Our recently released ISG Index™ covering the second quarter of 2017 revealed that as-a-service now makes up 41 percent of the global commercial sourcing market – and growing. It won’t be long before as-a-service spending globally reaches parity with traditional sourcing and even eclipses it.
That’s already happening in the Americas market, where spending over the last four quarters has been split about evenly between traditional sourcing and the cloud-based platform services (Infrastructure-as-a-Service and Software-as-a-Service) that comprise the as-a-service sector. In Asia Pacific, as-a-service accounts for more than half of the commercial market already.
In the latest quarter, overall spending, as measured by annual contract value, or ACV, for the combined global market (traditional and as-a-service) seems relatively unaffected by any geopolitical turmoil, growing 9 percent, to $9.3 billion. Combined with the record $10.5 billion in ACV last quarter, the global sourcing market reached an all-time high in the first half. At this rate, combined ACV for all of 2017 could exceed last year’s total by nearly $3 billion.
Much of the credit for the market’s strength can be attributed to the as-a-service segment, which saw ACV rise by 32 percent, to $3.8 billion. Infrastructure-as-a-Service (IaaS) outpaced Software-as-a-Service (SaaS) in every region, as has been the pattern.
Traditional sourcing, meanwhile, dipped 3 percent this quarter, to $5.5 billion, but showed pockets of strength in the Asia Pacific and Europe, Middle East and Africa (EMEA) regions.
The Americas posted $4.5 billion in ACV this quarter, up 2 percent, with as-a-service growth of 27 percent compensating for a 13 percent decline in traditional sourcing. The movement to Infrastructure-as-a-Service continues to grow. Enterprises are no longer piloting cloud deployments, but doing the hard work of remediating workloads and transitioning them to the cloud.
EMEA, more dependent on traditional sourcing, still grew 13 percent this quarter, to $3.5 billion in ACV. Traditional sourcing saw 188 contracts awarded, a near-record high for a quarter, and as-a-service ACV increased by 40 percent.
Asia Pacific reached a record $1.3 billion in combined market ACV this quarter. Traditional sourcing ACV rose 11 percent, driven by a record 66 contracts. As-a-service spending posted a 42 percent gain over this time last year.
The big surprise among industry verticals this quarter was manufacturing, where ACV jumped 35 percent in the Americas after several lackluster quarters. That industry has been going through extensive structural change as it embraces digital transformation. The rapid growth of the direct-to-consumer market is one indication of the changes impacting manufacturing and its distribution channels.
Uncertainty in how healthcare policy will be resolved in the U.S. hampered traditional sourcing ACV in healthcare and pharmaceuticals in the Americas but aided the as-a-service sector. Payers and providers expect to see a flurry of mergers and acquisitions and are reluctant to engage in long-term contracts.
Asia Pacific’s largest vertical, telecom and media, took a hit this quarter, falling 34 percent compared with this time last year. Firms may be moving away from data centers and splitting off assets that can’t compete with global cloud services. We may see more industry consolidation as integrated carriers combine mobile connectivity with media content and video delivery.
The energy sector is making a comeback in EMEA after recent challenges. Financial services posted strong gains across all regions.
Looking ahead, we expect the as-a-service segment of the global commercial market to end the year with double-digit growth and traditional sourcing to remain flat. EMEA may see mid-single-digit growth in traditional sourcing, which will support a strong second half of the year. In the Americas and Asia Pacific, we forecast double-digit growth in as-a-service. Globally, IaaS growth likely will far outpace that of SaaS.
To get a fuller picture of current market dynamics, including the growth in demand for the as-a-service model, view the 2Q17 Global ISG Index™ presentation slides, press release and infographic on the ISG Index™ page.
About the author
As 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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