“ISG Index™: Resilience of Global IT and Business Services Market in Q1 Amid Economic Challenges”

ISG Reports Record Growth in Global IT Services Market

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

The global IT and business services market demonstrated significant resilience in Q1, despite ongoing economic uncertainty and the potential impact of U.S. tariffs. This assertion comes from the latest report by Information Services Group (ISG) III, a prominent AI-focused technology research and advisory firm.

The ISG Index™, which tracks commercial outsourcing contracts, indicates that the first-quarter annual contract value (ACV) for the total global market, encompassing managed services and cloud-based as-a-service solutions, reached $28.8 billion—up 18% compared to last year. This marks the seventh consecutive quarter of growth in this combined market, with a 2% increase from the previous quarter.

“First-quarter market demand is cause for optimism,” noted ISG President and Chief AI Officer Steve Hall. Cloud computing and AI technologies continue to drive significant transformation across various sectors. He added that global capability centers are not only helping businesses manage geopolitical risk but are also enhancing product development and the adoption of hybrid delivery methods. Enterprises, nevertheless, are still focusing on cost resilience, productivity, and platform modernization. The demand for AI-driven cost optimization remains robust, with over $18 billion in project awards recorded over the past year.

However, Hall cautioned that the market is poised for increased volatility amid the potential introduction of tariffs and retaliatory measures, which could create uncertainty in discretionary IT spending. Spending pressure is particularly evident in software applications, where investments in capital-intensive projects like SAP S/4HANA migrations are most vulnerable.

Q1 Results by Segment

The as-a-service (XaaS) segment saw a remarkable 30% increase from the previous year, reaching a record $18.4 billion, with a 5% rise compared to Q4. This marks the fourth consecutive quarter of double-digit growth for XaaS, although growth slowed by 290 basis points from the last quarter.

Diving deeper into XaaS, infrastructure-as-a-service (IaaS) reported an impressive $13.9 billion in ACV, reflecting a 34% increase from the prior year, though it rose only 4% from the fourth quarter. The three major hyperscalers—AWS, Google Cloud, and Azure—contributed to 75% of IaaS ACV in Q1, achieving a collective year-over-year growth of 48%. Nevertheless, they also experienced a sequential growth deceleration similar to the overall market trends.

The software-as-a-service (SaaS) sector had its strongest quarter to date, generating $4.5 billion in ACV, a 19% year-over-year increase, marking its fourth consecutive quarter of growth.

Managed services ACV held steady above $10 billion for the tenth successive quarter, reaching $10.5 billion in Q1. This reflects a 2% gain year-over-year, though it is down 2% compared to the fourth quarter. In total, 713 managed services contracts were awarded in Q1, a decrease of 2% from the previous year. This figure included six mega-deals worth $100 million or more, an increase from four such deals last year.

A noticeable decline in smaller contracts—those valued between $5 million to $10 million—was observed, dropping 6% from the previous year and 13% sequentially, indicating possible pressures on discretionary spending.

Within managed services, IT outsourcing (ITO) ACV surged to $7.8 billion, an increase of 12% from the previous year—the highest quarterly growth since Q4 2023. This growth was propelled by heightened demand for infrastructure services, up nearly 60% from a weak baseline last year, as well as a 12% rise in application services from the same period.

Conversely, business process outsourcing (BPO) ACV decreased significantly to $1.5 billion—down 39%, reflecting the largest quarterly decline in over a decade. All sectors of BPO experienced double-digit drops compared to a strong prior-year performance. Over the trailing 12 months, BPO declined by 5%. New data reveals that engineering, research, and development (ER&D) services, separated from BPO for the first time, grew by 42% to a record $1.1 billion ACV, marking its fifth consecutive quarter of double-digit growth.

2025 Forecast

Despite a strong start in Q1, ongoing trade policy changes, geopolitical tensions, and regulatory shifts are influencing forecasts for Q2. Hall indicated that clients are extending decision timelines, holding on to discretionary budgets, and reassessing capital-heavy projects—especially in sectors like manufacturing, retail, automotive, and financial services.

Hall emphasized that ISG’s 2025 growth projections are based on two potential scenarios. In the first, if tariff conditions stabilize by mid-year, the market may experience a boost in decision-making during the second half. This scenario suggests XaaS growth of 18% for 2025, consistent with previous forecasts, driven by AI and cloud innovations. For managed services, growth might be projected at 1.3%, a reduction from January’s forecast of 4.5%, due to delayed discretionary projects.

In the alternative scenario where tariffs persist beyond the third quarter, compounded by issues such as immigration enforcement and EU digital services taxes, ISG anticipates a prolonged period of discretionary demand contraction. In this more pessimistic outlook, XaaS growth could drop to 15%, while managed services spending might decline by 2.4%, almost a 700 basis point deviation from earlier predictions.

“We remain cautious in our base case but not pessimistic,” concluded Hall. “Q1 signals remain fundamentally strong, reflecting delayed demand rather than a decline.”

About the ISG Index™

The ISG Index™ serves as the authoritative resource for market intelligence on the global technology and business services industry. For 90 consecutive quarters, it has provided crucial industry insights and trends for financial analysts, corporate buyers, service providers, legal firms, academic institutions, and the media.

The first quarter results for the ISG Index were presented during a live webcast. To view a replay and access presentation materials, visit this webpage.

About ISG

ISG III is a global technology research and advisory firm focused on AI. They serve over 900 clients, including 75 of the world’s largest enterprises. Founded in 2006, ISG excels in technological and business services and aims to leverage AI for operational excellence and accelerated growth. The firm is recognized for its proprietary market insights, extensive knowledge of provider ecosystems, and expertise from 1,600 professionals worldwide dedicated to maximizing client investments in technology.