Spending on IT and BPO services drops as demand for cloud services slows
Spending on IT and business process outsourcing (BPO) services dropped sharply in the first quarter of this year as spending on cloud services slowed.
According to the latest figures, ISG revealed that $24bn was spent on IT and BPO globally, an 8% decrease from the same period last year.
ISG records all deals struck that are worth over $5m to come up with the total actual contract value for a given period. Spending on cloud-based as-a-service offerings by organisations during the first three months of this year was $14.3bn, a 13% drop from the record high of a year earlier. Meanwhile, more traditional IT services, known by ISG as managed services, were up 1% at $9.bn.
Steve Hall, president at ISG, said the results are a tale of two markets: “On the one hand, we saw record-high actual contract value in the managed services sector this quarter, fuelled by continuing demand for applications and engineering services – a clear sign that ongoing digital transformation is alive and well.
“On the other, the cloud services market has seen its blistering growth slow considerably in recent quarters as enterprises slow the pace of migrations and look to optimise existing workloads in response to the uncertain economic environment.”
During the first quarter, there were 703 managed services contracts signed including eight mega-deals, worth more than $100m per year, as well as 237 restructured contracts worth a record $4.0bn.
IT outsourcing, which falls within the managed services category, saw £6.8bn in spending, a 7% increase on the same quarter last year. ISG said this was driven by growth in application development and maintenance services. Within this segment, organisations spent $3.0bn on BPO during the quarter, a 10% against a record first quarter in 2022.
According to the ISG findings, cloud services spending has now fallen four quarters in a row after hitting its peak in the first quarter of last year. Infrastructure-as-a-Service (IaaS) spending fell 16% to $10bn in the first three months of 2023. Software-as-a-Service (SaaS) spending was down 4% to $3.9bn
“We see enterprises focusing on optimising the cloud-based services they have already committed to, rather than adding new workloads to the cloud,” said Hall.
He said the large cloud suppliers are being forced to cut costs as demand for their services slows: “On the cost side, hyperscalers really over-hired during the pandemic, and now they’re adjusting their operational expenses to fit today’s macro conditions and declining demand. That’s one of the reasons we’re seeing layoffs in big tech.”
ISG has lowered its forecast for cloud service spending in revenue growth in 2023. Hall said the fall in cloud contracts is expected to last through the second quarter, with demand picking up again in the second half.
“The macro environment remains uncertain, with interest rates, inflation and trouble in the banking sector topping concerns for enterprise clients,” said Hall. “There continues to be more scrutiny on deal signings, especially in discretionary spending areas. Enterprises are revisiting cost optimisation, efficiency gains and vendor consolidation deals.”
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