STAMFORD, Conn.--(BUSINESS WIRE)--

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 () (Nasdaq: ), 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.

Business process outsourcing (BPO), meanwhile, rose 1 percent compared with last year, to $3.2 billion. Engineering services ACV was up 30 percent versus the prior year, while finance and accounting outsourcing (FAO) ACV rose 13 percent.

A total of 710 managed services deals were signed in the first quarter, down 1 percent. There were four mega deals (contracts with ACV of $100 million or more) in the quarter, compared with eight mega deals last year.

“Large deal activity was muted in the first quarter,” Hall said. “Smaller deals also were impacted by a slowdown in discretionary spending; we saw a 3 percent decline in deals valued at between $5 million and $30 million. The pause in discretionary spending at the enterprise level continued to impact managed services and consulting services in Q1.”

2024 Forecast

ISG is forecasting 3 percent growth for managed services, down 125 basis points from its January forecast, and maintaining its forecast of 15 percent revenue growth for XaaS in 2024.

“Looking ahead to the rest of the year, economic conditions are forecasted to be less volatile than in 2023, but challenges persist,” Hall said. “The global economy is expected to slow down, impacted by monetary policies to combat inflation, which is expected to decline.

“In this environment, outsourcing could see a boost as companies seek to balance cost management and service quality. Generative AI, meanwhile, is poised to be a growth catalyst, with large hyperscalers expected to manage increasing workloads. The data layer, integral for training AI models, presents a prime opportunity for service providers.”

About the ISG Index™

The ISG Index™ is recognized as the authoritative source for marketplace intelligence on the global technology and business services industry. For 86 consecutive quarters, it has detailed the latest industry data and trends for financial analysts, enterprise buyers, software and service providers, law firms, universities and the media.

The 1Q24 Global ISG Index results were presented during a webcast today. To view a replay of the webcast and download presentation slides, visit this .

About ISG

ISG (Information Services Group) (Nasdaq: ) is a leading global technology research and advisory firm. A trusted business partner to more than 900 clients, including more than 75 of the world’s top 100 enterprises, ISG is committed to helping corporations, public sector organizations, and service and technology providers achieve operational excellence and faster growth. The firm specializes in digital transformation services, including AI and automation, cloud and data analytics; sourcing advisory; managed governance and risk services; network carrier services; strategy and operations design; change management; market intelligence and technology research and analysis. Founded in 2006, and based in Stamford, Conn., ISG employs more than 1,600 digital-ready professionals operating in more than 20 countries—a global team known for its innovative thinking, market influence, deep industry and technology expertise, and world-class research and analytical capabilities based on the industry’s most comprehensive marketplace data. For more information, visit .

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