A couple generations ago, people predicted computers would do all our work for us. We’d struggle to fill up all our leisure time, they said. We know how that turned out. Yet now we hear echoes of this same belief when talk turns to AI and GenAI. The market is eager to figure out how to exploit this new technology to optimize costs and boost efficiency.
In our 4Q23 Global ISG Index™ webcast this week, Dave Menninger, executive director of ISG Software Research, explained where predictive AI and generative AI might be most effective and what it will take for that to happen.
There is little doubt AI will have a massive impact on the global IT and business services market in the coming years. By 2030, we estimate AI-related services alone will increase the global market for managed services by an incremental $175 billion annually. But these are still early days. Companies are trying to figure out what the practical uses cases are, not to mention the right infrastructure and governance, before adopting AI at scale.
Someday, we may have to report on AI as a distinct market segment, but for now, our quarterly report on the global IT and business services market remains focused on managed services and cloud-based as-a-service (XaaS).
Globally, the combined market of managed services and XaaS may be poised for an upswing. Annual contract value (ACV) of more than $23 billion in the fourth quarter dipped 3 percent from the prior year, the fifth consecutive quarter of year-over-year decline. However, the drop has been smaller with each passing quarter, suggesting the market may have bottomed out and is on the rise.
Conditions are certainly right for a rebound. Inflation is cooling rapidly and central banks are planning interest rate cuts. That should create a more friendly environment for enterprise spending and capital deployment in 2024.
Let’s take a quick look at the fourth quarter across segments and geographies.
Globally, managed services ACV hit $10 billion in the fourth quarter, about even with the prior year. Though bolstered by eight megadeals, it was still the softest quarter of the year for managed services. XaaS fell for the fifth consecutive quarter, to $13 billion, down 6 percent from the prior year.
In the Americas, ACV for the combined market dipped below $12 billion this quarter, falling both sequentially and year over year. Managed services was up 5 percent versus the prior year, driven by contract restructurings. XaaS slid 12 percent, although it was up 4 percent versus Q3.
In EMEA, the combined market produced $7.2 billion of ACV, down slightly from the prior year, but up 4 percent from the third quarter. Managed services was up 7 percent year on year, and although XaaS fell 8 percent versus the prior year, it was up 1 percent versus the third quarter.
In Asia Pacific, XaaS staged a comeback, rising 10 percent year on year. Managed services, meanwhile, was down 34 percent, pushing the combined market down 3 percent, the region’s sixth straight quarter of declining year-on-year results.
For the full year, the combined global market was down 6 percent, to $94.3 billion, the first down year since ISG added coverage of XaaS spending in 2015. Managed services advanced 5 percent, to a record $40.7 billion, while XaaS dropped 12.5 percent, to $53.6 billion – the first year this segment posted an annual decline.
Yet, as mentioned before, we’re seeing signs the market has bottomed out and is set to recover during 2024. With that in mind, we forecast XaaS revenue to grow 15 percent and managed services to grow 4.25 percent this year.
A final word on AI. What magic might it work? First, enterprises need skilled workers to run it, and such talent is in short supply. Workloads are resource-intensive. Processing the data requires advanced capabilities of graphics processing units (GPUs) and central processing units (CPUs). Expect to hear those acronyms frequently. And don’t expect generative AI to replace predictive AI anytime soon, but we do see significant adoption of both in the banking sector. Experimenting with and deploying this technology presents vast opportunity for the IT and business services industry.
To get a fuller picture of current market dynamics, view the 4Q23 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 “The Big Three” on this page or on YouTube.
Finally, we invite you to sign up for our weekly ISG Index Insider briefing. We’ll host our 1Q24 ISG Index call on April 11. Register today.
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.
