ISG Index™: Digital Drives Global Sourcing Market to New Heights in First Quarter

Data from the ISG Index™, which measures commercial outsourcing contracts with annual contract value (ACV) of $5 million or more, show first-quarter ACV for the combined global market (including both as-a-service and traditional sourcing) climbed 11 percent, to a record $12.2 billion. Although the global market has surpassed $10.5 billion of ACV in three of the past four quarters—reaching a record high of $10.9 billion in the first quarter of 2017—it had never surpassed the $11 billion mark, let alone the $12 billion level.

"We're talking rarefied air here," said Steve Hall, partner and president of ISG. "If the numbers this quarter tell us anything, it is that digital transformation is a very real and growing phenomenon. Digital technology is lowering costs and changing business models for virtually all the world's leading enterprises, and there is no end in sight. How organizations are adopting new business models, how they have shifted toward a product-oriented mindset and what that means to the broader sourcing market all point toward optimism for continuing growth."

The global market's push to the $12 billion level was driven by 40 percent growth in the as-a-service sector, which topped $5 billion in a quarter for the first time to reach $5.9 billion of ACV. Both infrastructure-as-a-service (IaaS) and software-as-a service (SaaS), the two components of the as-a-service market, established new quarterly highs. IaaS reached $4.6 billion of ACV, up 48 percent over last year, while SaaS ACV was $1.3 billion, up 18 percent. The new quarterly high for as-a-service is far beyond the $4 billion range in three of the last four quarters, and nearly double the typical ACV of just two years ago.

The traditional outsourcing market saw its ACV decline 6 percent versus a year ago, to $6.3 billion, roughly in line with ACV in four of the last five quarters, indicating relative market stability. Information technology outsourcing (ITO) produced ACV of $4.8 billion, down 3 percent, while business process outsourcing (BPO) generated $1.5 billion, down 14 percent. The trend toward more contracts of shorter duration and lower value continued, with a record 470 contracts signed during the first quarter.

Over the trailing 12 months, the financial services sector remained the largest global market for combined sourcing services, with ACV of $9.8 billion (up 20 percent), followed by business services, with ACV of $6.9 billion (up 10 percent), and manufacturing, with ACV of $6.8 billion (up 22 percent). The fastest-growing sector for sourcing was healthcare, which saw its ACV climb 31 percent, to $3.7 billion. Telecommunications and media, with ACV of $4.3 billion, was down 13 percent.

Americas

The Americas remains the world's largest sourcing market—a position it has held since the beginning of 2016—with first-quarter combined ACV surging 32 percent to a record $6.9 billion, continuing a trend that has seen the region generate more than $6 billion of ACV in two of the last three quarters.

The traditional market reached a record $3.7 billion, up 31 percent, fueled by strength in applications (ACV of $1.2 billion, up 22 percent) and BPO (ACV of $947 million, up 47 percent). Traditional sourcing volume reached an all-time high of 262 contracts. The as-a-service market climbed 32 percent, to $3.2 billion, setting new records for IaaS (ACV of $2.3 billion, up 38 percent) and SaaS (ACV of $866 million, up 19 percent).

Europe, Middle East and Africa (EMEA)

The EMEA market slumped in the first quarter, with combined ACV down 20 percent, to $3.8 billion, capping the region's worst three-quarter stretch since 2007. Although most of the region's markets were in positive territory this quarter, that performance could not overcome declines in its two largest markets, the UK and DACH. From an industry perspective, the banking and financial services sector was down significantly, along with the energy and telecommunications sectors.

Traditional sourcing, long the bellwether of the region, was down 40 percent in the quarter, to $2.1 billion. The as-a-service space, meanwhile, reached a record $1.7 billion, up 37 percent, with strength in both the IaaS and SaaS segments.

Asia Pacific

Asia Pacific's combined ACV came in at $1.5 billion, up 62 percent against a weak 2017 first quarter. It was the region's second-best quarter ever, trailing only the record performance in the 2017 third quarter. Overall growth was fueled by gains in the ASEAN and China markets, and from the banking, financial services and insurance sector, and the manufacturing and telecommunications sectors.

Traditional sourcing was up 35 percent, to $463 million, but broke a string of three straight $500 million-plus quarters. As-a-service sourcing reached a record high of $1.02 billion, eclipsing the $1 billion level for the first time and up 78 percent over the prior year. Both the IaaS and SaaS segments turned in record-setting results.

Forecast

"Going forward, we expect at least 20 percent ACV growth in the as-a-service segment for the remainder of 2018, on the strength of 30 percent-plus growth in public cloud (IaaS) and nearly 15 percent growth in SaaS," said Hall. "We expect traditional sourcing to grow by more than 2 percent, with unevenness to continue across regions and industries."

About the ISG Index™

Now in its 62nd 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 more than 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. In 2016, the ISG Index™ was expanded to include coverage of the fast-growing as-as-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 1Q 2018 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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