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From Applications to Data Centers, Digital is Driving the Global Sourcing Market


The data center is going digital. Not in the binary-code sense, but from the standpoint of being based in the cloud.

In the first quarter of 2018, enterprises increased their spending on infrastructure-as-a-service (IaaS) by $1.4 million, even as they spent some $600 million less on traditional sourcing infrastructure services than a year ago. Chalk up the $800 million net increase in annual contract value (ACV) to the impact of digital transformation.


The findings of the ISG Index™ for the first quarter of 2018 underscore that digital trend. Commercial outsourcing ACV (traditional sourcing and as-a-service combined), surged past the previous quarterly high of $10.9 billion, set in the first quarter of 2017, to reach an eye-popping $12.2 billion. The strong demand for as-a-service solutions we have seen in the past several quarters fueled much of the growth and shows no signs of abating. In the opening quarter, as-a-service ACV reached $5.9 billion, up 40 percent over last year.

Globally, traditional sourcing held its own at $6.3 billion in ACV this quarter and posted record-setting contracting activity, much of it in application outsourcing deals. The awards may be smaller than in the past, but there are more of them.

In the Americas, traditional sourcing put up very encouraging numbers. ACV in that space rose more than 30 percent compared to the first quarter of 2017. Application outsourcing and restructuring drove the increase. As-a-service grew by 32 percent, posting all-time highs for both IaaS (a 38 percent jump) and software-as-a-service (SaaS), up 19 percent.

In sharp contrast, traditional sourcing in Europe, the Middle East and Africa (EMEA) plummeted 40 percent during that same period, albeit compared to one of the strongest quarters in sourcing history last year. The regions two biggest markets, the U.K. and DACH, struggled this quarter, and the major industries of banking and finance, energy and telecommunications all slumped. Record as-a-service ACV of $1.7 billion, up 37 percent, could not overcome the steep drop in traditional sourcing.

Asia Pacific combined ACV rose a hefty 62 percent, albeit against a weak first quarter last year. As-a-service ACV crossed the $1 billion threshold for the first time and accounted for nearly 70 percent of the market. Both IaaS and SaaS reached record highs. Strength in the Southeast Asia and China markets can take some credit.

The applications (ADM) market was a bright spot this quarter, another indicator of growth in the digital economy. All three regions noted year-over-year gains. The Americas and EMEA each signed a record number of ADM deals, and the Americas reached a new high in ACV from ADM.

Digital technology continues to lower costs and change business models, which bodes well for growth. Much of that transformation will be enabled by network connectivity. In our ISG Index™ call, we asked ISG’s Dave Muller, a network advisory services partner, to weigh in on the direct relationship between digital transformation and network performance. He said to handle applications in the cloud, enterprises need flexible bandwidth and more of it. Thus, they are turning to Software Defined Wide-Area Network, or SD-WAN, which enables better application performance through centralized and real-time routing control at a lower network transport cost than today’s MPLS networks.

We haven’t seen a big wave of SD-WAN adoption yet, but watch for use of the technology to grow. Enterprises that wait too long to make the shift may delay their overall digital transformation. We expect to see more merger and acquisition activity in the network technology area. The current lack of standardization in SD-WAN will keep the market competitive.

Stanton Jones, a research director and principal analyst at ISG, joined our call and explained blockchain, which underpins all major cryptocurrencies, such as bitcoin, and tracking to improve food and pharmaceutical safety. Already the market has over 2,000 blockchain startups and nearly 1,000 investors and shows potential for reaching $50 billion dollars in the next few years. Stanton expects the opportunity for service providers will be very similar to cloud’s growth a few years ago: applications built on top of massive-scale platforms, creating new operating models to support.

Looking ahead, we see the strong start to the year as a harbinger of things to come. We expect at least 20 percent growth in as-a-service for the rest of the year. Public cloud (IaaS) ACV should lead the charge with more than 30 percent growth, while SaaS should be up nearly 15 percent. Traditional sourcing, meanwhile, will grow only about 2 percent.

To get a more complete picture of current market dynamics, including the growth in demand for the as-a-service model, view the 1Q18 Global ISG Index™ presentation slides, news release and infographic on the ISG Index™ page.


About the author

Steve Hall

Steve Hall

What he does at ISG

As the leader of ISG’s business in EMEA and an Executive Board Member, Steve provides strategic insight and advice to help ISG’s clients solve their most critical business challenges, helping them adopt and optimize the technology and operating models they need to compete successfully. In particular, he uses his long experience and broad expertise to challenge and inspire them to think about their risks and opportunities in new and unexpected ways.

Past achievements for clients

Steve leads his team’s engagement with clients with an industry-recognized and highly valued perspective on the most important trends in business and technology. He asks and answers the big questions: Why do you need to transform? What’s your best way forward? What do you need to accelerate? And where should you invest your technology dollars to make it all happen?

Among his many client success stories, his ability to take in the big picture, define the problem and connect the dots to the right solutions helped one legacy postal and shipping giant transform itself into a modern logistics powerhouse. He also guided a global energy industry leader through a complex operating model and IT provider transition, helping them see past the obvious cost cutting measures to identify the root causes of their challenges—and delivering savings far beyond what they had imagined.

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