Global IT market shows signs of slowing

Global demand for IT and business services remains strong, although the market is showing signs of slowing amid recession fears, finds the latest state-of-the industry report from Information Services Group (ISG) (Nasdaq: III), a leading global technology research and advisory firm.

Data from the ISG Index™, which measures commercial outsourcing contracts with annual contract value (ACV) of $5 million or more, show second-quarter ACV for the combined global market (both XaaS and managed services) reached $22.8 billion, up 9 percent versus the prior year, but down 7 percent compared with the first quarter.

It was the first time since the third quarter of 2020 that the global market did not grow sequentially – a period of six straight quarters in which quarter-over-quarter growth averaged 7 percent.

“We have been through an 18-month period of sustained high demand that has pushed the global market to new heights as companies accelerated their digital investments,” said Steve Hall, ISG president. “With fears of a potential recession on the horizon, we saw a slowdown in the second quarter and expect the market to be more volatile in the second half of the year.”

Hall said market demand remains high, as companies continue to embrace cloud computing and leverage technology to improve productivity, lower costs and get closer to customers to drive revenue growth. Yet the market faces headwinds, he said, including rising interest rates, lingering supply chain issues, a tight labor market and higher energy prices.

Results by Segment

The cloud-based XaaS market grew 13 percent in the second quarter, to $14.1 billion, but was down 11 percent versus the first quarter, as the market slowed from its average 44 percent quarterly growth rate over the last 12 months. Infrastructure-as-a-service (IaaS) rose 11 percent, to $10.2 billion, but was down 14 percent sequentially, reflecting weakness in China, which was impacted by extended Covid lockdowns and a tighter regulatory environment for the country’s technology sector. Software-as-a-service (SaaS), meanwhile, was up 20 percent, to $3.9 billion, and off only 1 percent from the prior quarter.

Managed services spending rose 2 percent, to $8.8 billion – the fifth straight quarter it exceeded ACV of $8 billion. Flat quarter over quarter, the market slowed from its average 16 percent quarterly growth rate over the last six quarters.

For the second quarter, IT outsourcing (ITO) declined 8 percent, to $6.0 billion, although it was up 5 percent sequentially. Business process outsourcing (BPO), meanwhile, rose 33 percent, to $2.8 billion, but declined 9 percent from the first quarter.

With the historically strong data center business in decline, demand is shifting from large, legacy infrastructure deals to smaller application development and maintenance (ADM), engineering, and industry-specific BPO awards.

A total of 600 managed services contracts were awarded in the second quarter, up 5 percent versus the prior year, though down 4 percent from the first quarter. The awards included nine mega-deals (contracts with annual value of $100 million or more), the highest number in the last three years.

First-Half Results

The combined market reached ACV of $47.3 billion in the first half, up 19 percent over the prior year. XaaS advanced 27 percent, to $29.8 billion, and now accounts for 63 percent of the combined global market, up from 51 percent three years ago. Managed services produced a record $17.5 billion of ACV, up 8 percent, on record volume of 1,225 contracts, up 12 percent versus the prior year.

2022 Forecast

ISG sees continued economic uncertainty impacting the second half of 2022, even as market demand remains high.

“We are lowering our growth forecast for managed services to 3.5 percent for the year, down from 5.1 percent last quarter, reflecting the negative impact of foreign currency translation and inflationary concerns,” said Hall.

On the XaaS side, ISG is lowering its growth forecast to 18 percent, compared with its previous forecast of 22 percent. “We see this segment coming under pressure due to Covid and regulatory headwinds in China, leaving the big three hyperscalers – AWS, Azure and Google Cloud – to support market growth. China is down almost $1.5 billion year to date, and we don’t see cloud providers there fully recovering this year.”