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ISG (a leading global technology research and advisory firm) conducted its Q2CY23 index call to discuss key technology trends and ordering activity across industry verticals and geographies. For Q2CY23, overall ACV (annual contract value) came in at US$22.6bn (-4.6% QoQ, -9.2% YoY), wherein healthy growth in managed services at US$10bn (+1% QoQ, +5.3% YoY) was offset by worsening weakness in as-a-service ACV (at US$12.6bn, - 8.7% QoQ, -18.2% YoY). As a result, ISG has further lowered its as-a-services ACV growth forecast from 15% to 11.5% due to continued slowdown in discretionary spend, especially in IaaS (infrastructure-as-a-service). There could be further downside risks to these estimates given that the guidance implies sharp pickup of 44% YoY in as-a-service ACV in H2CY23. ISG however has maintained its managed services growth outlook at 5% with expectations of recovery in the BFS vertical in H2FY24 and strong demand for cost optimisation deals. Guidance implies 6% YoY growth in H2CY23 vs 3.6% in H1CY23 for managed services’ ACV. Overall ACV guidance has been reduced from 11% earlier to 9% in CY23 on account of lower asa-service ACV.

Weakness in as-a-service was due to weakness in IaaS market. Top three hyperscalers (AWS, Azure and GCP) declined sharply at 20% on YTD basis. Cloud migration is slowing due to focus of clients on gaining RoI on existing cloud spends and ongoing cloud migration projects involving big complex industry-specific operations taking time to modernise. SaaS’ (software-as-a-service) ACV also declined 6% YTD due to slowdown in discretionary spend by clients and longer sales cycles.

Key takeaways from ISG index call

* Disconnect between healthy managed services ACV growth and revenue growth of IT companies in Mar’23 and Jun’23 quarters is due to slower conversion of bookings to revenue and ramp-down of discretionary projects (product engineering and app development), which account for ~30% of overall managed services ACV.

* Managed services ACV has been resilient driven by strength in IT sourcing ACV (US$14.6bn, +13% YTD) and EMEA (US$4.5bn, +21.6% QoQ, +15.4% YoY). Focus on cost optimisation is higher as reflected in a healthy restructuring ACV of >US$8bn in H1CY23. Global ACV for renewals and extensions has grown 24% YTD and was flat QoQ, representing over 40% of managed services ACV.

* Weakness in small project-based deals while large and mega deals are growing: ISG mentioned there is weakness in project-based work, but demand for long-term contracts with >US$5mn ACV is healthy with >1,000 such deals signed in Q2CY23. Ten mega deals were signed during the quarter representing over US$1.7bn ACV (5 mega deals in Americas, 5 in EMEA).

* Weakness in BFS continued; ISG expects recovery in H2CY23: BFS managed services/as-a-service ACV (accounting for 30% of global ACV) declined 10%/12% YoY in H1CY23. BFS weakness was more in the Americas with 20% YoY decline in this region, whereas in EMEA BFS ACV was up 4% YoY.

* Weakness in telecom: Telecom ACV was down 20% YoY as telecom companies focus on cost optimisation, corporate restructuring and headcount reduction.

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