The world’s insatiable appetite for all things digital has fed the as-a-service market in recent years – never more so than in the just completed third quarter. But while as-a-service may be eating up a larger percentage of the overall sourcing market, the good news is the pie is getting bigger.
Our recently released ISG Index™ covering the third quarter and first nine months of 2017 highlighted many of the factors driving the record-breaking demand for as-a-service solutions – demand that is leading to overall market growth. More companies are shifting their workloads to cloud, opening up new opportunities in the development of IT infrastructure and ongoing investment in digital products and services. Indeed, we see the digital backbone as the driver of enterprise growth, and with it, that of the global sourcing industry.
Annual contract value (ACV) of as-a-service sourcing reached a new high of $4.7 billion in the third quarter, up 43 percent, helping to lift the global market by 16 percent, to $10.7 billion. Traditional sourcing rose a modest 2 percent during that time, to $6 billion ACV for the quarter – still a healthy number for this market.
Infrastructure-as-a-Service, or IaaS, in particular, ignited the overall sourcing market. Globally, ACV for IaaS in the first nine months of the year hit $9.7 billion, up 58 percent over the same period last year, as more and more companies migrate work to the public cloud. Software-as-a-Service (SaaS) climbed as well during that period, posting a record-high $3.3 billion in ACV, a 7 percent increase over the like period in 2016.
A flurry of traditional sourcing deal activity, mainly in the applications space, powered a 7 percent rise in Information Technology Outsourcing (ITO) ACV over the first nine months. Organizations are modernizing their portfolios with new capabilities in engineering services and product development. As these new capabilities mature and the infrastructure is put in place, we expect to see the size of future projects grow.
From a regional perspective, the Americas rebounded from a sluggish second quarter, showing strength this quarter in both traditional and as-a-service sourcing and hitting a new record of $6.3 billion in ACV. ITO swelled, particularly in the applications and development space. Pent-up demand likely drove growth. Everyone knew digital was on the horizon, but one disruptive event after another — Brexit, the U.S. elections and other geopolitical antics — kept investment at bay. Now we seem more comfortable living in an uncertain world, and news events don’t have the impact on markets that they did before.
The Europe, Middle East and Africa region, unlike the Americas and Asia Pacific, relies more heavily on traditional sourcing, and when it swoons, as it has this quarter and last, even the 48 percent surge in the as-a-service market this quarter, to a record high $1.2 billion, was not sufficient to pull the combined market into positive territory.
Data privacy, data segmentation and regulatory concerns in Europe continue to impact investments by large cloud and SaaS providers. To succeed in Europe, IaaS and SaaS providers must have a data center in the country where they operate. That can be extraordinarily expensive in smaller countries with local laws and regulations.
In the smallest sourcing region, Asia Pacific, traditional sourcing ACV bounced back after starting the year with its lowest quarter in a decade. So far this year, as-a-service has outpaced traditional sourcing, accounting for 52 percent of market ACV.
The performance of two of the largest industries in the region — Telecom and BFSI — shed light on how spending decisions impact the sourcing market. Both are undergoing major structural shifts; both need to satisfy their customers with digital capability. But BFSI, or Banking, Financial Services and Insurance, is making money and isn’t under threat of major consolidation, and investment is happening across the board. Telecom, on the other hand, is struggling, and digital investment is on hold pending expected consolidation.
Looking ahead, we see growing demand for innovative digital capability to serve customers better, shift workloads to the cloud and trim costs. We forecast 20 percent-plus growth in the as-a-service market through next year, and a 2.5 percent rise in traditional sourcing.
Amid all the attention to our latest industry report card, I would be remiss if I didn’t point out that the ISG Index™ this quarter is celebrating a major milestone – its 60th consecutive quarter reporting on the state of the sourcing industry. That’s a remarkable run of 15 straight years serving as the barometer of global sourcing, and a testament to the continuing strength of ISG’s marketplace intelligence. Kudos to all who have supported this effort over the years.
To get a fuller picture of current market dynamics, including the growth in demand for the as-a-service model, view the 3Q17 Global ISG Index™ presentation slides, press release and infographic on the ISG Index™ page.
About the authorAs a partner and member of the Executive Board, Mr. Hall leads ISG’s Digital Strategy and all ISG Service Lines for the Americas. He also leads ISG’s Alliance group and is ISG’s Executive Sponsor to the TBM Council. During his time with ISG, Mr. Hall has led some of the company’s largest and most complex engagements with clients as diverse as United Airlines, Symantec, BP, World Bank, CEMEX and Motorola. He is a seasoned professional who brings considerable experience in emerging technologies to ISG clients. Prior to his position at ISG, Mr. Hall held senior roles at a number of renowned IT services companies, including Unisys and MCI. He also led large-scale eBusiness initiatives for technology solutions providers C-Bridge and CBSI and gained deep outsourcing and offshore software development experience as a delivery executive with Covansys. Mr. Hall co-authored Managing Global Development Risk: A Guide to Managing Global Software Development. He earned his degree in Computer Science from Regis University.
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