Hello. This is Stanton Jones with what’s important in the IT and business services industry this week.
If you’d like to read this on the web, click here. If someone forwarded you this briefing, consider subscribing here.
1Q24: Quick Recap
Managed services annual contract value (ACV) remained above $10 billion in the first quarter on strength in BPO in EMEA and Asia Pacific. However, ACV declined slightly year over year. Along with weakness in the BFSI sector in the Americas, we continue to see slow enterprise decision-making and continued pressure on discretionary spending. With the combination of these headwinds, we adjusted our full-year managed services growth forecast down to 3%.
Background
On our 1Q24 ISG Index call last week, we talked about the fact that while provider bookings remained above $10 billion for the third quarter in a row, they declined year over year. Managed services ACV fell 1% between 1Q23 and 1Q24. In today’s Insider, we wanted to give a little more background on the reasons for the softness and why we are adjusting our forecast down for the full year.
The first reason is the financial services sector in the U.S. ACV was down 18% Y/Y as banks and other financial services institutions continued to be laser-focused on costs. As we talked about a couple of quarters ago, interest rates have a big impact on technology spending in this sector. When they are high, tech spending tends to suffer a few quarters later.
When there is a challenge in BFSI, there is a challenge in the business and IT services industry. Americas BFSI makes up 14% of all the ACV in the market. So any downturn here puts downward pressure on growth for the industry, especially impacting those providers that have outsized exposure to the financial services sector in the U.S.
The second reason is manufacturing in Europe. Manufacturing is the second biggest sector in terms of outsourcing ACV in EMEA, and it was down 5% Y/Y. Technology spending in manufacturing-heavy regions like DACH continues to be under a lot of pressure as firms grapple with geopolitical challenges and high energy costs.
A decline in smaller awards is also something we’re watching in this sector. Awards between $5 million and $10 million ACV are down double digits compared to 2023, which is yet another indicator of pressure on discretionary spending.
What’s Next
Before we jump into the reasoning behind lowering the forecast, let’s recap where we were at the beginning of 2024. We had just wrapped up the best year ever for managed services ACV in 2023. However, discretionary spending remained under pressure, and we continued to see signs of slower decision-making, especially in BFSI.
At the time, there was an expectation that interest rates could start to come down sooner rather than later in the year, as it appeared inflation was under control. This (plus other factors) was important input into demand recovering in the second half of the year – and in our 4.25% forecast.
Now, more than three months later, an early rebound in BFSI in the Americas and manufacturing in EMEA seems less likely, especially after the inflation news in the U.S. last week. The revised forecast of 3% full-year growth still projects a stronger second half of 2024, but continued headwinds and delays in enterprise spending may present some downside to this outlook.
That said, we do see decision-making picking up in some areas, and the general consensus is that the second half will be stronger for the industry. And, even with the revised forecast, it’s important to remember that the managed services industry has held up quite well during this most recent tech downturn. Only two of the last 15 quarters have fallen into negative territory as other sectors like healthcare and energy continue to support the industry.
About the author
Stanton Jones
Stanton leads ISG's Index research, helping providers, investors and ISG clients make sense of the global IT services sector. Stanton’s weekly newsletter, the Index Insider, is read by thousands of market stakeholders each week. An ISG Digital Fellow, Stanton has been quoted in Fast Company, Forbes and CIO.com, and has appeared on national cable news.
