The digital revolution continues to reshape the very definition of sourcing, and is causing a fundamental shift in the way operating models are designed and services are delivered.
Based on our most recent market data, which we reported yesterday in our 4Q16 ISG Index™, the global market is migrating rapidly from traditional sourcing to as-as-service sourcing, a segment that includes Infrastructure-as-a-Service and Software-as-a-Service, as enterprises embrace the digital opportunity to transform their operations, enhance their engagement with customers and better leverage their connections with suppliers.
Our data show growth in the as-a-service market is accelerating. Three years ago, barely one in every four dollars in total market annual contract value (ACV) was spent in the as-a-service space. Now as-a-service is capturing nearly 40 percent of the total market ACV.
Full-year 2016 ACV for the combined global market (including both as-a-service and traditional sourcing) climbed 9 percent, to $37.4 billion, driven primarily by an impressive 38 percent gain in the as-a-service segment. As-a-service ACV also jumped the same 38 percent in the fourth quarter, but the growth was not enough to offset a poor showing in the traditional sourcing market, resulting in a combined market that was down 5 percent.
Traditional sourcing faltered a bit under the uncertainty brought about by the Brexit vote, the U.S. elections and the upcoming elections in G8 countries, however, the biggest factor in its decline was the shrinking number of megadeals (contracts worth $100 million or more), a trend we don’t seeing changing going forward.
Traditional sourcing continues to undergo structural change, as more and more services are moved to the cloud and companies take advantage of evolving digital technologies to look for new ways of doing business. We expect emerging digital workforces to have a profound impact on our people-intensive industry. This digital labor uses software to create virtual employees that work like humans and automate knowledge work, doing it faster, with better quality and often much more cost-effectively. And as more companies feel strong price and margin pressure, a digital workforce could offer some relief.
Looking at regional performance for the past year, the Americas, EMEA and Asia Pacific all turned in steady combined-market growth. All three regions also set new records for as-a-service growth, with Asia Pacific growing the fastest.
Variations across regions tended to reflect differences in market maturity and macro-economic conditions. The Americas’ combined market again outpaced EMEA’s – the eighth time in the last 10 quarters that has happened – in part because the as-a-service market in the Americas is larger than in EMEA. And, after growing 51 percent last year, the as-a-service market in Asia Pacific is poised to surpass traditional sourcing in 2017.
Within the as-a-service space, Infrastructure-as-a-Service continued to outpace Software-as-a-Service, with the difference showing itself most notably in the Americas. As we’ve pointed out before, the rise in as-a-service spending is not cannibalizing traditional sourcing. Witness the Americas, which had record high ACV in the ITO sector along with a noticeable spike in as-a-service ACV.
Even with the shifting dynamics of the global sourcing industry, we’re optimistic the global market is poised for strong growth as we enter 2017. We expect traditional sourcing to find its footing, and as-a-service growth to accelerate, as the challenges of price and margin pressure drive businesses toward new digitally enabled solutions. Overall, we are forecasting double-digit growth in the combined market in 2017.
To get a fuller picture of current market dynamics and the growth in demand for the as-a-service model, view the 4Q16 Global ISG Index™ presentation slides, press release and infographic on the ISG Index™ page.
John is a proven executive leader with strategic, transaction and post-transaction experience. John has helped many large, global enterprises introduce and cultivate innovation as a part of the transformation process. Many of John’s projects have led to groundbreaking transactions, particularly in the UK Life and Pensions market, where John is a sought after C-suite advisor in the strategic sourcing of insurance operations. John has also conducted significant transactions in both IT infrastructure and applications environments. As a Partner and President, he sits on the ISG Executive Board and leads ISG EMEA and Asia.