Remember the good old days of 2019, when the biggest concerns we had were Brexit, geopolitical tensions and tariff and trade wars? When unemployment rates were at all-time lows and stock markets were at all-time highs?
COVID-19 whooshed us into a different world this quarter.
The global pandemic brought an abrupt halt to many of our rising trajectories by the end of the first quarter of 2020. Work-from-home mandates, social-distancing requirements and government-ordered closing of non-essential businesses all took their toll. But because most of the world didn’t feel the impact of the virus until at least two-thirds of the way through the quarter, our 1Q20 ISG IndexTM findings, which we released last week, largely paint a “before” picture of the global sourcing industry, pre-virus.
What we saw when we analyzed all the numbers was a combined annual contract value of $14.8 billion globally, an all-time high for a quarter. That ACV, composed of managed services and as-a-service contracts, was up 7 percent over last year.
Managed services ACV was on pace for one of its best quarters ever, likely topping $7.3 billion, until COVID-19 slowed its momentum in March to a more pedestrian $6.8 billion for the quarter, up 2 percent. As-a-service ACV, on the other hand, continued to forge ahead, up 11 percent globally. Infrastructure-as-a-service ACV soared 18 percent in the first quarter, mostly due to strong demand for cloud services provided by hyperscalers like Amazon Web Services, Microsoft Azure, Google Cloud Platform and IBM Cloud.
I’ve said before that the tailwinds of digital are stronger than the headwinds of macro-economic forces, and COVID-19 has not altered my belief. In fact, as we said during our ISG Index call, companies that are well along in their digital transformation journeys may recover more quickly, and those that are less digitally mature may be more motivated now to accelerate their digital investments.
The pandemic affected each region differently, depending on how far into the quarter it hit and how fast companies in a given area could pivot to a new operating model. COVID-19 arrived in the Americas fairly late in the quarter, so market performance was affected less than in other regions. The Americas started the quarter with unexpected vigor after closing 2019 quietly. Combined market ACV rose 9 percent to a near-record level of $7.6 billion. Even with the business shutdowns in the final two weeks of the quarter, as-a-service ACV smashed through $4 billion for the first time. Managed services grew 6 percent, despite a sharp drop in those last two weeks.
In Europe, the Middle East and Africa (EMEA), combined market ACV gained 4 percent. The virus rolled through the E.U. in early March, starting with Italy, then on to Germany and the U.K., which already had its hands full with continued anxiety over Brexit, before infecting Spain and other countries. Several large managed services contracts in DACH shored up overall performance. As-a-service inched up 1 percent, but that’s all it took to set a new record.
Although Asia Pacific was the first region to feel the impact of the virus, combined market ACV matched its best prior quarter. Managed services slid 27 percent, though Australia/New Zealand reversed its downward trajectory over the past three quarters. As-a-service ACV, meanwhile, soared 25 percent, with this segment now making up three-quarters of the combined market.
During our 1Q20 ISG Index call, we bravely entered the M*A*S*H tent of the industry hit hardest by the pandemic — Travel, Transportation and Hospitality. Cruise ships have stopped sailing; airplanes sit on the tarmac; hotels are empty. These industries have had to get creative to bring in revenue. Cruise lines are making their ships available to the government as floating hospitals, charging only for operational costs. Some hotels are following suit. Some airlines are flying critical cargo instead of passengers. But what will the industry look like post-coronavirus? Will customers change where and how they vacation? Will service workers move to industries less vulnerable to a possible second wave of the virus? Those sorts of questions keep industry executives up at night.
The decade of the 2020s is certainly off to a dramatic start. We don’t know what lies ahead as the pandemic rocks our global economy. Will we discover effective treatment to make the virus less lethal, or develop a vaccine in time to protect against a possible second wave? Will customer behavior change permanently?
What’s clear is COVID-19 will impact the technology and business services industry dramatically in the nearer term. We expect managed services ACV will drop 17 percent sequentially in the second quarter and end the year down 7 percent versus 2019. As-a-service has a better prognosis. We expect to see a 5 percent rise next quarter and a 12 percent increase over the full year, but that’s still far below the 23.5 percent growth we forecast at the start of the year.
Success will vary by industry. We’ll have more news next quarter about which industries saw increased demand for their products and services; which companies were able to work effectively from home; and which were able to keep their customers engaged.
To get a fuller picture of current market dynamics, view the 1Q20 Global ISG Index presentation slides, news release and infographic on our ISG Index webpage.
For a video summary focused specifically on the COVID-19 impact, I encourage you to watch our latest ISG Index™ Headlines program.
Stay healthy, everyone.
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.
