earnings SEASON

Demand for IT services is strong, but margin pressure is increasing. As we wrap up earnings season for the IT services sector, some patterns have emerged: 1) providers are seeing strong demand for technology services focused on accelerating their clients’ digital transformations, 2) robust pipelines are resulting in strong bookings for the quarter, but 3) talent is extremely tight, which means both salaries – and attrition – are up, putting margin pressure on providers.
 
As we discussed at the beginning of earnings season on the 2Q21 Index call, managed services first-half ACV is up 15% Y/Y and up 8% over 1H19. And it’s our POV that while some of this growth is pent-up COVID demand, much of it is net new demand focused on using managed services to create savings that are then re-invested into digital transformation programs. And the unstoppable march to cloud is creating big demand for application services – resulting in an increase in first-half ADM ACV of 31%.
 
In terms of talent, the pandemic has created what’s being referred to as the “great resignation” – a record number of employees leaving or switching jobs. This resignation curve will be choppy for some time, especially in IT services where demand for digital talent is exceptionally strong. For example, a provider recently reported that the attrition rate in India for employees under 30 years old was over 50%. Our view is that everyone – enterprises and providers – will have to learn how to operate in a high-attrition environment for the foreseeable future.

managed services

The number of mid-size deals is near an all-time high: 17% of awards in 2Q21 had an ACV between $20M and $39M. The market has not seen a percentage that high in this ACV bracket since 3Q12 (see Data Watch). Deals in this range would be equivalent to larger deals from a decade ago, when contracts were bigger and durations longer.
 
Although deals of this size don’t get the publicity of mega-deals, they are very much influencing market growth. It’s our POV that the percentage of mid-size deals will continue to tick up as standalone digital investments find their way into managed services agreements.

Data watch

deal activity, M&A

Stay safe and have a great weekend!
 
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