by 69 percent growth in IaaS.
The Americas saw its combined second-quarter ACV grow 7 percent, to $4.2 billion, propelled by a surging As-a-Service market that generated $1.8 billion in ACV, up 49 percent over the prior year. The traditional sourcing market recorded its tenth consecutive quarter of ACV in excess of $2 billion and outpaced the quarterly ACV of the Europe, Middle East and Africa (EMEA) market for the first time since the first quarter of 2013.
For the first half, the combined market in the Americas reached $8.7 billion, up 19 percent over the prior year, fueled by growth in ITO, IaaS and SaaS. First-half contract volume in traditional sourcing reached a record 391 contracts on ACV of $5.3 billion, up 6 percent from 2015. Growth was driven primarily by the manufacturing sector.
Europe, Middle East and Africa (EMEA)
The Europe, Middle East and Africa (EMEA) sourcing market, far less reliant than the Americas on As-a-Service activity, saw its combined second-quarter ACV drop 18 percent, to $2.7 billion. Traditional sourcing, at $2.0 billion, was down 28 percent, while the As-a-Service market, at $654 million, was up 38 percent.
Over the first six months of the year, the EMEA market generated $6.1 billion in combined ACV, flat with the prior year, due to slowing large-deal and restructuring activity. Contract volume, at 294, was even with the prior year, despite strength in the DACH (Germany, Austria, Switzerland) and Nordics markets that helped offset a falloff in the U.K. By industry, manufacturing and retail were the bright spots.
Second-quarter ACV in the combined Asia Pacific market rose 13 percent, to $989 million, with the As-a-Service market growing 42 percent even as the traditional sourcing market remained relatively flat (in a range between $500 million and $600 million) for the sixth straight quarter.
Combined first-half ACV, at $1.8 billion, was up 7 percent over the prior year; the As-a-Service market grew 38 percent, to $757 million, on increased IaaS activity, while the traditional market declined 7 percent, to $1.0 billion. Traditional outsourcing contract volume fell 17 percent, to 67, and among major industries, only manufacturing and telecommunications had ACV growth.
"Looking ahead, we see As-a-Service growth remaining on a steep, upward trajectory. At the half-year mark, 36 percent of the combined market is accounted for by As-a-Service ACV, and we expect that percentage to grow in the future," Keppel said.
"Traditional sourcing markets pulled back in the second quarter and came in at lower levels than initially projected. Even though we see demand in sourcing increasing, with more deals being awarded than three to five years ago, second-half ACV results from last year will be difficult to match. We expect traditional market ACV may come in slightly lower than in 2015. Factoring As-a-Service contract flow into the combined market view, we expect ACV likely will finish 2016 with high single-digit growth."
About the ISG Index™
Now in its 55th consecutive quarter, the ISG Index™ provides a quarterly review of the latest sourcing industry data and trends for clients, service providers, analysts and the media. For nearly 15 years, it has been the authoritative source for marketplace intelligence related to outsourcing transaction structures and terms, industry adoption, geographic prevalence and service provider performance.
The 2Q 2016 ISG Index™ was presented during a conference call and webcast for media and analysts today. To listen to an audio replay of the call and view presentation slides, please visit http://www.isg-one.com/web/research-insights/isg-outsourcing-index/.
About Information Services Group
Information Services Group (ISG) (NASDAQ: III) is a leading technology insights, market intelligence and advisory services company, serving more than 500 clients around the world to help them achieve operational excellence. ISG supports private and public sector organizations to transform and optimize their operational environments through research, benchmarking, consulting and managed services, with a focus on information technology, business process transformation, program management services and enterprise resource planning. Clients look to ISG for unique insights and innovative solutions for leveraging technology, the deepest data source in the industry, and more than five decades of experience and global leadership in information and advisory services. Based in Stamford, Conn., the company has more than 1,000 employees and operates in 21 countries.
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SOURCE Information Services Group