ISG Finds Managed Services on the Rise in Q3, Thanks to Cost Efficiency

ISG Finds Managed Services on the Rise in Q3, Thanks to Cost Efficiency

By Greg Tavarez

Organizations often seek ways to streamline their operations, enhance their IT capabilities, and adapt to changing technologies. This increases the popularity of managed services because it allows organizations to delegate day-to-day responsibilities and operational areas to experts, freeing up their resources and time for core activities.

Managed services typically provide cost predictability and scalability, enabling businesses to adjust their service levels according to their evolving needs. Managed services also offer enhanced security, with a subset of these services dedicated to managing and protecting IT systems from threats and vulnerabilities, and they are instrumental in helping organizations meet regulatory and compliance requirements.

All those things are great, but what’s really driving the demand for managed services is cost optimization. In fact, according to a recent industry report from Information Services Group, a focus on cost optimization propelled the global managed services market to a new high in the third quarter, even as demand continued to slow for cloud-based as-a-service offerings.

According to the data, the managed services sector exhibited robust growth in the third quarter, recording an 11% increase and reaching a milestone with $10.4 billion in annual contract value, or ACV. This surge in performance can be largely attributed to the emergence of nine megadeals — contracts exceeding $100 million in annual value. These megadeals collectively contributed a substantial $1.8 billion to the total ACV. This highlights a positive trend, as the market for managed services demonstrated resilience and the capacity for growth even amid broader market fluctuations.

“We continue to see very strong demand for cost optimization, both in the awards ISG is advising and in the broader market,” said Steve Hall, President of ISG. “This is reflected both in the number and size of the megadeals we saw this quarter, as well as in the surge of mid-sized deals. Smaller deals were down 8%, as enterprises delayed discretionary projects in favor of those with more immediate cost benefit.”

The Index assesses commercial outsourcing agreements with ACV exceeding $5 million, and the third quarter saw the combined global market's ACV, which includes XaaS and managed services, amounting to $23.1 billion, marking a 3% decline compared to the previous year. This marks the fifth consecutive quarter of year-over-year decline for the combined market, although the pace of the decline moderated in this quarter.

A closer examination of the data reveals a notable distinction within the managed services segment. Specifically, spending on Information Technology Outsourcing, or ITO, surged by an impressive 17% to reach $8.2 billion in ACV, according to the data. This surge was largely driven by a 28% growth in the domain of application development and maintenance services. On the other hand, business process outsourcing, or BPO, reported a 6% decline, reducing its ACV to $2.1 billion during the same quarter. This decrease was influenced by a slowdown in spending within various subcategories, such as customer engagement, procurement and engineering, as well as research and development services. This data reflects the dynamic nature of the managed services market, with various segments experiencing distinct trajectories and responding to changing market conditions in unique ways.

The XaaS market fell by 13% to $12.8 billion, driven lower by declining demand for infrastructure-as-a-service, down 19% to $9.0 billion in the quarter. Sticking with the IaaS market, the big three U.S. hyperscalers – AWS, Azure and Google Cloud – saw bookings decline by a combined 22% year to date, part of a general downward trend for the IaaS sector.

“IaaS bookings continue to be under pressure as enterprises focus on using what they bought post-pandemic, rather than buying more,” Hall said. “It will likely be one or two more quarters before we start to see the bottom of this cycle for infrastructure-as-a-service. That said, it’s important to reinforce that we still see significant cloud activity happening – especially around application modernization.”

Software-as-a-service did see an 8% increase to $3.8 billion. However, Hall added that the SaaS market has likely bottomed out this quarter.

“The top 10 SaaS providers actually grew bookings by 7% year to date, as enterprises continue to favor platform-based consolidation as opposed to best-of-breed solutions,” said Hall. “On a quarterly basis, areas like collaboration, HCM and ERP were up year over year.”

The long story short? ISG raised its forecast for managed services growth by 40 basis points, to 5.4% for the year, and maintained its forecast for XaaS revenue growth in 2023 at 11.5%.

Edited by Alex Passett
Get stories like this delivered straight to your inbox. [Free eNews Subscription]

MSPToday Editor

Related Articles

ICYMI: What's Happening in the MSP Industry?

By: Greg Tavarez    7/19/2024

Here are a few articles compiled into one for readers interested in developments around the MSP space.

Read More

Global Microsoft Outage Linked to CrowdStrike: What Happened, and What's Next

By: Alex Passett    7/19/2024

A massive global Microsoft outage has reportedly stemmed from a misconfigured update from cybersecurity company CrowdStrike.

Read More

MSPs: When is it Time to Evolve Your Brand, Positioning, and Marketing?

By: Contributing Writer    7/18/2024

From the rise of AI to the increase in cyber attacks and the shift to hybrid offices, dynamic forces are driving stronger demand for managed services.…

Read More

Assuring Top-Notch Cybersecurity: Assura and Stellar Cyber Announce New Partnership

By: Alex Passett    7/18/2024

Assura, Inc. and Stellar Cyber have announced a strategic partnership aimed at bolstering both offensive and defensive cybersecurity capabilities for …

Read More

Unveiling Seismic LLC's Unique Value Proposition: An Interview with Richard Cabelo

By: Rich Tehrani    7/18/2024

Seismic is distinctively purpose-built to empower MSPs, VARs, integrators, OEMs, and distributors with the resources and agility needed to achieve bes…

Read More