IT Services Spend Slows in Q3, Despite Demand Staying SteadyIT Services Spend Slows in Q3, Despite Demand Staying Steady
The global market is down for the first time since 2016, yet contracts remain high. Puzzling, but not surprising.
October 14, 2022
According to data from the Information Services Group (ISG) Index, in Q3, global spend on IT and business services has pulled back on the reins a bit. The reason is pretty much what you’d expect — the economy’s precarious perch.
Amid these rising economic concerns, though, the volume of contracts signed in the quarter was at an all-time high. Bit of a head scratcher, but not altogether surprising.
ISG’s Steve Hall
“Demand remains at an all-time high, but we are seeing some pullback in spending, as enterprises delay decision-making due to concerns about the economy,” said Steve Hall, president of ISG. “Companies are still invested in ongoing digital transformation but are going slower for now.”
Information Services Group Predicts Causes
Hall said annual contract value (ACV) growth also was impacted by the strengthening of the U.S. dollar. The market also experienced record peaks last year, which is likely causing some of the discrepancy.
“We saw a period of sustained growth from the end of 2020 through the first quarter of 2022, but the comps are much tougher now,” said Hall. “There are definitely some headwinds in the market, but we remain optimistic on the overall deal flow.”
Feeling the Pressure
The ISG Index found a total of 661 managed services contracts were signed in Q3. That is up 3% from last year. It was the second most contracts ever signed in a quarter.
Hall said providers are feeling pressure on their margins. This is likely due to rising inflation and higher labor costs in a tight labor market.
“We do see pricing power for the most in-demand skill sets, but margins are falling for more commoditized services,” said Hall. “This can be beneficial to enterprises looking to optimize their costs. We see providers responding with more automation, more innovation and other productivity measures.”
Results by Area
The cloud-based XaaS market saw its first down quarter since the beginning of 2015. Infrastructure-as-a-service (IaaS) was flat versus the prior year, while software-as-a-service (SaaS) declined 12%.
Managed services spending, meanwhile, ticked down only one percent. This segment was bolstered by IT outsourcing (ITO), up 2%, while business process outsourcing (BPO) faltered, declining 10%. .
According to the Information Services Group report, combined market ACV for the first nine months rose 11.5%, to $71.8 billion. Managed services ACV reached $27.7 billion, up 6%, on on record deal volume for the period – 1,992 contracts, up 11%. XaaS ACV came in at $44.1 billion, up 15% – the slowest growth rate for this period since ISG began tracking the market for cloud-based services in 2015.
“The slowdown in XaaS spending comes down to weaker demand for infrastructure services provided by China’s big four hyperscalers, which have been impacted by continuing lockdowns and the stronger U.S. dollar,” said Hall. “The big three hyperscalers in the U.S. – AWS, Azure and Google Cloud – continue to carry this segment, although we’re seeing growth slow slightly there as well.”
Growth in SaaS spending has also slowed, even considering strong demand in such areas as IT service management. Halls says that ISG predicts even more of a drag, as companies grow more wary of spending big bucks.
Rest of 2022 Forecast
Looking ahead, ISG sees economic uncertainty putting a bit of a damper on enterprise demand. At least in the short term. This, of course, is caused by rising interest rates, energy shortages, supply chain disruptions and continuing inflation.
“Given current demand, we are maintaining our growth forecast for managed services at 3.5% for the year, but lowering our growth forecast for XaaS to 10.5% from 18% last quarter,” Hall said.
Service Leadership’s Peter Kujawa
Peter Kujawa, vice president of Service Leadership, a Connectwise solution, who has weighed in on these shifts from an economic standpoint in the past, offered his insight.
“While the data presented in the report is interesting, the ISG Index measures outsourcing contracts with an annual contract value of $5 million or more,” said Kujawa. “So, this is truly large enterprise data. If there is a slowdown occurring in the enterprise space, we are not seeing it yet in our results and we are certainly not seeing it in the SMB space. While we are currently processing Q3 results and won’t have those for a couple of more weeks, our Q2 results were extremely strong. Across all business models we benchmark, Q2 showed continued strong performance in Revenue, EBITDA, and Gross Margin and we believe this will be the case in Q3 data as well. 2020 and 2021 were excellent financial years for the MSP industry and we believe 2022 will continue this trend.”
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