ISG Index™: Global Commercial Sourcing Market up 12% in 1Q

The ISG Index™, which measures commercial and public sector outsourcing contracts with annual contract value (ACV) of $5 million or more, shows first-quarter ACV for the combined global commercial market (including both as-a-service and traditional sourcing) reached $10.5 billion, up 12 percent over the first quarter last year, and up 13 percent sequentially from the fourth quarter of 2016.

In a continuing trend, growth in the combined commercial market was fueled by the as-a-service (Infrastructure-as-a-Service and Software-as-a-Service) segment, which surged 39 percent versus the prior year, to $4.4 billion. Traditional sourcing, meanwhile, dipped 1 percent, to $6.2 billion, yet was up 17 percent versus the fourth quarter of 2016.

The public-sector space paints a decidedly different picture. The combined market, at $12.9 billion, was down 21 percent year-over-year, yet rose 17 percent from the 2016 fourth quarter. Traditional sourcing, which represents the lion's share of spending in the public sector, was $12.5 billion, down 22 percent, due to softness in the U.S. and Europe, while as-a-service, at $0.4 billion, was up a robust 31 percent. At only 3.1 percent of public-sector spending, the as-a-service segment still represents a small share of the total market, as governments have yet to embrace cloud-based services as strongly as the commercial market.

"The first quarter marks a continuing trend in what we consider to be a healthy global market for sourcing," said John Keppel, partner and president of ISG. "To put this into perspective, the combined market for both commercial and public sector sourcing now has recorded 11 consecutive $20-billion-plus quarters, four of which topped $25 billion. These have become our benchmarks — anything below $20 billion is a weak quarter, and anything above $25 billion is considered strong.

"From a trailing-12-month perspective, combined market ACV contracted somewhat as traditional sourcing settled down after a very strong 2015, returning to what it was two years ago. As-a-service, meanwhile, continues on a fairly steep upward trajectory, with the gap between traditional and as-a-service in the commercial sector narrowing considerably with each passing quarter."

In the as-a-service segment, Infrastructure-as-a-Service (IaaS) was particularly strong in the first quarter, reaching $3.3 billion, up 79 percent, while Software-as-a-Service (SaaS) retreated by 18 percent, to $1.1 billion.

By industry, the largest market, Financial Services, generated $8.4 billion in ACV during the trailing 12 months, a 15 percent increase over the prior year. The rapidly growing as-a-service segment, at $2.5 billion, accounted for 29 percent of the Financial Services market in that period.

Business Services emerged as another strong performer. In the trailing 12 months, its ACV increased 26 percent, and was up 80 percent versus the same period two years ago. As-a-service accounts for 63 percent of the total market ACV, up from 51 percent two years ago, indicating this industry segment is rapidly adopting cloud-based services.

From a regional perspective, the combined commercial markets in the Americas; Europe, Middle East and Africa, and Asia Pacific each delivered double-digit growth in the first quarter, with as-a-service driving results in each region, albeit at differing paces. EMEA is in the early stages of cloud adoption, while the Americas is more evenly split between traditional and cloud-based services. Asia Pacific, meantime, is more heavily weighted toward as-a-service, as the traditional market there is less mature, making the region more open to new cloud-based services.

Americas

The Americas region delivered its best-ever quarter, with ACV of $5 billion, up 11 percent. Traditional sourcing ($2.6 billion) and as-a-service ($2.4 billion) now split the market almost evenly, due to a continuing robust market for as-a-service solutions, which rose 29 percent over last year. Two years ago, the as-a-service segment represented only about one-third of the combined market, versus 46 percent in the latest trailing 12 months. After a dip the last two quarters, traditional sourcing once again eclipsed the $2.5 billion mark for the quarter, a sign of market strength.

By traditional service domain, IT outsourcing (ITO) dropped 10 percent over the trailing 12 months and business process outsourcing (BPO) declined 6 percent. In as-a-service, IaaS surged 63 percent in the trailing 12-month period, while SaaS declined 10 percent.

Financial Services, the region's top sourcing industry, up 12 percent, and Business Services, up 26 percent – both early adopters of cloud services – continued to pace market growth over the last 12 months, in line with their growing use of fast-growing as-a-service solutions. Telecom and Media also is on the rise, despite industry consolidation, as growing digitalization of services spurs as-a-service growth.

Europe, Middle East and Africa (EMEA)

EMEA turned in its second-best quarter ever, with ACV of $4.4 billion, up 13 percent. With adoption of as-a-service solutions still lagging behind the other two regions, EMEA's growth remains more dependent on the traditional market, which reached $3.2 billion, up 3 percent over last year, fueled by six mega-deals (contracts exceeding $100 million in ACV) during the quarter. The as-a-service market, meanwhile, climbed 48 percent, to $1.2 billion.

By domain, ITO was down 18 percent in the trailing 12 months versus the same previous period, while BPO was relatively flat. In cloud-based services, SaaS dropped 14 percent over the last 12 months, while IaaS surged 65 percent.

EMEA's largest sourcing industry, Financial Services, rose 15 percent over the trailing 12 months, propelled by rapid adoption of as-a-service offerings, up 43 percent. The Telecom and Media vertical also showed solid growth, up 34 percent, while Energy declined 2 percent due to the industry's economic headwinds. Manufacturing, meanwhile, stumbled 28 percent.

Asia Pacific

Asia Pacific achieved its best combined sourcing ACV, $1.1 billion, since early 2014 – the fourth consecutive quarter the region has generated ACV in excess of $1 billion. Combined ACV jumped 16 percent, propelled by rapid as-a-service growth, up 59 percent. In the first quarter, the region's as-a-service segment was more than twice the size of its traditional sourcing market, which has sunk to its lowest level in a decade.

The IaaS market soared 77 percent in the trailing 12 months, while the SaaS market declined 6 percent. ITO continued its climb out of the 2016 trough, up 8 percent in the trailing 12 months, while BPO slid by 48 percent, due to the absence of a megadeal that drove performance in the previous 12-month period.

The region's largest sourcing industry, Telecom and Media, saw strong growth in the trailing 12 months, with as-a-service up 60 percent and traditional sourcing up 17 percent. Similarly, Financial Services also grew sharply, with as-a-service up 49 percent and traditional sourcing up 10 percent. Manufacturing, meanwhile, was off sharply from the prior 12-month period, as even a 43 percent increase in as-a-service could not offset a 49 percent drop in traditional sourcing.

Forecast

"Looking ahead to the rest of 2017, we forecast high single-digit gains in the combined commercial markets of each of the three regions due to increasing adoption of as-a-service solutions. We expect occasional strong quarters in traditional sourcing as a result of high volumes or more large deals. Public sector spending, while going through a period of contraction, is expected to rebound with the increasing focus on defense, intelligence, security and elder care," Keppel said.

About the ISG Index™

Now in its 58th 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 1Q 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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