ISG Index™: Digital Revolution Fuels 2016 Sourcing Market

STAMFORD, Conn., Jan. 12, 2017 /PRNewswire/ -- The global sourcing market, driven increasingly by the digital revolution, continues to be bolstered by surging demand and record-high value for as-a-service offerings amid a declining market for traditional sourcing, according to fourth-quarter and full-year 2016 data released today by 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 full-year ACV for the combined global market (including both as-a-service and traditional sourcing) climbed 9 percent, to $37.4 billion, driven primarily by an impressive 38 percent gain in the as-a-service segment. As-a-service ACV also jumped the same 38 percent in the fourth quarter, but the growth was not enough to offset a poor showing in the traditional sourcing market. Fourth-quarter combined market ACV of $9.6 billion was up 3 percent over the third quarter, but was down 5 percent from the prior year, when the industry posted its highest quarterly ACV over the previous four years.

"The market migration from traditional sourcing to as-as-service sourcing is gaining momentum, as enterprises increasingly embrace the digital opportunity to transform their operations, enhance their engagement with customers and better leverage their connections with suppliers," said John Keppel, partner and president of ISG. "This fundamental shift demands speed, mobility, innovation and increased productivity from service and technology providers, who are investing in digital platforms and services and adapting their delivery models to this new paradigm."

Keppel noted the decline in traditional sourcing ACV is likely the result of fewer megadeals, "a trend we don't see changing going forward." Meanwhile, the as-a-service market continues to accelerate. "Three years ago, barely one in every four dollars in total market ACV was spent in the as-a-service space. Now as-a-service is capturing nearly 40 percent of the total market ACV, and the pace of growth is accelerating," he said.

Within as-a-service, Infrastructure-as-a-Service (IaaS) outpaced Software-as-a-Service (SaaS) as the strongest growth area. In the fourth quarter alone, IaaS ACV was three times that of SaaS. For the year, IaaS logged ACV of $10 billion, up 54 percent, compared with $4.6 billion for SaaS, up 13 percent.

By service type, ITO posted $3.2 billion of ACV for the quarter, down 39 percent from the prior year, and $16.3 billion for all of 2016, down 5 percent. The BPO market generated $2 billion in ACV in the fourth quarter, up 23 percent, and $6.5 billion for the year, down 2 percent.

In terms of market size, the combined global sourcing market was worth $233 billion, of which 45 percent, or $104 billion, came from the as-a-service segment.

Americas

The Americas turned in a solid performance in the fourth quarter, generating ACV of $4.7 billion from the combined market, up 5 percent. With that result, the region has outpaced the Europe, Middle East and Africa (EMEA) region in eight of the past 10 quarters in combined market ACV. For the full year, the Americas' combined market ACV came in at $18.4 billion, up 14 percent, with essentially all the growth coming from the as-a-service segment, which accounted for $8.5 billion of ACV, up 37 percent.

Among industries, Financial Services saw a 12 percent increase in traditional sourcing ACV over last year, driven by widespread demographic and behavioral changes in the industry's customer base, particularly with the digitization of banking services. Healthcare also hit an all-time high, driven by new opportunities in care and claims management, as well as present and possible future changes in Medicare, Medicaid and compliance. Consumer Packaged Goods also produced a near record high in ACV. However, Manufacturing decreased with its second-lowest ACV in a decade, Energy was down for the second consecutive year due to lower oil prices, and Retail, Travel and Transportation, declined versus the prior year, but remained essentially even with their five-year averages.

Europe, Middle East and Africa (EMEA)

EMEA saw weak results in the fourth quarter, with combined ACV coming in at $3.8 billion, down 19 percent. For the full year, ACV in EMEA came in at $14.7 billion, up slightly from $14.5 billion in 2015, but still under 2014's ACV of $15.1 billion.

Overall, traditional sourcing still dominates the EMEA, but is steadily decreasing, while as-a-service accelerates, as public and hybrid cloud computing starts to take hold in the region.

Within the EMEA, the U.K. fell 10 percent over last year, while the Nordics, France and Southern Europe posted more favorable ACV year-over-year. Most industries in the region experienced challenges, except for Telecom and Media, which grew 70 percent over 2015. Financial Services saw flat results year-over-year and was 15 percent below its five-year average, due in part to trends in capital markets that include low interest rates, price compression and margin issues. Manufacturing also saw an 8 percent decrease year-over-year, and Travel and Transportation posted a 45 percent drop over 2015.

Asia Pacific

Asia Pacific's combined ACV came in at $1.1 billion for the quarter, up 15 percent. Combined full-year ACV was $4.3 billion, up 16 percent, with as-a-service ACV reaching $2.3 billion, up 51 percent, and accounting for 53 percent of total market ACV.  As-a-service growth in both SaaS and IaaS was the highest of all three regions.

While BPO held steady, ITO dropped from a record-high ACV in 2014. IaaS surged 63 percent year over year, and now claims a larger ACV than traditional sourcing. Australia and New Zealand, the region's largest market, saw its traditional sourcing ACV rise 29 percent over a soft 2015. By industry, Telecom and Media saw a 12 percent year-over-year increase, despite dropping against its five-year average. Manufacturing saw significant gains, coming in at 60 percent over 2015. Other verticals, including Financial Services, and Travel and Transport, saw year-over-year decreases.

Forecast

The year overall ended positively, with as-a-service solutions making significant gains against traditional sourcing, which is facing margin pressure, especially as companies move towards digital solutions and new technology. "We expect to see continued as-a-service growth in all three regions, and believe that digital labor will continue to have a major impact on the supplier ecosystem," said Keppel. "We will see momentum building especially in EMEA as that region expands public and hybrid cloud offerings and data center footprints. Traditional sourcing will feel an impact as spending continues to move from basic operational projects to digital initiatives, and we expect to see double-digit combined market growth in 2017."

About the ISG Index™

Now in its 57th 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 4Q 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/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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