Platform services (as-a-service, as we like to call it) have been the leaven in the global sourcing market in recent years, rising quarter to quarter and bringing many market segments up with it. We’ve tracked the impact of these cloud-based services going back to the start of 2014, differentiating between Software-as-a-Service and Infrastructure-as-a-Service, and starting this quarter, examining their impact on individual industries.
The sourcing industry’s healthy start to 2017 has the as-a-service segment to thank. The global commercial sourcing market rose 12 percent over last year, with as-a-service increasing market share amid flat spending on traditional sourcing. In our recently released 1Q17 ISG Index™, we noted a 39 percent surge in annual contract value (ACV) for as-a-service solutions compared with a year ago, more than enough to overcome a slight dip in traditional sourcing during that period.
Now in its 58th consecutive quarter, the ISG Index™ has long been the industry barometer for sourcing volume and value in the commercial sector. Meanwhile, the public-sector market, which eclipses the commercial market in size, has been the elephant in the room. Traditionally, we have examined it only once every year, but starting with our 1Q17 ISG Index™, we officially make note of its looming presence and analyze its performance on a quarterly basis.
Historically, the public sector has relied on traditional sourcing and has been slow to adopt cloud-based services. Security concerns and general risk aversion have limited the use of such services, but these issues are being overcome. In the first quarter, as-a-service posted a robust 31 percent gain, but as that segment represents only about 3 percent of combined public-sector sourcing spend, that was not sufficient to counter a 22 percent drop in traditional sourcing.
The commercial markets in the Americas, Europe, Middle East and Africa (EMEA) and Asia Pacific all enjoyed solid growth. Not coincidentally, all three regions show as-a-service comprising an ever-increasing share of total sourcing spend. Market maturity factors into the rates at which each is adopting cloud-based services and hence is growing. The Americas hit a best-ever quarter, improving 11 percent over last year and last quarter. Traditional sourcing and as-a-service now split the market fairly evenly.
In EMEA, which grew 13 percent over last year, as-a-service makes up some 27 percent of the combined market. EMEA is slower to adopt cloud due to concerns around data privacy and data location. This is changing as providers build in territory centers.
Asia Pacific, a relatively small market compared with the others, logged its fourth consecutive quarter of more than a billion dollars in ACV. Its 16 percent year-on-year growth was the highest of the three regions. As-a-service now accounts for more than twice the region’s spending as traditional sourcing. Asia Pacific has been faster to adopt cloud; companies there aren’t as heavily invested in traditional, on-premises infrastructure, and, in many cases, are able to adopt a cloud-first growth strategy.
As-a-service was behind the growth in the hottest industries in the Americas — Financial Services, Business Services and Telecom. The strongest industries in EMEA — Financial Services and Business Services — similarly had a vigorous approach to leveraging as-a-service solutions. In Asia Pacific, such industry leaders as Financial Services, Business Services, Telecom and Retail all saw increases in as-a-service adoption.
Looking ahead to the remainder of 2017, we forecast high single-digit growth in all three regions, given the vitality of the as-a-service market. We expect traditional sourcing to post some strong quarters due to volume and megadeals.
To get a fuller picture of current market dynamics, including the public sector, and the growth in demand for the as-a-service model, view the 1Q17 Global ISG Index™ presentation slides, press release and infographic on the ISG Index™ page.
About the authorJohn is a proven executive leader with strategic, transaction and post-transaction experience. John has helped many large, global enterprises introduce and cultivate innovation as a part of the transformation process. Many of John’s projects have led to groundbreaking transactions, particularly in the UK Life and Pensions market, where John is a sought after C-suite advisor in the strategic sourcing of insurance operations. John has also conducted significant transactions in both IT infrastructure and applications environments. As a Partner and President, he sits on the ISG Executive Board and leads ISG EMEA and Asia.
