Combined market ACV up 18% from the prior year, to record $28.8 billion
Record XaaS ACV up 30%, managed services ACV up 2%
Depending on duration of tariff uncertainty, ISG sees XaaS growth of 15%-18% and managed services growth of -2.4% to 1.3% in 2025
STAMFORD, Conn., April 10, 2025–(BUSINESS WIRE)–The global market for IT and business services showed continued resilience in the first quarter, despite heightened economic uncertainty and the looming threat of U.S. tariffs, according to the latest state-of-the industry report from Information Services Group (ISG) (Nasdaq: III), a global AI-centered 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 18 percent year over year, to a record $28.8 billion. It was the seventh consecutive quarter of sequential growth for the combined market. Compared with the fourth quarter, the combined market was up 2 percent sequentially.
“First-quarter market demand is cause for optimism,” said Steve Hall, president and chief AI officer of ISG. “Cloud and AI continue to drive transformation across sectors, and global capability centers are accelerating product development and hybrid delivery adoption, while helping enterprises manage geopolitical risk and advance speed and efficiency. Even with uncertainty in the macro environment, enterprises remain focused on cost resiliency, productivity and platform modernization. Demand for cost optimization enabled by AI remains high, with more than $18 billion of project awards over the trailing 12 months.”
Still, the market is heading into a period of increased volatility, Hall said. “The introduction of sweeping tariffs and potential retaliatory measures has raised short-term uncertainty—particularly related to discretionary IT spend. Spending on applications looks to be the most immediate pressure point, and large, capital-intensive initiatives like SAP S/4HANA migrations are particularly exposed right now.”
The as-a-service (XaaS) segment advanced 30 percent versus the prior year, to a record $18.4 billion, and was up 5 percent versus the fourth quarter. It was the fourth straight quarter XaaS grew by double digits year over year, even as Q1 growth slowed 290 basis points from the fourth quarter.
Within XaaS, infrastructure-as-a-service (IaaS) generated a record $13.9 billion of ACV, up 34 percent versus the prior year, but up only 4 percent from the fourth quarter. The big three hyperscalers (AWS, Google Cloud and Azure) accounted for 75 percent of IaaS ACV in Q1 and as a group posted 48 percent year-over-year growth, though, like the overall market, growth decelerated sequentially.
The software-as-a-service (SaaS) segment, meanwhile, posted its best quarter ever, with ACV of $4.5 billion, up 19 percent over the prior year—its fourth consecutive quarter of year-over-year growth.
Managed services ACV remained above $10 billion for a tenth straight quarter, posting $10.5 billion of ACV in the first quarter, up 2 percent from the prior year, although it was down 2 percent versus the fourth quarter. A total of 713 managed services contracts were awarded in the first quarter, down 2 percent from last year. Included in that total were six mega-deals valued at $100 million or more, compared with four such deals in the same period last year.
In a sign that discretionary spending may be under pressure, the number of smaller contracts—those valued at $5 million to $10 million—was down 6 percent from the prior year and down 13 percent sequentially.
Within managed services, IT outsourcing (ITO) ACV reached $7.8 billion, up 12 percent versus the prior year, its highest quarterly growth since the fourth quarter of 2023. The ITO segment was fueled by rising demand for infrastructure services, up nearly 60 percent versus a weak first quarter last year, and application services, up 12 percent from last year.
Business process outsourcing (BPO) ACV, meanwhile, was $1.5 billion, down 39 percent, its biggest quarterly decline in over a decade, with all areas of BPO down by double digits compared with the strong prior-year period. For the trailing 12 months, BPO is down 5 percent compared with the previous 12-month period. Engineering, research and development (ER&D) services, previously part of BPO but now broken out separately for the first time, advanced 42 percent, to a record $1.1 billion of ACV, its fifth straight quarter of double-digit growth.
2025 Forecast
Despite the solid first quarter, heightened uncertainty from trade policy, geopolitical tensions and evolving regulations are beginning to weigh on second-quarter forecasts, Hall said.
“Clients are lengthening decision cycles, holding discretionary budgets, and re-evaluating capital-intensive projects—particularly in industries like manufacturing, retail, automotive and financial services,” said Hall.
Hall noted that ISG’s forecasts for market growth in 2025 are based on two scenarios. In the first scenario, the tariff environment stabilizes by midyear, and the market sees faster decision-making in the second half. Under that scenario, ISG forecasts XaaS growth of 18 percent for 2025, unchanged from its January forecast, fueled by AI, cloud, and consumption-based scaling. ISG’s forecast for managed services growth would be 1.3 percent, down from its January forecast of 4.5 percent, as delayed discretionary projects begin to convert later in the year.
In the second scenario, tariffs would extend through the third quarter or beyond, compounded by immigration enforcement, prevailing wage issues or retaliatory digital services taxes in the EU. “Under this scenario, we would anticipate a longer pullback in discretionary demand and larger delays in award conversion,” Hall said. “In this more bearish case, XaaS growth for the year would moderate to 15 percent, while managed services spending would be negative 2.4 percent, a nearly 700 basis-point swing from our January forecast.”
Said Hall: “We remain cautious in our base case, but not pessimistic. The signals from Q1 are fundamentally strong. The shift we’re seeing is not one of declining demand, but one of delayed commitment.”
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 90 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 1Q25 Global ISG Index results were presented during a webcast today. To view a replay of the webcast and download presentation slides, visit this webpage.
About ISG
ISG (Nasdaq: III) is a global AI-centered technology research and advisory firm. A trusted partner to more than 900 clients, including 75 of the world’s top 100 enterprises, ISG is a long-time leader in technology and business services that is now at the forefront of leveraging AI to help organizations achieve operational excellence and faster growth. The firm, founded in 2006, is known for its proprietary market data, in-depth knowledge of provider ecosystems, and the expertise of its 1,600 professionals worldwide working together to help clients maximize the value of their technology investments.
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