Interest in GenAI is at an all-time high. Amid the hype, and with some early experimentation, enterprises are moving GenAI from their wish list to their must-do list, looking for the funding, expertise, software and infrastructure to make it part of their operations.
Dave Menninger, executive director of ISG Software Research, joined our 2Q24 Global ISG Index™ webcast this week to demystify the complexity of establishing GenAI in an enterprise. He and his team recently completed ISG’s Buyers Guide assessment of dozens of AI and data platforms. He reminded viewers that with all the promise GenAI holds, adopting it is not like flipping a light switch. You can learn all the details by watching a replay of the webcast below.
Turning to our normal ISG Index coverage, we reviewed the performance of the managed services and as-a-service (XaaS) markets globally and by region for the quarter and half year. The upshot: the global managed services market remains sluggish even as demand is picking up again for cloud-based XaaS.
The Q2 numbers for the combined market look good—at first blush. Annual contract value (ACV) in Q2 was $24.8 billion, up 7 percent from the prior year. While that sounds like decent growth, remember it’s against a soft year-ago quarter. The reality is that the combined global market, while rising sequentially for five straight quarters, is growing very slowly, at a sequential rate of 1.4 percent over that span.
And that’s just bookings. Revenues are a different story. Revenue growth for the industry slowed in the second quarter to just over 1 percent, compared with just over 3 percent in the second quarter last year. Provider margins are also under pressure and margin growth declined for the second quarter in a row, resulting in slower hiring as topline growth stalls. This low-single-digit growth environment can be attributed to slower discretionary spending by clients, as they remain cautious in the face of continuing macroeconomic and geopolitical uncertainty.
Global managed services ACV of $10.1 billion in Q2 kept alive a streak of seven consecutive quarters above $10 billion, yet it was up only 1 percent versus the prior year, and year-to-date ACV was flat compared to the first half of 2023. In a word, sluggish.
Drilling down further on managed services: IT outsourcing (ITO) advance 2 percent versus last year’s Q2. During the first half of the year, however, ITO ACV edged up only 0.2 percent from a year ago.
On the business process outsourcing (BPO) side, after a robust first quarter that exceeded $3 billion in ACV, BPO settled down to a more typical level in the second quarter with $2.4 billion in ACV, down 1 percent. BPO ACV was flat at the half-year mark, at $5.6 billion.
Meanwhile, the XaaS market seems to have turned a corner, though infrastructure-as-a-service (IaaS) and software-as-a-service (SaaS) moved in opposite directions in Q2. IaaS ACV rose 15 percent year-over-year, to $10.9 billion, while SaaS edged down 0.2 percent, to $3.8 billion for the quarter. Enterprise cost optimization in IaaS appears to be slowing—signaling an end to an 18-month cycle of companies trying to get more from existing investments rather than spending on new initiatives. Companies are once again prioritizing infrastructure modernization, especially as they experiment with AI.
The SaaS business model has been stuck in a holding pattern despite its scalability, low entry costs and recurring revenue. CIOs are scrutinizing IT budgets, seeking cost reductions (think SaaS license renewals) to fund necessary investments. Some businesses are delaying decisions while they figure out how to move forward with AI.
During our Index call, we took a closer look at the impact AI is having on the market. The number of AI-related projects has increased about 60 percent in the trailing 12 months. The top 10 service providers say AI accounted for nearly 2.5 percent of total revenue. That share may rise to 5 or 10 percent over time as proofs-of-concept lead to projects that can scale. Our analytics show that AI-related projects are adding about 250 basis points to annual growth rates. Our concern is that the AI boom may be masking underlying weakness in the IT services market.
Looking ahead to the rest of the year, we see the current low-growth environment continuing in the second half. We’ve lowered our 2024 revenue growth forecast for managed services by 100 basis points, to 2 percent, and we’ve dropped our growth forecast for XaaS by the same amount, to 14 percent, as pockets of weakness in SaaS gave us pause.
To get a fuller picture of current market dynamics, view the 2Q24 Global ISG Index™ webcast replay, presentation slides and press release on our website.
While you’re there, we invite you to sign up for our weekly ISG Index Insider briefing and register for our third-quarter ISG Index call, set for October 15.
Until next time, here’s to a better third quarter, everyone.
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.
