Hello. This is Stanton Jones and Steve Hall with a special preview edition of our 1Q23 Index Call next Thursday, April 13 at 9:00 AM U.S. ET. We have over 1,000 enterprise clients, service providers and investors attending, so make sure to reserve your spot here.
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1Q23 INDEX PREVIEW
Outsourcing demand remains robust in the first quarter, and we are not seeing any significant slowdown in deal flow. However, several service providers are indicating delayed decision making and are slowing hiring and reducing non-billable costs in response.
Background for the Call
As we discussed on the 4Q22 Index call, we forecasted 5% growth for managed services in 2022. And while Q1 demand remains strong, several factors have emerged in the first quarter that could result in a change to that forecast – which we’ll discuss on the call next week.
Questions We’ll Address
- How will the recent banking crisis impact the sector? The recent banking crisis has put significant stress on the industry, given that the BFSI vertical has traditionally made up ≈25% of all the managed services ACV in the sector. Financial services ACV growth was up over 25% Q/Q, but it’s important to keep in mind that many of these awards were close to signing prior to the crisis. That said, we have not seen a noticeable slowdown in spending, and our recent buyer behavior research indicates that BFSI transformation programs are largely protected.
- How will the big tech layoffs impact the sector? Big tech and startups continue to drive down costs, and the Big 3 hyperscalers continue to guide lower, which has put pressure on the IT services sector. However, unlike BFSI, business services (which includes big tech firms) is typically less than 10% of the ACV in the sector, so the slowdown in the tech sector won’t have as broad an impact. But it will continue to have an impact on smaller providers focused on software and product engineering services, especially since many of them focus more on time and materials-based work, which is where we see some softness.
- Why did hiring slow down so much this quarter? The uncertain macro situation has led to a significant slowdown in hiring in Q1. During the demand peak in 2022, providers were hiring approximately two people for every one person that left. Today that has slowed to just replacing for attrition. However, it’s important to keep in mind that this slowdown is more of a reflection that providers have the staff they need to service the unprecedented demand that was generated in 2022. Today, providers are recalibrating their growth trajectories for 2023, and as part of that, we expect hiring to pick back up in Q2 and Q3.
- If demand is steady, why are layoffs happening in IT services? A handful of IT services providers have undertaken cost management actions in the first quarter. However, it’s important to keep in mind that most of these actions have focused on non-billable resources. But we also expect providers to use the current uncertainty in the market to rebalance their delivery organizations – both the ratio of senior to junior resources and the ratio of onshore to offshore.
- Why are margins under so much pressure? During the peak of supply side challenges in 2022, providers significantly increased pay to attract lateral hires – which led to a surge in delivery costs. But providers struggled to pass these costs on to clients. For example, in infrastructure services, market prices are declining twice as fast as committed price reductions in contracts. This is putting significant pressure on providers with exposure to legacy infrastructure contracts.
- Are decisions being delayed? We’re not seeing any significant slowdown in deal flow. And, as we predicted last quarter, we did see a significant number of mega awards that were being developed in 2022 close this quarter (more detail on this on the call). That said, if the banking sector situation worsens, it could potentially delay some of the transformation-related work mentioned above.
Register for the Call
I encourage you to join Steve, Kathy, Namratha, Owen and me on the 1Q23 ISG Index call next Thursday, April 13 at 9:00 AM U.S ET, where we’ll review these key questions and discuss our forecast for the balance of the year. You can register here.
About the authors
Stanton Jones
Stanton leads ISG's Index research, helping providers, investors and ISG clients make sense of the global IT services sector. Stanton’s weekly newsletter, the Index Insider, is read by thousands of market stakeholders each week. An ISG Digital Fellow, Stanton has been quoted in Fast Company, Forbes and CIO.com, and has appeared on national cable news.
Steve Hall
What he does at ISG
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.
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.
