Information Services Group Inc
NASDAQ:III
Earnings Call Analysis
Q4-2023 Analysis
Information Services Group Inc
The latest ISG Global Index Call reveals a mixed picture of the IT and business services industry as it ends a challenging 2023. ISG, a prominent influence on $200 billion of technology spending annually, has observed strong demand for cost optimization driving the best managed services year on record. With 4 consecutive quarters exceeding $10 million in ACV, the managed services market reached a total of $40.7 billion for the year, projecting continued strength into 2024. This stems from ongoing cost optimization efforts by enterprises pivoting towards utilizing AI strategies, particularly around 'GenAI' advancements.
The global market ACV for Q4 stood at $23.4 billion, marking a slight year-over-year decrease of 3% but maintaining quarter-over-quarter stability. Managed services achieved a $10 billion ACV in Q4, indicative of modest year-over-year growth. In contrast, the as-a-service sector experienced a dip to $13.4 billion, down 6% year-over-year, suggesting a possible new baseline after recent declines. On a yearly scale, the combined market generated an ACV of $94.3 billion, with managed services contributing $40.7 billion, up 5% from the previous year, while the as-a-service market declined 12.5% to $53.6 billion.
An emergence of mega-deals defined 2023, with a total of 34 mega-deals amassing nearly $6 billion in annual contract value. Despite representing a smaller portion of the total ACV compared to a decade ago, this trend indicates a healthier, less volatile market less prone to disruption from fluctuations in large deal flow. As organizations strive for extensive cost structure changes, they gravitate towards outsourcing, thereby integrating significant technology and process modernization. Providers' strategies to shape these large deals through creative financial solutions and deep relationship building are expected to foster a positive environment for mega-deals in 2024.
There was a mixed performance across regions. The Americas exhibited slow decision-making while Europe showed stronger signs powered by new scope awards, reaching its best year ever with almost $16 billion ACV, up 7% in Q4 and 4% annually. In contrast, the Asia Pacific region experienced a decline, with ACV of $800 million in Q4, marking a downward trend against the previous year's $1 billion quarter. As we look forward, buoyant demand for cost optimization in EMEA is anticipated, particularly with a focus on extension and renewal activity.
BFSI (Banking, Financial Services, and Insurance) observed a 4% dip in the combined market year-over-year, with a flattish managed services and almost 9% decline in cloud services. The telco and media sector also faced a reduction by 4% compared to 2022. Prospects for 2024 point towards potential headwinds with slower decision-making and a falter in smaller discretionary work. However, one segment showed defiance against the negative trend. The BPM (Business Process Management) sector saw an uptick, though its overall position remains that of a market laggard.
Cloud services faced pressure throughout 2023 due to a focus on cost optimization over discretionary spending. Infrastructure as a Service (IaaS) experienced a fifth consecutive quarter of negative year-on-year results, with a significant 16% decrease in ACV compared to 2022. Hyperscalers noted a sharper decline of 22% year-over-year. Despite the downturn, the latter part of the year began to see a slowdown in these declines, signaling a potential reversal as businesses transition from optimization to building, driven by AI demand. Similar trends were observed in Software as a Service (SaaS), which underwent a 3% year-over-year decline. Nonetheless, certain SaaS segments like Human Capital Management and Collaboration have shown resilience and signs of recovery.
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Hello, and welcome to the Fourth Quarter 2023 ISG Global Index Call. I'm Bryan Bergin, senior analyst at TD Cowen. And I'd like to thank the team at ISG for their valued work in the industry and for asking us to host the call today. ISG has been hosting the index call on the IT and business services industry for more than 20 years and ISG influences $200 billion of technology spending each year. And that gives them deep insights into the industry as well as key changes in enterprise demand. So we always appreciate their views as they sit between enterprise buyers and IT vendors.I'll now turn the call over to Stanton Jones, Distinguished Analyst at ISG. Stanton?
Thanks, Bryan, and hi, everyone. With me today is Steve Hall, Partner and President of ISG EMEA; Kathy Rudy, Chief Data and Analytics Officer; Namratha Dharshan, Chief Business Leader for ISG India; and Dave Menninger; Executive Director of ISG Software Research.This is our 85th consecutive index call. So whether you've been joining us for all of these years or are new to the call today, thank you for investing some of your time with us today as we give you ISG's point of view on the health and the growth of the IT and business services industry.With that, let's start off with a recap of the big 3 thoughts from 2023. Steve, over to you.
Great. Well, thanks, Stanton, and 85 straight quarters, that's amazing. I will say I think most of us are glad to see 2023 come to an end. I don't think any of us had worked this hard for this much growth that we've seen this year.So let me give the big 3 thoughts. First of all, really strong demand for cost optimization really led to the best managed services year that we've had. We've had 4 consecutive quarters, over $10 million or more of ACV. The managed services market is going to break $40.7 billion for the year. And it's just been incredibly strong from that standpoint. And when I look at the demand for managed services, we think it's going to remain strong going into 2024 as enterprises really continue on the cost optimization, but really look to reduce costs to drive their AI strategies, especially everything around GenAI as that moves forward.And really, #3, AI is going to generate new demand. We think there's some talent shortages, which Dave is going to talk through. There's still challenges with discretionary spending, but the pressure is going to continue to weigh on the market as we go forward. So how about we take a look at the global market? From the global market perspective, the combined market ACV for the quarter stood at $23.4 billion. We had a slight year-over-year decrease of 3%, but we really maintain stability on a quarter-over-quarter basis.Now if we look at it on a quarterly basis, the managed services market did reach $10 billion of ACV. Again, modest year-over-year growth, and the as-a-service however, really experienced a decrease to $13.4 billion, which was down 6% year-over-year. For 2023, the combined market generated an ACV of $94.3 billion. Let's break this down a little bit, though. Managed services contributed $40.7 billion, which was a 5% increase from 2022. The as-a-service market generated $53.6 billion. This was down 12.5% from the previous year. The managed services market has shown resilience, consistently staying above $10 billion for 4 consecutive quarters.The segment is seeing growth in mega-deals with 8 mega-deals awarded in the quarter and a total of 34 mega-deals awarded in 2023. Smaller deals have declined with a shift towards deals in the $30 million to $50 million ACV range, indicating a shift towards larger contracts, which is healthy for the market. Extension and renewal ACV remained at elevated levels during the fourth quarter. In 4Q '23, the restructuring segment of managed services market was up 34% year-over-year. Since the onset of the rising rate environment, starting at the beginning of 2022 and the resulting focus on cost optimization, we've seen some of the largest quarters ever for contract restructurings.Six of the 8 quarters since the beginning of 2022 have seen restructuring ACV surpass $3.5 billion. The high restructuring market appears to be associated also with delayed decision-making and risk reduction. Just think about it. It's easier to stick with the existing provider than try to change horses midstream. From an as-a-service market, this segment has seen a decline both year-over-year and annually, contrasting it with previous growth trends. ACV has stabilized around $13 billion, suggesting a potential new baseline after recent declines.So if we look ahead, these trends indicate a maturing market, particularly in the as-a-service segment, which is navigating its first annual decline after consistent growth. The managed services market, however, is demonstrating resilience and steady demand.Now let's take a look at the ITO and BPO market. The ITO market really led by applications ended the year strong. The quarterly ACV in 4Q '23 in the ITO market generated $7.7 billion, up 12% year-over-year but down 5% quarter-over-quarter. The annual ACV for the full-year in the ITO market saw $30.4 billion in ACV, a 13.3% increase from 2022, which set a new record for the global market. Contract awards, we saw a total of 2,007 IPO contracts awarded in 2023, which was up 7% from 2022, marking the highest number of ITO deals ever awarded in a year.ADM or application development and maintenance achieved nearly $20 billion in ACV, up 22.5% for the year, with each quarter really setting a new record. Applications accounted for 65% of the ACV awarded in 2023. Infrastructure, contrasted with a slight decline, was down 0.8% from 2022, totaling $10.5 billion in ACV. From a BPO perspective, the quarterly ACV in fourth quarter '23 was $2.3 billion, down 25% year-over-year, but up 6% quarter-over-quarter. The full-year saw $10.3 billion in ACV, a 14% decrease from 2022, but still the second-best year for BPO processes. The market delivered 763 BPO contracts, down 18% from 2022, yet again, it was the second-best year in terms of the number of contracts.Industry-specific BPO experienced a 28% decline in ACV to $2.6 billion. Engineering, which includes research and development, saw a 13% decrease in ACV to $2.3 billion. But once again, this was the second-best year on record for the engineering space. Customer engagement declined 14% annually with the Americas really showing a 20% decrease. Other back-office processes, including F&A, procurement, both declined, while HRO really grew and multi-process BPO had its best year since 2017.In summary, 2023 was a year of contrast in the global market with the ITO market achieving record highs in ACV and deal count, led by really strong growth in ADM and a mixed performance in infrastructure. The BPO market faced challenges, particularly in the Americas and industry-specific BPO segments despite it being the second-best year overall for the BPO processes. The decline in certain BPO areas was offset by growth in others. For example, HRO and the multi-process BPO, indicating a shifting landscape within the BPO market.Kathy, do you want to give us an update on the regions?
Thanks, Steve.Let's start out with the Americas. In the fourth quarter, annual contract value was up 5% year-on-year, and most of this was driven by extension and renewal activity. For the full-year, the Americas posted its best result ever, managed services ACV of $21 billion, which was up over 6%. And of that $21 billion, 40% of it was extension and renewal activity. That's the most extension and renewal activity ever in the Americas. As Steve mentioned earlier, when we see a lot of extension and renewal activity as opposed to new scope awards, that's often a sign that we're in an environment where enterprises are focused on reducing costs and risk.Large deals were also important to the Americas in 2023. 18 mega-deals were awarded last year, which added to incremental $1 billion in ACV to the region. On an industry basis, within the Americas, the energy, health care and telecom sectors each set record highs for ACV, while financial services and manufacturing were both down double digits.Looking forward, at the first quarter, we do see some continued slowness in decision-making in the Americas as clients remain cautious about the economy. However, we also see pockets of strong demand in areas like energy and utilities. In Europe, fourth quarter ACV of nearly $4 billion was up 7%. But unlike the Americas, most of this growth was driven by new scope awards, which had its best results ever in over a year. On a full-year basis, EMEA had its best year ever with ACV of nearly $16 billion, which was up 4% versus 2022. On an industry basis in EMEA, financial services and energy posted very strong results. Most of the remaining sectors weighed on results with manufacturing, telco, travel and transportation, all down on the full-year.On a regional basis, the U.K. posted its second best-ever year. The Benelux region was the only other market in positive territory in 2023. On the other hand, France was down 4%, and the DACH region was down over 20% for the full-year.Looking at the first quarter, we think we'll continue to see strong demand for cost optimization in EMEA with more focus on extension and renewal activity than new scope. We think demand in South Europe will stay similar to the fourth quarter levels. However, demand in the DACH region in the first quarter will likely be down given the immense cost pressure many firms are under. In Asia Pacific, ACV of $800 million was down against a $1 billion quarter in the fourth quarter of 2022. On a full-year, managed services generated 3.5 of ACV, and that was up 1.5% versus 2022, and it was the second-best year ever for managed services in Asia Pacific.On an industry basis, most verticals pulled back in 2023, except for manufacturing and telecom. And on a subregion basis, the largest market of ANZ was up 5% year-over-year, while the second largest market, India was up nearly 90% year-over-year. We believe demand levels will be similar in Q1 to what they were in Q4. However, we're seeing a shift in the mix between traditional outsourcing towards more transformational projects, especially ERP.Let's look at the managed services industry. For our industry update, we're going to take a look at the combined market results for the full-year, which gives a better picture of overall technology spending in each industry. As you can see here, the combined market in BFSI fell 4% year-over-year. As we discussed in the regional update, BFSI was actually positive in EMEA in 2023, but it was down in the Americas and in Asia Pacific, which pulled the global results down. And when you break the BFSI results down by managed services versus cloud, managed service was basically flat and cloud was down nearly 9% versus 2022.The performance of the entire sector in 2024 will be dependent on the turnaround in banking and financial services. As we mentioned last quarter, the sector is impacted by the effect of central banks and their monetary tightening policies, which typically take effect after a 12- to 18-month lag. So we expect the BFSI sector to improve materially with any easing of monetary policy.Moving on to the telco and media sector. The combined market also struggled in 2023. It was down 4% versus 2022. Regionally, telco is positive in the Americas, but weighed down their results in EMEA and Asia Pacific. And on a service line basis, managed services was up 10% for the year, but much of that growth came from large contract awards. Almost 50% of the ACV awarded in media and telecom came from deals with an ACV of greater than $50 million, while at the same time, the number of awards was down.Looking into 2024, there are some potential headwinds ahead for the sector, the slowing pace of decision-making, the lack of smaller discretionary work and the fact that much of the growth in 2023 came from large awards, which may not be repeated in 2024.Stanton, over to you for an update on what we're seeing happening in big deals.
Thanks, Kathy. As we wrote about on the Index Insider last week, mega-deal activity was exceptionally strong in 2023. And just as a reminder, a mega-deal is an outsourcing award with an annual contract value of $100 million or more. There were 34 mega awards in 2023, which generated nearly $6 billion of annual contract value. That's the most mega awards and the most mega award ACV in almost 10 years. And that $6 billion represents about 15% of the total ACV in the industry. Now that's up 9% from last year, but it's down from nearly 25% in 2014. And we think this is a good thing for the industry.Today, the industry is much less dependent on a small number of large deals, which makes it less likely that the industry would be negatively impacted if those large deals dried up for a quarter or two. 18 of the mega deals were in the Americas, 12 in EMEA and 4 in Asia Pacific and most of those deals were in the BFSI, telecom and manufacturing sectors.So let's talk briefly about the reasons for the increased mega-deal activity. First, enterprises continue to be laser-focused on cost optimization, as Steve mentioned. And this is not small cuts here and there. Many firms are looking for fundamental change in their cost structure and outsourcing is a lever they can pull to make that happen. And it's important to note here that for the most part, we're no longer talking about your mess for less type outsourcing. There's a lot of technology and process modernization required to get the savings companies need.So mega-deals today include a lot of transformation, which is different from mega-deals 10 years ago. And the second reason for the increased level of mega-deal activity is that providers have really started to focus on shaping large deals and using creative financial engineering to create value for their clients. So that means that mega-deals are not always RFP led. Often, the deal is proactively shaped by the provider through incumbency and through relationship building, and that process can sometimes last months or even years. So of course, this means that account incumbency is an advantage when it comes to winning mega-deals. But incumbency is not a requirement.So we did some analysis recently on some large awards with a TCV of $500 million or greater. And when that mega-deal was awarded, a 1/4 of the time, it did not get awarded to a provider that already owned a significant portion of the TCV of that client. So given the continued need to optimize costs in 2024 and the fact that more providers are focused on growing their big deal teams, and their deal shaping capabilities, we expect 2024 to be a conducive environment for mega-deals.Okay. Let's move on now to what we see happening with cloud demand. As we discussed for most of 2023, cloud bookings were under a lot of pressure given the slowdown in discretionary spending and the intense focus on enterprises on optimizing their costs. So that pattern repeated in the fourth quarter with Infrastructure as a Service ACV down nearly 10% year-over-year. That was the fifth consecutive quarter with a negative year-on-year result for Infrastructure as a Service. On a full-year basis, IaaS generated $38 billion of annual contract value, which was down 16% versus 2022 and that's the only time that IaaS has turned negative since we started reporting on this market way back in 2015.And by provider category, as you can see here, the big 3 hyperscalers were down even more than our broader index. ACV for the big 3 was down 22% on the full-year. That said, we think these declines may have peaked in the third quarter of last year. And while the fourth quarter was still negative, the rate of decline slowed, and we think is starting to reverse course. But we still think it will be 1 or 2 more quarters before we've moved past the difficult comparisons and before enterprises will start moving from optimization mode, which is really where they've been over the past 12 months to 18 months and back into build mode.And we think a lot of that build mode will be driven by demand for AI, and we'll hear from Dave here in just a minute on that topic.Let's move on to Software as a Service. So unlike Infrastructure as a Service, we think a few segments within SaaS have already found their bottom and are already on the upswing. If you look at the fourth quarter, SaaS generated nearly $4 billion of ACV and that was up 4% year-over-year, and that's on the back of another positive quarter from the third quarter of last year. So we've now had 2 consecutive quarters of year-on-year growth in SaaS, and that's what we mean when we say that SaaS has already likely found its bottom.That said, on the full-year, SaaS was down. It generated $15.5 billion of ACV and that was down 3% versus 2022. And like Infrastructure as a Service, that's the first decline in SaaS ACV since we started reporting on it. By app category, Human Capital Management continues to hold up well against the difficult macro environment. ACV has continued to grow steadily over the past couple of years. Collaboration had a good year. It was up 11%. And finally, analytics and BI, IT service management and ERP have stayed relatively buoyant throughout most of this SaaS downturn, and they're now finally rolling over against some tough comparisons.There was one area, however, that bucked the negative ACV trend, and that's the top 10 SaaS providers. We talked about this a lot last year where we see consolidation that's happening in this space as CFOs and CIOs looked to lower their total cost of ownership in software. And the top 10 SaaS providers benefited from that. ACV for that group was up 6.5% compared to the 3% decline for the broader SaaS index that I just mentioned. And we think this consolidation wave will continue in 2024 as generative AI features are added to software, which will in turn increase prices and drive even more focus on TCO.And speaking of prices, we actually just wrapped up a really interesting new buyer behavior study, specifically focused on AI. And one of the questions we asked was what level of price increase enterprise leaders would accept across various software categories in order to get access to these AI features. And the range was between 6% and 9% increase on a per-seat basis, depending, of course, on the application category. So we think this is a good indicator of how strong the demand is for AI features right now. But of course, this has yet to meet budget reality.And if you recall from our top 10 trends that we published before the holidays, we think that the increased spending on AI features in 2024 could have an impact on other areas of the IT budget as it stays relatively flat as a percentage of revenues.So staying on the red hot topic of AI, let's dive a little deeper. Dave, over to you.
Thanks, Stanton. The first observation I'd like to share is that AI workloads are taking place primarily in the cloud. These workloads are resource intensive. Models are more accurate when many historical data points can be considered. And with the advent of generative AI, unstructured data has become a more significant source of input in AI processes. Text, images, audio and video are much more voluminous than simple transaction data. Given the computing resources required to process all this data, chip manufacturers have been advancing capabilities via GPUs, which, while more powerful, are also more expensive than CPUs.Cloud platforms offer the potential to keep GPUs more fully utilized than captive data centers and therefore, it can lower the effective cost of utilizing GPUs. In addition, given the data volumes and fluctuating demands of model building versus inferencing, Elastacloud resources make a lot of sense. AI workloads could drive additional demand for hyperscalers, possibly reversing the recent trends of decelerating growth. But we also expect to see more diversity in AI workloads in the future.Second observation is that enterprises need more skilled resources to effectively utilize AI. Developing and fine-tuning AI-based analyses require specialized skills that are not readily available in today's workforce. 1/4, 23% report that they have the skills they need, while 2/3, 65% report they need more skills. And unfortunately, enterprises are having the most difficulty finding and retaining those with AI skills. Finding and retaining those with cloud platform skills and those with data and database skills are also among the top 5 most challenging.So while ChatGPT makes it appear that AI is easy, it's also exacerbating the demand for skills that are in short supply. Service providers that build out AI practices to fill the gap that enterprises are facing can grow their businesses. But it's important to understand that AI skills alone are not enough. From our most recent buyer behavior study on AI published earlier this week, the #1 area where service providers fall short is having a holistic understanding of the business needs. The business context is critical to successfully applying AI.Third observation is that generative AI is not replacing predictive AI yet. Generative AI is making many tasks easier, but it's not completely replacing predictive AI, at least not yet. The most common tasks where generative AIÂ is being applied include natural language processing, such as chatbots, assistance, extracting information from and summarizing documents and assisting with software development tasks such as cogeneration and application migration. Our research shows that generative AIÂ is expected to have a bigger impact in these areas than predictive AI, at least within the banking industry.However, in areas such as credit risk, fraud detection, algorithmic trading and even customer acquisition, predictive AI is expected to have a bigger impact. Part of the reason, as noted previously, is that predictive AI is hard. Fine-tuning models requires knowledge of not just the algorithms, but also the various parameters and the data preparation techniques. Data scientists must also understand biases in the data and issues in the training process, such as overfitting or poor sampling. Once developed, a model must be monitored constantly to see if it has drifted from reality.Finally, one must understand that models are never 100% accurate and must evaluate the risk of false positives and false negatives. So while AI tooling is getting better, including the use of generative AI to make modeling easier, I still want Stanford trained biomedical PhDs, developing and tuning any predictive personalized medicine models used in my clinical care for the foreseeable future.Namratha, over to you to talk about how these AI trends will impact the IT and business services industry.
Thanks, Dave. As Dave mentioned, enterprises are experimenting with generative AI and predictive AI. Now we believe this experimentation and deployment will continue to accelerate over the next few years, which represents a massive opportunity for the IT services industry. We are estimating at least $175 billion of additional annual IT services revenue from AI by 2030.And that said, in 2024, we expect it will continue to be more of project-based work and optimization and then gradually expanding into larger transformational engagement over the next few years. Now one area where we'll see significant adoption of both predictive and generative AI is in the banking sector. AI is one of the hottest topics in this sector right now, where more than 90% of the banking leaders are using or planning to use AI in the next 24 months to mitigate fraud, model customer behavior and optimize sales and marketing.Now similarly, in manufacturing, 75% of the respondents maintained or increased investment in AI in 2023. And in the insurance industry, over 80% of the leaders feel that generative AI will have a positive impact on customer service by making functions like claims and policy management much easier. Since the demand for AI-enabled transformations is extremely strong today, we observe similar investment patterns across other industries too.Dave brought up an important point on talent. There's no doubt that the demand for AI skills is considerably high. As we look across our buyer behavior studies and as we interact with our enterprise clients, enterprises are looking to nearly double the number of AI-enabled applications by the end of this year. Given the rapid growth, clients are facing challenges in finding and retaining AI and analytics skills. But enterprises will have a lot of options. As service providers are actively investing in building their AI capabilities, including training millions of employees to meet the expected demand, providers are also using GenAI and predictive AI themselves to stay ahead of the curve and also build use cases for their clients.As Steve mentioned, cost optimization continues to be a key focus for enterprises. Thus, enterprises will have increased expectations from service providers. And one way we believe that will manifest itself in 2024 is the price performance. We'll start to see significant improvements in price performance on both ITO and BPO contracts in 2024. And in many cases, those prices are going to go down because of the productivity improvements that the providers will bring to the table this year, especially in areas like application modernization and call centers.Moving on to our leaderboards now. As a reminder, providers are listed in alphabetical order, and positioning is based on annual contract value signed over the past 12 months. The companies new to the list are denoted with an asterisk and also a reminder that the regional leaderboards can be accessed on the ISG website. In the largest group, the big 15, we saw very little turnover in the leaderboard as the leaders have exhibited a strong hold in the top 15 positioning. Some of the noteworthy deals signed during the quarter are Accenture signed a new partnership with Vodafone to invest EUR 150 million and help commercialize its shared services operations. Accenture will provide technology and transformation services such as its digital solutions and platforms and also bring AI expertise.Also IBM signed a 5-year agreement with Belgian banking and insurance group, Belfius for infrastructure and security services. In The Building 15 group, we saw a couple of new firms. Allied joined the leaderboard as the company bagged new awards at FedEx, BMW and Royal BAM. And Sopra Steria rejoined the leaderboard after signing large series of contracts at National Savings, where they will manage frontline contact centers to assist customers with digital self-service interaction as well as providing back-office services, including managing end-to-end internal banking service.In the Breakthrough 15 group, last quarter saw Coforge move up a group to this category. And this quarter, we saw L&T Technology Services leverage their consistent success to scale up this category as well. During the quarter, LTTS signed several large deals, notable one, a multi-year engineering services partnership with BP to focus on engineering, data management and services for sustainable initiatives. We also saw 2 SaaS providers, ERP vendor, Sage and cyber security vendor, Okta join the leaderboard as well.And finally, in The Booming 15 group, we saw an India-based product engineering company, Tata Technologies join the leaderboard. They recently filed for an IPO, and they have JLR and Tata Motors as key clients. We also saw Sonata Software sign several deals at both Bayer as well as Ammega Group, which specializes in conveyor belts and power transmission. And finally, we featured Eltel Networks on the leaderboard, which won network services deal at Equinor, Norway's largest oil and gas company.Congratulations to all the companies that made it to the leaderboard.And on that note, let me hand it over to Steve to close it out with the forecast.
Thanks a lot, Namratha.So 2023 was really a challenging year for the tech sector. Really even in the broader macro environment, there was challenges across different markets.So let's take a summary of the key trends. Overall performance, the managed services had a really strong year with the global market up by 5%, setting a record of ACV of over $40.7 billion. Regional success was seen in both the Americas and the EMEA regions and really showed some positive results with their own record ACVs as well. The ITO market was driven by a surge in application activity. The ADM space segment set record highs each quarter and captured a larger share of the ITO activity, now accounting for over 65% of the total ACV awarded in 2023.There was a prevalence of contract extensions and renewals as enterprise focused on cost optimization. The sector also witnessed 34 mega-deals, the most since 2014 as Stanton walked through. There were some challenges though. Despite the overall growth, banking, financial services and insurance saw a decline, and there was weakness in smaller discretionary deal categories. The SaaS market was highlighted by diversity within the SaaS market. While some segments like human capital management or HCM maintained positive results, others were in the process adjusting to higher interest rates in the environment.The big 3 hyperscalers also face challenges, though they're close to facing software compares for early 2023, indicating a potential technology reacceleration aligned with reduced cost optimization and, of course, the impact of generative AI for the cloud hyperscalers. And just thinking of generative AI, it was really emerged as a significant tailwind for both as-a-service and the managed services sector. We're going to see accelerating investments in 2023 that will continue into 2024. Its adoption is still in the early stage, but I think we're going to expect to see it drive monetization into the coming decade.We take a look at the macro trends, the global inflation is on decline, leading to a prediction of earlier and more aggressive rate cuts by major central banks. And this scenario is likely to create a conducive environment for increased enterprise spending and capital deployment. We expect high levels of spending are anticipated to continue in app modernization and business transformation projects, particularly those led by generative AI. Public cloud spending is also expected to shift from optimization to reacceleration. Recovery is anticipated in smaller discretionary deals and a rebound in the financial services sector, potentially catalyzing financial and further market growth.So let's just jump right into the forecast. The forecast for as-a-service in 2024 is projected to grow by 15%. The growth forecast for managed services in 2024 is forecasted to grow by 4.25%. In conclusion, 2023 was really a transformative year for tech with different sectors adapting uniquely to the macro environment challenges.The outlook for 2024 is optimistic with expectations of growth driven by emerging technologies like generative AI. And to balance that with favorable macroeconomic conditions, we should see a resurgence in end market questions.So that brings us to the end of the formal call. We'll now open it up for questions. Please type your questions into the comments on the right side of the screen.And Bryan, would you like to start the questions?
All right. Very good. I always appreciate the insights. So thank you there. A few questions before we jump into the audience queue. So maybe we can start at a high level with '24 IT budgets. Can you kind of talk about what you -- you touched a little bit on this already, but maybe what are you seeing in that enterprise IT budget cycle for '24? Do you expect those to be firmed up by the end of this month or may that be more drawn out due to uncertainty? And I guess in general, when you think about budget sentiment right now versus 1 year ago, maybe share some color around what you're seeing there too.
Yes. Thanks, Bryan, for the question. And thanks again for hosting. I think a lot of the budgets are pretty firmed up for 2024. That's usually sort of an October-November piece. There's probably a little bit of pullback this year than past as far as the time line just because of a little bit of the uncertainty, but I think that's getting more stable. I would suspect the tech budgets are going to be remaining fairly flat for 2024. That's what we're seeing, that's what we're hearing, but I think the allocation of that budget will change. So when I look at cost optimization as still sort of being a major driver for managed services, I think we'll continue to see IT, even BPO continue to use those as a driver, helps to manage services. It will reduce costs for the enterprises.I think the SaaS budgets really on the software side are likely to go up. And I think the reason for that is really, as we've talked about GenAI. I think there's going to be a big push to integrate AI solutions into the software, especially into the SaaS side. I think organizations are likely to do that, whether that's, call it, 6% to 9% increase, I think we're probably going to be in that range for that. So I would expect to see that as we go forward. And then I do think that there will be a recovery, likely, call it, the back half, so maybe the end of Q2, where we see more discretionary spend really come back. I don't think we're in the same pent-up demand situation that we were after COVID that I think clearly sort of the last 18 months with the economic uncertainty, we're starting to get a bit more certainty around that. And I think what we'll see is enterprises starting to spend.There's so much technology as we just talked through, that everybody is talking through that's going to change to really transform organizations. I think everybody wants to get involved in that.Does that help kind of give you a perspective?
It does, yes, for sure.
Bryan, I think, as Steve mentioned, the impact of AI, I think if you think about the fact that we talked about on the SaaS update, potentially a 6% to 9% increase per seat, of course, the hyperscalers are integrating generative AI into their services, right? Those services themselves are going to cost more. And that's not going to be free. So I think it's going to be a really interesting year for budgets because one of the things we've talked a lot about the fact is as generative AI gets added into as a feature or as part of the service offering from the hyperscalers, it's still relatively new, right? Huge demand for it. There's a kind of a fast track to GenAI adoption through SaaS and through the hyperscalers.But that's not yet been reconciled through the IT budgets because of how fast this has come up. So lots of demand, but budgets are still kind of looking maybe like they did a year ago, as Steve mentioned, kind of flat as a percentage of revenue. So it's going to come from somewhere. But that's also one of the reasons that we think we're going to continue to see a lot of this cost optimization focus through outsourcing in order to fund a lot of this transformational AI work.
Okay. That's helpful. It kind of dovetails with a follow-up question I wanted to pose around managed services outlook and signings, right, bookings. So managed services ACV, you add up 5% in '23, your forecast here for '24 reflects slightly lower rate of contracting, it was 4.25%, I believe. Maybe talk about a little bit, is there -- for the moderation that you have in that forecast, is there anything you would point to? Because you did talk about cloud optimization spend potentially ending here. So I'm just curious, is it maybe a moderation of mega-deal strength. What's driving just maybe that slight downtick?
Yes. I won't read too much into the downtick, though we do think it's going to be a little bit lower. And at 4.25%, we kind of backed it down because we see some good signs, but there's still, we think, again, probably 2 quarters of some headwinds to go through. The big piece that we see is really the recovery of BFS. It was down in the Americas. There's still some headwinds there. We think that will recover, but we really need to see some of that recovery to it. And BFS is still, call it, 35% -- 30% to 35% of the market. So that has to recover, and we know that there's a little pullback there. I think we see really strong -- we see strong signs in health care, life sciences, even in energy, but we still see some struggles in manufacturing, especially on the European side.So when we looked at the whole, Bryan, sort of across different verticals, we sort of saw some pullback. If we go -- I think we'll hit $10.5 billion to $11 billion of ACV per quarter for 2024. So I think we're at sort of some new heights. We did have 34 mega-deals as Stanton walked through. That's the most that we've had since 2014. We see some more, but what we really see is mega-deals changing and they're really being shaped in the market versus just being wake up one morning and decide to go with an RFP.Some of those take some time. Some of those are going to continue to shape as we go forward. So I think we're just being a bit cautious at the beginning of the year. We're excited about what the Fed, Bank of England and others we think are going to do. We think that really reduces the stress there. Again, we think the tax spend, though flattish is going to change. So we think that's a good sign, especially on the cost optimization side.
Okay. Understood. And last one I have for you before we turn it over to the queue. Just as it relates to that GenAI revenue opportunity, the $175 billion by 2030, can you talk about the largest service activities or maybe the underlying categories of work in that assumption? I'm curious, does it include a significant amount of readiness component versus the model development deployment, and things like that, if you can kind of cover it a little bit.
Well, we knew that would get some headlines when we published the $175 billion because that is a big spend. And when we looked at it, we really looked at it across sort of, let me call it, 4 major segments. There's the segment of the SaaS providers where AI is going to be integrated into most of the SaaS products, whether it's Salesforce to ServiceNow to Workday, they're all going to be AI-infused and AI-enabled. And that's going to drive more spend to the SaaS providers, quite frankly.There's also a really big part of the market that's going to be more about data, data lakes, API, AI-driven. So think of Databricks, sort of that host of players in that space, that's going to drive a lot of SI activity. It's going to drive SI activity, get the data right, to create data products, to integrate data products across the board. The third one is really the cloud providers. So all the cloud providers and hyperscalers are clearly moving forward with integrated AI solutions and how they think through that. That, again, is a big SI opportunity.And then the fourth one, we're going to see a big push towards more models, more integrated LLMs, organizations that are going to really integrate their own data with multiple third-party LLMs. So you have everything from the training of that data, the validation and testing but still just the integration of that work going through. And I think what you're going to see is a really big resurgence of SI activities because of what we're going to see coming through. And I think that that take is really good for the overall tech sector as we move forward.
Let me add some comments as well. What we see happening right now among the various software providers is that they're incorporating the AI capabilities on behalf of their users, right? AI is difficult, as I said in my presentation. AI is difficult. And so the vendors have more opportunity to add features to their products that are more or less invisible. They just add and extend the capabilities of the product, making those products more useful, more productive, and that's where we see this desire or willingness on the part of the organizations to pay more for those different software products.So we think that will have an impact on the opportunities both for the service providers. We're helping organizations adopt these tools as well as the SaaS providers themselves.
All right. Very good. Thanks, team. Over to the audience queue.
Awesome. Thanks, Bryan.So we've got a bunch of questions to get through. So let's go ahead and start with -- I'll take this first one and Dave, I'm going to come back to you. So we've got a question about HCM software. So I guess kind of linking back to what we just talked about on SaaS, so how is the demand environment for HCM software currently? What are you anticipating for 2024 growth relative to 2023? So I can tell you a little bit about on the demand side, and then I'll pass it over to Dave more around what he sees around emerging capabilities.On the demand side, as I mentioned in the SaaS update, HCM is actually the category that's really held up best during this downturn, the SaaS downturn that we've seen over the past couple of years. ACV -- and just a reminder, as we're talking about ACV positive or negative, it's an indicator of revenue accelerating versus a negative ACV as an indicator of revenue decelerating. We're not talking about declines in revenue here. It's an early indicator of revenue growth. So out of all those SaaS categories that we talked about, HCM has actually performed the best. Only had negative revenue -- negative ACV growth for 1 quarter.We anticipate that continuing. We see a lot on the HR side and on the HCM side or the HRO side, still a lot of consolidation happening. Some of that in response to cost pressure. But that's a trend that we've kind of been talking about for the past couple of years, just generally with HR organizations, more moving towards a shared services model, some in-sourcing and some outsourcing. But as that consolidation happens, in our view, that favors software because it's going to rely on more of a consolidated software platform to accelerate that consolidation or to support that consolidation. So we think that, that trend will continue for HCM software.Dave, any commentary on what you see happening in terms of capabilities?
Sure. I mean like I was saying, it's about enhancing these software products, making them easier to use, but there's a very specific thing that generative AI is able to do, it's able to help personalize the experience. And personalized experiences for the workers generally translate to better experiences for the customers, right? You've happy employees. They are then giving their customers and clients better service. So things like how do I fix an error in my timesheet, what's my next assignment. When will I get my first paycheck, right? These things are personalized to the individual and it makes them more productive.You don't have to open a ticket, it's much more -- much less friction in the organization.
Got it. Thanks, Dave.Okay. Kathy, I'm going to come to you. What savings do you expect or pricing decreases as a result of providers integrating generative AI into their ITO operations and ADM services?
Well, we've been looking at this pretty closely, and we've been doing a couple of different things. One is looking at deals that we're part of to see where pricing has gone down. Another is actually going out and talking to the providers about what they're expecting. And where we're kind of landing right now is about a 30% decrease in pricing. We'll continue to watch it. And obviously, we'll continue to collect data on it to validate that. But our sense is right now, it's about 30%, and that's across ITO is what I'm referring to. So that's infrastructure as well as application maintenance and development spend.On the application side, I think there's a more significant impact because of generative AI whereas on the infrastructure side, we've had AI as part of how we deliver those services in the past. So really where I'm focused right now is on the application side and watching how quickly we're able to integrate generative AI into co-development and fixing and testing and looking at where we see that flattening out or big decreases in the market.
Got it. Thanks, Kathy.Steve, I'm going to come to you next. We've got a question about BFSI. So will BFSI spending come back in 2024?
I think that's what we all want to know. Well, I would say, in general, I think it's going to be the back half. Now interestingly, the BFSI was stronger in Europe this quarter and over the year than it was in the U.S. as far as a growth rate in what we did. But I think there's going to be challenges in both markets. When I look at the change to the business where we have the discretionary impact, I think we're going to continue to see some headwinds and probably some back half of the year before we see that really going forward.I think on run the business, though, cost optimization will continue to be a big driver. BFS is such a big part of the overall outsourcing market and managed services market that we do expect to see the spend come back. And it's not down that much. I mean we talk about it being down, but it's still a really healthy segment. It's still 30% plus. I think it's just the discretionary spend that we need to see come back. So the revenues are more in line with where we see the managed services and the bookings.
Yes, I agree. I mean if you look at the data, Steven, it's really only down 1% on the full-year.
Exactly.
And in response to what happened with the Fed from 2022, actually, that's a really positive result to see it only be down 1%. Time will tell for -- like we said, we think it's going to be tight in the first half given the comparisons but actually a pretty positive result given what we saw happen with interest rates.
Yes, I would agree. I mean the bookings in BFS have been strong and continue to be strong. Again, just down 1% in this environment, it isn't a bad outcome. Especially when you look at the overall market being up 5% for managed services, it's pretty good. I think we're all just feeling the disconnect between the bookings and the revenue. And again, this sort of disconnect that we have on what's happening on the discretionary feels like we're drawing down some older deals. It feels like there's some app things that haven't been turned on yet.So I think those will move forward. We just need that change the business for that discretionary spend to really kick in on the banks as we go forward.
Okay. Namratha, I'm going to come to you next. We've got a question on hiring. IT hiring has considerably slowed down. Do we expect it to pick up in the near future?
Thanks, Stanton.I think the cost and the margin pressures continues in the industry. With all the hiring, especially that happened in the last couple of years, there was a surge in hiring to meet the anticipated demand. But right now, given the current scenario, I think there's a large part of focus from the service providers to really train and upskill some of their workforces. AI skills, I mean we've spoken all about it. We spoke about the challenges in terms of hiring and retaining the AI skills as well. So given the potential of growth in that space, for instance, I think there's going to be a huge focus on just upskilling some of these resources, making sure that they're comfortable with not just the technology itself, but in terms of usage, deployment, et cetera, I think those are some of the areas that's going to be a focus.Besides, I think with all the IT services growth, that's kind of softening a little longer decision-making cycles. There's a huge focus in terms of also getting the existing resources to be like fully productive and utilized. So we kind of see the utilization rates also kind of getting better. And I think some of the pieces that we spoke about in the presentation is that we are going to see probably gradually some of the larger transformation deals to start kicking.And Steve just mentioned that there could be some amount of recovery in the second half. So potentially, we could see hiring coming back later, especially for some of these key skills. And then I think what's also important is either hiring will pick up or probably the providers are just going to go back into a just-in-time hiring model so that they can actually address the demand like subcontracting and lateral hiring.
Namratha, it feels to me -- hey, Namratha, it feels to me that we're not really moving to a non-linear revenue model now with AI or there's really any impact of AI on the hiring yet that really is sort of the demand side that's impacting the hiring. Does that make sense or do you see anything different there?
I think if the solution start materializing, there could be a potential that the hiring could potentially go up. But at the moment, I think given the fact that it's still at a nascent stages in terms of POCs and discovering the use cases, I don't see that kind of a demand in terms of bringing on board a workforce to be able to meet those demands. Potentially, with the whole AI piece kicking in, we might probably start seeing some of those surge in hiring.
Yes. And I think, Steve, a lot of it -- we've talked about this with the really significant slowdown in campus-based hiring that we've seen over the past year or so. I still think very much still linked to demand. And I think we're -- my personal view is we're still a ways away from that non-linear growth that I know the industry has been after for many years. But I think one thing that is interesting to watch, and we've written about this a couple of times is when that discretionary spending, as we talked about probably more into the second half of 2024, when that starts to come back, what will that look like for providers. If they are running, it's a very tight market right now in terms of -- because providers have really slowed down hiring and haven't necessarily backfilled for attrition.What will that rebound look like? And to Namratha's point, is that going to be more of a traditional model or more of a just-in-time model where they start tapping in back into lateral hires in the subcontracting channel, like what happened after COVID? I'm not saying that, that's going to be that same kind of boom. I think that's going to be a really interesting thing to watch over the next 12 months to 18 months.
Although there are a couple of providers who have gradually started the campus hiring, so that could be some signs of recovery there.
Yes. Okay. We've got a question on cloud and what's the rationale behind our forecast, 15% for cloud. I think there's a few factors here. We kind of talked about this on the call. I mean there's just -- there's like a market technical reason. So the comparisons just get easier as we move into 2024. We are anticipating the macro situation to get better, potentially if the Fed starts to lower interest rates, that's favorable for discretionary spendings. We've talked a lot about the fact that there's just a lot of optimization work happening right now.We think that, that will start to ease up in favor of more build work, as we talked about on the call, a lot of that focused on AI. And then AI and generative AI, as we talked about, that's being added into all of the cloud hyperscaler services, and there's going to be tremendous demand for that, for AI-infused, software and other services in 2024. That's really kind of the driver behind why we are forecasting 15% growth back to positive ACV growth in cloud.Okay. Kathy, I'll come back to you. You've got a question about, you mentioned increased market activity in India, but that's up 90%. So what's driving that?
Yes. That was a little bit of a surprise to us. So we did look at that. Now India is not a huge market, so $300 million, but 3 consecutive quarters of growth, which we haven't seen in India in the past. So we looked in, and there's 12 really large deals in India. Most of those, I think, 8 or 9 were ITO related. The remainder were ADM. And they were new deal activity. So we see India as an economy to watch and to continue to track in terms of growth in the sourcing market.So not just deliverers of the service, but now consumers of the service. So mainly ITO, as I said, a little bit of application maintenance and development. But because of the consecutive growth in India, we did kind of put a little focus on it, and we'll continue to track and report that out.
Awesome. Thanks, Kathy. Okay. I think we've got time for one, maybe two more. So Dave, I'm going to come to you. We've got a question -- excuse me, on AI. So what area should service providers focus on their AI efforts as they build out AI practices?
Sure. I think there's a real opportunity driven by the shortage of skills. Many organizations don't have the skills that they need. Obviously, it's going to vary by specific organization. But the thing that those organizations can't do are build the custom models, the custom LLMs and the custom predictive models. And so there's an opportunity for the service providers to help organizations do that and perhaps even build practices around industry-specific models that they've developed. So they can even develop some of their own IP and use that IP in their engagements with customers.
Yes. I think, Dave, the industry-specific LLMs. I think that, as Steve mentioned earlier, I think that's really where we see a lot of the systems integration work coming over the coming years. I think the whether -- whatever specific industry that's in, that's where we think we believe a lot of that systems integration opportunity will be for service providers, which, of course, means, as you talked about, having that business context is going to be absolutely key, right? We talked about this, and we'll just keep hammering home this point that having the AI skills is not enough. It's having the AI skills combined with the business context. That's really what we think is going to differentiate providers.So providers that have that industry expertise and that ability to have those conversations oftentimes outside of IT because that's probably where a lot of this work is going to start is going to be super important.
Stanton, it's one of the --
I think --
Go ahead, Kathy.
Yes, sure. I was just going to say, and it's not just the provider bringing those business contact skills. It is the business participating with the provider or the internal technology teams. It will be this model, an operating model of both sides, I believe.
I believe it's all about business value, right? I mean like many aspects of technology, if you don't tie it back to the business, what's the point? I mean we're not just doing this because it's interesting. We're doing this because it helps organizations operate more efficiently, operate more effectively. So it's really important to tie it back to the business.
I agree, Dave. I think that's the best message that really, I think it's hard not to be on the AI hype train a little bit, but we clearly see a rapid adoption. We see what it means for organizations and enterprises. We looked at a study in December, and I think the study was 76% of CIOs who we all know don't jump on the hype train are fairly cynical think that GenAI exceeds or far exceeds expectations. So I think they're experimenting, they're driving value through -- they drive value to their businesses.And I think we'll see that at a much rapid pace throughout 2024.
I agree, Steve. As a former CIO, it's exceeding my expectations. So.
That's good.
Okay. We're going to go ahead and close out the call. Bryan, huge thanks to you and your team for hosting the call today. As a reminder, you can access a copy of the slides that we showed you today as well as the regional leaderboards on the ISG website. Thank you very much for sharing some of your time with us, and we'll see you on the first quarter 2024 call on April 11. Thanks.