What is Happening?
Last week, we held our 59th quarterly Index call summarizing the state of the combined sourcing and as-a-service industries for global, commercial and public sector contracts worth more than $5 million in annual contract value (ACV). Key takeaways from the call include the following:
- Global as-a-service sourcing continues to approach parity with traditional sourcing, with the as-a-service market now comprising 41 percent of the total global market.
- Combined ACV for the second quarter of 2017 reached $9.3 billion, up 9 percent year-over-year, fueled by as-a-service growth of 32 percent.
- EMEA and Asia Pacific both showed strong double-digit ACV growth.
The data this quarter tell a generally positive story of steady growth. Both the traditional sourcing and as-a-service markets continue to attract new investment, primarily driven by the need to reduce the costs of using traditional outsourcing to fund digital transformation initiatives – often with as-a-service platforms.
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Figure 1: Global Commercial Sector ACV ($B). Source: Q2 2017 ISG Index™.
Though traditional sourcing ACV slipped a bit this quarter, it still held within the fairly tight range it has inhabited for quite some time. The $5 billion mark is the floor for a good quarter, while $6 billion is the marker for a great quarter. The traditional and as-a-service sourcing markets are moving in different directions, with traditional sourcing numbers tightening despite very strong contracting activity. Quarterly as-a-service ACV, in contrast, rose 32% year-over-year. Continuing a trend of robust contract signing activity, 427 contracts were inked in Q2, the most in the past 24 months.
Why is it Happening?
The rationale for traditional and as-a-service shifting is fairly straightforward: enterprises are moving into the heavy-lifting phase of their cloud transformation. We see a significant volume of application portfolio rationalization work underway, with nearly 50 percent of enterprise applications expected to move to a public cloud delivery model (SaaS or hybrid IaaS) over the next three years.
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Figure 2: Workload Distribution, 2016 – 2020. Source: 2016 IT Leadership Digital Transformation Survey, n=352.
The assessment and transformation of workloads to the public cloud often take place as part of a professional services agreement (not counted towards our ACV calculations). While the management of these workloads does count towards ACV, the overall volume of work is decreased, given that moving workloads to a public cloud delivery model eliminates much of the traditional maintenance work that creates revenue for service providers (patches, upgrades, etc.). As-a-service vendors work from a single code base, essentially eliminating the technical debt for the workload or workloads that run on these platforms. Hence, the reason as-a-service is spiking, while traditional outsourcing remains relatively flat.
Market Impact
Looking ahead, expect double-digit growth in the as-a-service markets in the Americas and Asia Pacific. Infrastructure-as-a-Service will continue to outpace Software-as-a-Service, with growth forecasted to be 24 percent and 12 percent, respectively. Traditional sourcing will remain flat through the end of the year. In EMEA, Infrastructure-as-a-Service and Software-as-a-Service will remain fairly flat, primarily due to compliance and security-related barriers. Traditional outsourcing will see mid-single-digit growth for the year.
