ISG Reports Continued Resilience in Global IT Services Market

Despite growing economic uncertainties and the potential impact of new U.S. trade tariffs, the global IT and business services market delivered a strong showing in the first quarter of 2025, according to the latest ISG Index from technology advisory firm Information Services Group (ISG).

The report reveals that the combined annual contract value (ACV) for both managed services and cloud-based as-a-service (XaaS) offerings reached a record $28.8 billion in Q1—an 18% increase year-over-year and a 2% rise from the previous quarter. This marks the sixth consecutive quarter of growth.

Cloud-based solutions continued to fuel this momentum. XaaS posted a 30% year-over-year increase in ACV, reaching $18.4 billion. Within this segment, infrastructure-as-a-service (IaaS) hit a new high of $13.9 billion, a 34% increase from Q1 2024 and up 4% quarter-over-quarter. Leading cloud providers—Amazon Web Services (AWS), Google Cloud, and Microsoft Azure—accounted for 75% of IaaS revenue, collectively growing 48% over the year.

Software-as-a-Service (SaaS) also performed strongly, with ACV rising to $4.5 billion—up 19% from the same period last year. This marks the fourth consecutive quarter of year-over-year growth, driven by ongoing enterprise adoption of cloud-based applications.

Managed services showed more modest gains, with ACV totaling $10.5 billion—up 2% from Q1 2024 but down 2% from the previous quarter. The number of deals declined slightly to 713 (a 2% year-over-year drop), though the volume of large contracts—those worth $100 million or more—increased to six, up from four in the same period last year.

IT outsourcing (ITO) stood out with a strong performance, reaching $7.8 billion in ACV—12% higher than Q1 2024. Infrastructure services saw a notable 60% surge, while application services rose 12%.

In contrast, business process outsourcing (BPO) experienced its sharpest decline in over a decade. ACV fell to $1.5 billion, a 39% drop year-over-year, with all BPO subsegments seeing double-digit declines. Over the past 12 months, BPO has contracted by 5%.

Meanwhile, engineering, research, and development (ER&D) services—now tracked independently by ISG—posted record growth. ACV reached $1.1 billion, a 42% year-over-year increase, marking the fifth consecutive quarter of double-digit expansion.

Outlook for 2025: Cautious Optimism Amid Uncertainty

ISG President and Chief AI Officer Steve Hall described the market’s current trajectory as promising but warned that short-term volatility could impact IT spending. “Cloud and AI continue to drive digital transformation,” Hall said, “but ongoing trade tensions and regulatory uncertainties could influence discretionary investments.”

Global capability centers are playing a vital role in helping organizations manage geopolitical risks, while supporting hybrid delivery models and accelerating innovation cycles, he added.

Looking ahead, ISG outlines two potential scenarios for the remainder of 2025. Under a more optimistic scenario—where trade tensions ease by mid-year—XaaS is projected to grow by 18%, while managed services could see a modest 1.3% uptick. However, if trade and tariff uncertainties persist into the third quarter or beyond, managed services may contract by 2.4%, and XaaS growth could slow to 15%.

Sectors such as manufacturing, retail, automotive, and financial services are already showing signs of delayed decision-making and postponed investments. “This isn’t a sign of declining demand,” Hall noted, “but rather a pause in commitments as companies wait for greater clarity.”

Smaller contracts—valued between $5 million and $10 million—also reflect this cautious sentiment, declining 13% sequentially and 6% year-over-year.

Despite these headwinds, ISG remains confident in the market’s long-term resilience. Organizations continue to prioritize operational efficiency, cost optimization, and modernization—especially through cloud-native platforms and AI-powered innovation.

“Q1 indicators remain strong,” Hall concluded. “What we’re seeing isn’t a drop in demand, but a strategic delay in execution. Once uncertainties subside, many of these initiatives are likely to resume.”

The ISG Index tracks commercial outsourcing contracts with an ACV of $5 million or more. The latest findings underscore a market that remains fundamentally robust, driven by long-term digital transformation trends, even as it navigates an increasingly complex geopolitical and economic environment.