ISG Index™: Global As-a-Service Approaching Parity with Traditional Sourcing

The ISG Index™, which measures commercial outsourcing contracts with annual contract value (ACV) of $5 million or more, shows second-quarter ACV for the combined global market (including both as-a-service and traditional sourcing) reached $9.3 billion, up 9 percent over last year, but down 11 percent from the record first quarter of 2017.

The growth in demand for as-a-service solutions continues to outstrip that of traditional services. During the quarter, as-a-service (Infrastructure-as-a-Service and Software-as-a-Service) ACV climbed 32 percent, to $3.8 billion, while traditional sourcing ACV declined 3 percent, to $5.5 billion.

As-a-service now accounts for 41 percent of the global sourcing market, and ISG forecasts continued double-digit growth in this segment for the balance of the year, with traditional market spending remaining essentially flat.

"The demand for as-a-service solutions continues to grow so rapidly that it won't be long before as-a-service spending reaches parity with traditional sourcing and even eclipses it," said Steve Hall, partner and global leader, ISG Index™.

Despite this reversal in fortune, Hall points out the overall sourcing market remains healthy. "With a record first quarter and a solid second quarter, combined global spending for sourcing services, as measured by annual contract value, reached an all-time high of $19.8 billion in the first half, up 10 percent over last year. At this rate, combined ACV for all of 2017 could exceed last year's total by nearly $3 billion."

Spending on traditional sourcing, although down overall in the quarter, continued to grow in Europe, Middle East and Africa (EMEA) and was up by a double-digit percentage in Asia Pacific. The number of traditional sourcing contracts signed in the quarter – 427 – was the second most ever, with much of the activity in information technology outsourcing (ITO), particularly the applications space.

In the first half, global ITO spending reached $9.3 billion, up 7 percent, on 623 contract awards, a record for a half year. Business process outsourcing (BPO), meanwhile, slumped 27 percent, to $2.4 billion. On the as-a-service side, Infrastructure-as-a-Service (IaaS) ACV soared 62 percent, to $6.1 billion, while Software-as-a-Service (SaaS) slowed 9 percent, to $2.0 billion.

Americas

ACV in the Americas region reached $4.5 billion for the quarter, up 2 percent, with as-a-service growth of 27 percent offsetting a 13 percent decline in traditional sourcing. The Americas is now essentially a 50-50 market, with the region's spending about evenly split between traditional and as-a-service sourcing over the last four quarters.

In the first half, Americas combined ACV reached $9.5 billion, up 6 percent over the prior-year period. Spending consisted of $5.0 billion in traditional sourcing (down 8 percent), including $4.0 billion in ITO (even with the prior year) and $0.9 billion in BPO (down 32 percent). On the as-a-service side, ACV was $4.5 billion for the half (up 27 percent), including $3.2 billion in IaaS (up 53 percent) and $1.3 billion in SaaS (down 10 percent).

ACV in financial services, the region's top industry for sourcing services, reached a record $2.1 billion, up a combined 15 percent in the first half, and up 35 percent in the as-a-service space. Manufacturing, previously lagging, is gaining momentum, with ACV up 35 percent in both the combined and as-a-service markets in the first half, driven by transformation initiatives.

Europe, Middle East and Africa (EMEA)

EMEA generated ACV of $3.5 billion in the second quarter, up 13 percent. Unlike the Americas and Asia Pacific, the region continues to be more dependent on traditional sourcing, which grew 5 percent in the quarter, to $2.5 billion, on the strength of 188 contract awards, the second most ever for a quarter. ACV in the as-a-service segment grew 40 percent for the quarter.

In the first half, EMEA's combined spending reached $7.9 billion, up 13 percent over the same period last year. A record $2.2 billion was spent on as-a-service sourcing, up 48 percent, fueled by an 80 percent increase in IaaS, offset partially by a 7 percent decline in SaaS. Traditional sourcing, at $5.7 billion, was up 3 percent, driven by a 9 percent increase in ITO spending, to $4.4 billion, and a record 270 contracts in the first half. BPO, meanwhile, fell 10 percent, to $1.4 billion.

Financial services is, like the Americas, EMEA's largest sourcing industry. This vertical generated $2.2 billion in ACV, up 31 percent for the first half. Energy is picking up steam, with ACV up 44 percent in the half, while the telecom and media sector grew 17 percent.

Asia Pacific

Asia Pacific reached a record $1.3 billion in combined ACV in the second quarter, up 24 percent. Driven by a record 66 contracts in the quarter, traditional sourcing ACV rose 11 percent, to $659 million, the highest spending since the fourth quarter of 2014. As-a-service spending reached $679 million, the second-best quarter ever, up 42 percent from the prior year.

For the first half, combined spending reached $2.4 billion, up 20 percent, propelled by a record $1.4 billion in ACV from the as-a-service segment. Traditional sourcing, meanwhile, slid 6 percent to $1.0 billion. As-a-service spending was driven by $1.2 billion in IaaS ACV, up 64 percent, offset partially by a 4 percent decline in SaaS, to $216 million. In traditional sourcing, ITO spending, at $878 million, was up 43 percent, while BPO, at $136 million, was down 70 percent.

By industry, business services generated nearly one-third of the region's ACV in the first half – $431 million, up 28 percent, with as-a-service spending accounting for lion's share (87 percent) of that total. Financial services contributed a similar level of spending – $449 million – also up 41 percent in the first six months, with just over half of that spending coming from as-a-service sourcing.

Forecast

"Looking ahead to the rest of 2017, we forecast double-digit growth in the as-a-service segment in both the Americas and Asia Pacific, with IaaS continuing to outpace SaaS," said Hall. "Traditional sourcing in these regions is expected to remain flat. In EMEA, we expect a strong second half, with traditional sourcing spending growing by a mid-single-digit percentage for the year, even as IaaS and SaaS spending remains fairly flat."

About the ISG Index™

Now in its 59th 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 2017 Global 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 the presentation slides and infographic, please visit http://www.isg-one.com/research/research-detail-page/isg-index.

About ISG

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 75 of the top 100 enterprises in the world, 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; technology 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 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.

SOURCE Information Services Group, Inc.

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