The global economy got a proverbial shot in the arm in the second quarter — this time, quite literally — as COVID vaccines continue to be administered around the world and the pandemic begins to recede in many, though not all, places.
With the loosening of lockdowns, economic activity is picking up. Enterprises that invested in digital over the last 15 months—just to keep the wheels of business turning—are now doubling down on digital, as they chase new growth opportunities coming out of the pandemic.
We expected the growth numbers we reported during our Q2 ISG’s Index™ call this week would be eye-popping, given the comparison with the economic standstill of the prior spring. But our data showed emerging strength across markets and technology stacks, even without the benefit of the soft compare.
The annual contract value (ACV) for the global combined market (managed services plus as-a-service) reached a record $19.1 billion in the second quarter, a 32 percent increase from the same period in 2020 and an 11 percent gain from the first quarter of this year. It was the third straight quarter the industry topped itself and set a new record for spending. A $30 billion quarter later this year isn’t out of the question.
Even before the pandemic, cloud adoption and digital transformation were all the rage. COVID fast-forwarded those trends by three to five years. As-a-service ACV topped $11 billion for the first time, a 13 percent increase from the prior quarter. Infrastructure-as-a-service and software-as-a-service each recorded their own personal bests.
Managed services nearly hit $8 billion this quarter. For the past several years, we noticed deal size shrinking, but in this quarter, a majority of contracts were larger, in the $20 million to $40 million range. In the ITO space, ADM made a strong showing, perhaps as a response to the rapid growth in cloud-based applications, data modernization and the digital workplace. The growth of engineering services, fueled by IT/OT integration and smart manufacturing, will continue to shape the future of BPO.
Growth in the Americas historically has been a seesaw pattern of one quarter up, the next down. But this quarter, ACV once again grew by double digits. Combined market ACV surpassed $9 billion for the first time. Both as-a-service and managed service recorded new highs.
EMEA’s combined market ACV edged up 4 percent from the prior quarter. Its quarterly growth seems to be moving sideways, though Q2 showed a strong 31 percent gain from this time last year. The as-a-service market gets credit for bolstering the region’s performance. Its record $2.3 billion quarter marks a 41 percent increase from the prior quarter, and means cloud-based services, now at 46 percent of the combined market, will soon eclipse managed services for market dominance in the region. Infrastructure-as-a-service surged 47 percent sequentially to $2.3 billion. Managed services ACV, meanwhile, declined for the second consecutive quarter.
Not to be outdone, Asia Pacific had its own record-high ACV for the combined market, reaching $3.3 billion, a 59 percent gain over the prior year, and a 35 percent rise from the first quarter. Both as-a-service and managed services ACV set records, and contracting activity was the highest it’s been in three years.
We invite industry experts to our ISG Index™ call each quarter, and this time we took a closer look at the insurance industry. Johanna von Geyr, ISG partner and EMEA lead in BFSI, lent her insights into the opportunities and pitfalls she sees in the sector. CEOs tell her they’ve made progress in their digital transformation, now they want it to work faster. They want to simplify and enhance the customer experience for transactions that, admittedly, hold little excitement for customers. Who looks forward to buying insurance or filing a claim? Private equity investors, particularly in the U.S., are putting more pressure on insurance companies to work at their most cost-efficient level. And the increasing frequency and escalating damage of cybersecurity attacks has pushed the risk-averse insurance industry to come up with new products and improvements.
Stanton Jones, a regular on our ISG Index™ calls, also had cybersecurity as one of the three themes he recapped from his weekly ISG Index Insider email — you can sign up for it on ISG’s website. The prevalence of ransomware attacks has created huge demand for managed security services. He also shared some interesting data on how enterprises make buying decisions — the lowest bidder doesn’t always win. And he praised the resiliency of Indian-heritage IT service providers during the COVID surge.
Looking out on the balance of the year, we’re predicting 9 percent growth in managed services ACV for 2021, and a 21 percent increase in as-a-service, both up over our prior forecasts. Join our Q3 ISG Index™ call, on October 13, to see if we’re on pace..
Before I close, one public service announcement: if you get the opportunity for a vaccine, please take your shot. Do it for yourself, your family, your community and the economy.
To get a fuller picture of current market dynamics, view our 2Q21 Global ISG Index™ webcast replay, presentation slides and press release on our ISG Index™ website.
For a quick video summary, I encourage you to watch the latest edition of “ISG Index™ Headlines” on this page or by clicking here.
Until next quarter, stay safe and happy sourcing!
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.
