If you’re in the market for an IT specialist these days, prepare to pay top dollar.
That’s one of “The Big 3” market findings we shared during our recent first-quarter ISG Index™ webcast. As enterprises continue their pursuit of digital transformation, one of the things that may slow their progress is the scarcity of tech talent. Several service providers report record-high attrition as people with in-demand skills leave for higher pay or better work-life balance.
Our model shows average attrition for the industry at just above 21 percent. And while we’ve seen attrition at this level before, it’s never been combined with such strong demand (read on for more). That’s what’s causing so much disruption in the global IT services market right now. And it’s this disruption that is driving many large enterprises to ramp up their captive center planning, while at the same time driving many providers to ramp up unprecedented levels campus-based hiring. For enterprises, the higher cost of talent is translating into higher invoices. We’re seeing rates on highly in-demand skills, like cloud and cybersecurity, up as much as 15 percent.
A second key finding from our analysis is that managed services contract value and award counts were at all-time highs in Q1. There were more than 600 managed services awards in the quarter—the most we’ve ever tracked. We’ve also seen four consecutive quarters with over $8.5 billion of annual contract value (ACV)—a strong run of sustained demand for the industry. That said, IT outsourcing (ITO) ACV was down slightly quarter-over-quarter—dipping below $6 billion for the first time in a year—something we are watching closely.
Our third key observation is that enterprise costs are rising overall. This is due to a number of macro factors, such as global inflation, continuing supply chain disruptions, geopolitical concerns, higher energy costs and that shortage of IT talent mentioned before. We think these factors will drive enterprises to reprioritize their overall IT and enterprise technology budgets, focusing first on the things that save money or make money. That is why we’re holding our IT services forecast at 5.1 percent for the full year. That said, it’s important to keep in mind that 5.1 percent is actually double the historical growth rate for the managed services sector.
For the cloud-based as-a-service sector (XaaS), we are raising our annual growth forecast from 20 percent to 22 percent for 2022. The shift to the cloud continues unabated as enterprises seek greater agility, flexibility, scalability, accessibility and other operating benefits from cloud computing. Oh, and did I mention cost savings (with proper FinOps in place, of course)?
The XaaS market added $15.6 billion in ACV in the first quarter, up 43 percent versus last year and up 9 percent against the fourth quarter. This was the third consecutive quarter with a growth rate higher than 40 percent, which hasn’t happened since the early days of broad cloud adoption, in 2018. XaaS ACV accounts for almost 65 percent of the combined market (the other 35 percent coming from traditional managed services), vividly illustrating the shift to the cloud.
As enterprises push ahead with digital transformation and cloud adoption, they’re keenly aware of the need for cybersecurity. On our webcast, partner Doug Saylors, ISG cybersecurity co-lead, laid out the top cyber threats and how the market is responding. The biggest threat comes from ransomware attacks, and that’s driving the demand for recovery and resiliency services. Banks and critical infrastructure providers are top targets, with growing concerns in both the private and public sectors, especially in the wake of Russia’s invasion of Ukraine.
Increasingly, enterprise boards and cyber insurance providers are demanding proof of an enterprise’s ability to recover from a cyberattack, whether on the company itself or within its third-party ecosystem. It's no wonder then that cybersecurity is among the fastest-growing areas of the global IT and business services market, outperforming the broader market with a 45 percent increase in ACV over the past year.
To get a more complete picture of current market dynamics, view the 1Q22 Global ISG Index™ webcast replay, presentation slides and press releases on our website. And for a quick snapshot of the three things you need to know this quarter, watch our ISG Index video, “The Big 3,” hosted by yours truly.
Finally, we invite you to sign up for our weekly ISG Index Insider briefing, to stay abreast of key developments between our quarterly ISG Index webcasts. Our next webcast, covering second-quarter results, is set for Wednesday, July 13. Look forward to seeing you then.
About the author
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.
