Global Spending on IT, Business Services Up in Q1 As Cloud Demand Rebounds

ISG Index

Global spending on IT and business services rose in the first quarter as the market for cloud-based services returned to growth, driven in part by rising interest in generative AI, according to the latest state-of-the industry report from Information Services Group (ISG) (Nasdaq: III), a leading global technology research and advisory firm.

Data from the global ISG Index, which measures commercial outsourcing contracts with annual contract value (ACV) of $5 million or more, show first-quarter ACV for the combined global market (both managed services and cloud-based as-a-service) was up 4 percent year over year, to $24.7 billion, its highest level since the second quarter of 2022. It was the first time the combined market grew year over year since the fourth quarter of 2022, but the third consecutive quarter it has risen sequentially.

“The market overall appears to be on an upswing, in line with our observations last quarter,” said Steve Hall, president and chief AI officer of ISG. “The as-a-service market drove the growth in Q1, led by a rebound in infrastructure-as-a-service, as enterprises increased cloud spending and GenAI began to increase cloud usage. Managed services, meanwhile, slightly underperformed forecasts, with a rare dip that we see as more an anomaly than a trend.”

Q1 Results by Segment

The as-a-service (XaaS) segment advanced 7 percent versus the prior year, to $14.6 billion, breaking a streak of five straight quarters of year-over-year declines. It was the segment’s highest quarterly ACV since the third quarter of 2022.

Within the XaaS segment, infrastructure-as-a-service (IaaS) broke through the $10 billion quarterly ACV mark for the first time since the fourth quarter of 2022. At $10.7 billion, IaaS was up 11 percent year over year and 12 percent sequentially. Growth was driven by the telecom, energy and travel and transportation industries.

Software-as-a-service (SaaS), meanwhile, was down 2 percent versus the prior year, to $4.0 billion. Human Capital Management, up 3 percent year over year, outperformed the overall segment.

The managed services segment generated first-quarter ACV of $10.0 billion, the sixth consecutive quarter at or above this mark. Nonetheless, ACV was down 1.4 percent versus a strong prior-year quarter – only the second time in the last 15 quarters managed services has dipped into negative territory.

Within managed services, IT outsourcing (ITO) declined 2 percent versus the prior year, to $6.8 billion – its lowest level in nearly two years. Application development and maintenance (ADM), at approximately 65 percent of ITO spend, continues to drive this market segment. While the ACV of standalone ADM services was down this quarter, the ACV of deals in which applications were bundled with infrastructure was up 130 percent.