Would you be able to tell whether I wrote this blog using ChatGPT? (Read on for the answer.)
Generative AI (GAI) keeps getting better, and industries across the board are interested in how it might be used to handle tedious tasks and improve productivity. While the economy stubbornly resists dipping into a recession, enterprises nervously stay alert for signs of a downturn and want to maintain tight control over costs.
In our 2Q23 Global ISG Index™ webcast this week, ISG Chief Data and Analytics Officer Kathy Rudy explained how GAI has taken AI to a new level by digesting, suggesting, creating and re-creating information. Already, companies have used the technology in e-commerce to generate product descriptions, in pharmaceuticals to speed up drug discovery and in finance for natural language processing (NLP) tasks. The hope is it will improve productivity. The fear is data security and privacy could be compromised. But that’s a whole other discussion.
Instead, let’s turn to the Index results for second quarter and first half. Managed services ACV hit all-time highs for the quarter and the half, but that wasn’t enough to offset the steeper-than-expected decline in cloud services.
With weaker demand for cloud (XaaS) services, the global combined market – both managed services and cloud services – continued its slide since the start of 2022, when annual contract value (ACV) was over $26 billion. This quarter, it fell 9 percent, to $22.7 billion, and we still have one more quarter of difficult comps ahead of us.
At the half-year point, the combined market showed a nearly 10 percent decline in ACV from the first half of 2022. This was the first time since 2015 the first half fell into negative territory. A slowdown was inevitable as the combined market has come off an incredible growth period. But the sudden drop was unexpected.
Managed services continue to be resilient in the face of an uncertain economy, as outsourcing remains a prime lever for cost optimization. In Q2, the market was boosted by 10 mega-deals (contracts with ACV of $100 million or more). IT outsourcing (ITO) was particularly strong, driven by growing demand for application development and maintenance (ADM) services.
On the other hand, the XaaS market continues to lose strength. In infrastructure-as-a-service (IaaS), all three big hyperscalers saw declines in the first half, which hadn’t happened before. Previously, they had averaged about 50 percent year-over-year growth in the first half, so the 20 percent decline this year was an abrupt about-face. Many companies overbought cloud in responding to the pandemic. Those contracts will be renegotiated over the next 12 to 18 months.
Software-as-a-Service (SaaS) ACV declined in each of the three regions. Enterprises are concerned about the unpredictability and volatility of the market in front of them and are being cautious. Despite strong demand, sales cycles have lengthened, and both providers and enterprises are scrutinizing deals for cost savings and ROI.
From a regional perspective, ACV in the Americas declined at the half-year mark for the first time. A drop in the BFSI sector dragged down managed services. If BFSI in the Americas had first-half ACV equal to that of the same period in 2022, it would have been up nearly 5 percent, instead of down 3.5 percent.
EMEA rallied, reaching a new high in combined-market ACV for the quarter, fueled by record demand for managed services. Five megadeals in managed services added a billion dollars of ACV this quarter, and restructurings soared 76 percent from 2Q22. But it wasn’t enough to push the half-year numbers into positive territory. XaaS was down 10 percent for the half, showing EMEA is not immune to the malaise affecting the overall XaaS sector.
Asia Pacific’s combined market ACV this quarter suffered its fifth consecutive year-over-year decline. Its first-half ACV fell 19 percent compared to 1H22, snapping a streak of first-half increases that had held since the beginning of 2017. Managed services was up nearly 50 percent at the half, but XaaS ACV dropped 29 percent year-to-date.
Our 2023 full-year revenue forecast considered macro uncertainties that have delayed decision-making and tightened discretionary spending, thus slowing movement in the pipeline. Interest rates continue to rise, but the U.S. economy is still strong and so far has resisted any recession. We still believe managed services revenue will grow 5 percent this year.
And as excitement grows around GAI being a catalyst for growth in the XaaS segment, new developments in the chip market have left enterprises cautious about infrastructure investments. We have revised our 2023 revenue forecast for XaaS down from 15 percent to 11.5 percent.
To get a fuller picture of current market dynamics, view the 2Q23 Global ISG Index™ webcast replay, presentation slides and press release on our website.
For a quick video summary, I encourage you to watch the latest edition of “ISG Index: Big Three Takeaways” above, on our Index page or on YouTube.
Finally, we invite you to sign up for our weekly ISG Index Insider™ briefing, and register for our third-quarter ISG Index call, to be held on Oct. 12.
Oh, and by the way, I wrote this blog without benefit of AI … for now.
About the author
Steve Hall
As the leader of ISG’s business in EMEA and an Executive Board Member, Steve provides strategic insight and advice to help ISG’s clients solve their most critical business challenges, helping them adopt and optimize the technology and operating models they need to compete successfully. In particular, he uses his long experience and broad expertise to challenge and inspire them to think about their risks and opportunities in new and unexpected ways.
Past achievements for clients
Steve leads his team’s engagement with clients with an industry-recognized and highly valued perspective on the most important trends in business and technology. He asks and answers the big questions: Why do you need to transform? What’s your best way forward? What do you need to accelerate? And where should you invest your technology dollars to make it all happen?
Among his many client success stories, his ability to take in the big picture, define the problem and connect the dots to the right solutions helped one legacy postal and shipping giant transform itself into a modern logistics powerhouse. He also guided a global energy industry leader through a complex operating model and IT provider transition, helping them see past the obvious cost cutting measures to identify the root causes of their challenges—and delivering savings far beyond what they had imagined.
