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Global Sourcing Playing the Shift, But Switch-Hitters Still Abound

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by Steve Hall
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To borrow a baseball metaphor, the outsourcing market has put on a shift. The accelerating demand for all things digital continues to move industry players to the as-a-service side of the field.

That’s not to say the industry has abandoned those who hit to the other side. Traditional sourcing is alive and well, thank you, as shown by the second-quarter ISG Index™.  Yes, as-a-service climbed to another record high, but traditional sourcing scored $7 billion in annual contract value (ACV), an impressive number reached only five times before in the 15-year-plus history of the ISG Index.

To extend the baseball analogy, we’re seeing a lot of switch-hitters capable of using both sides of the field. And that’s a winning combination for the global sourcing industry, which reached an all-time high of $12.4 billion in ACV for the quarter.

Like the game of baseball, businesses of all kinds are relying on cloud, automation, data analytics and the like. This digital transformation, in many cases, is causing technology to morph from a supporter of business operations to being the business itself.

Take cloud, for instance. With more and more workloads moving to the cloud, we saw tremendous growth this quarter in Infrastructure-as-a-Service (IaaS), with ACV rising 58 percent, to $3.9 billion. Software-as-a-Service (SaaS) registered a 35 percent gain, to $1.5 billion.

In the Americas, traditional sourcing extended its winning streak to four consecutive quarters of ACV above the $3 billion mark. Combined with a thriving as-a-service segment, which now accounts for almost half the total market, the two sides of sourcing posted ACV of almost $6 billion this quarter and more than $12.1 billion halfway through the year. At a time when we’ve gotten used to a proliferation of small deals, the Americas witnessed a flurry of larger deals — 16 worth more than $40 million this quarter.

EMEA rebounded after a sluggish start to the year. Traditional sourcing still dominates the combined market, and its $3.1 billion in ACV for the quarter (the first time in 18 months it has reached this level) contributed to the combined market’s 23 percent year-over-year increase. As-a-service surged 56 percent, to $1.5 billion, with IaaS and SaaS contributing equally to that success.

The much smaller Asia Pacific market grew aggressively. Its combined market ACV hit $1.9 billion, up 44 percent. Traditional sourcing, at $865 million, had its best quarter in four years, and as-a-service ACV surpassed $1 billion for the first time, reaching $1.1 billion, up 65 percent, making this region the fastest-growing in this segment.   

Little by little, traditional sourcing deal size has been shrinking, and contract duration is down to 3.2 years, on average. At this point, deals between $5 million and $10 million make up a good 60 percent of the broader market. We attribute this groundswell of small deals to the steadily growing digital market. In the past, many of these digital deals came in below our metrics threshold of $5 million. But as they mature beyond prototyping and proof-of-concept, and digital technologies scale, they are showing up now in our Index. 

In our industry lineup, manufacturing’s 33 percent increase in as-a-service ACV put it near the top of the order, though traditional sourcing’s decline brought down the average. Retail had admirable ACV for the first half of the year, scoring both traditional sourcing and as-a-service gains.

Financial services came in strong, apparently balancing well the challenges and opportunities in today’s business climate. Regulations such as Basel III have increased capital requirements, leaving banks with less money to invest in technology, and they face competition from start-up banks, fintechs and other disrupters. On the other hand, rising interest rates, tax reform and open banking all work to the benefit of the Banking and Financial Services (BFS) sector.

With the chance to tap into RPA, Augmented Reality and AI — think chat-bots — and the security and flexibility of cloud computing, the BFS industry has slid head first into digital transformation.

Looking ahead, we can’t ignore the looming tariffs and trade battles that could put a damper on market momentum. The construction, automotive and manufacturing industries are particularly vulnerable. However, it looks like the UK and EU are working through Brexit issues, although not without some drama, and paving the way for a soft exit.

Public cloud growth is accelerating, and we expect to see a 45 percent increase for all of 2018 contributing to overall IaaS growth of 30 percent. We are confident SaaS will grow between 14 and 16 percent for the year, and we’re bullish on traditional sourcing expanding more than 4.4 percent – double our previous forecast.

To get a fuller picture of current market dynamics, including the growing demand for the as-a-service model, view the 2Q18 Global ISG Index presentation slides, news release and infographic on our ISG Index webpage.

About the author

Steve Hall is responsible for the firm’s Europe, Middle East & Africa region, as well as its global Digital Advisory Services business. During his time with ISG, Mr. Hall has led some of the company’s largest and most complex engagements with clients as diverse as United Airlines, Symantec, BP, World Bank, CEMEX and Motorola. He is a seasoned professional who brings considerable experience in emerging technologies to ISG clients. Prior to his position at ISG, Mr. Hall held senior roles at a number of renowned IT services companies, including Unisys and MCI. He also led large-scale eBusiness initiatives for technology solutions providers C-Bridge and CBSI and gained deep outsourcing and offshore software development experience as a delivery executive with Covansys. Mr. Hall co-authored Managing Global Development Risk: A Guide to Managing Global Software Development. He earned his degree in Computer Science from Regis University.