Q4 2023 Information Services Group Inc Global ISG Index
We really maintained stability on a quarter over quarter basis now.
Now if we look at on a quarterly basis. The managed services market did reach $10 billion of ACB again modest year over year growth and the as a service. However, really experienced a decreased to 13 4 billion, which was down 6% year over year.
For 2023, the combined market generate an ACB of $94 3 billion.
Let's break this down a little bit, though managed services contributed $40 7 billion, which was a 5% increase from 2022.
The as a service market generated $53 6 billion. This was down 12, 5% from the previous year.
The managed services market has shown resilience consistently staying above $10 billion for four consecutive quarters. The segment is seeing growth in mega deals with eight mega deals awarded in the quarter and a total of 34 Mega deals awarded in 202023.
Smaller deals have declined with a shift towards deals in that 30 to 50 million HCV range, indicating a shift towards larger contracts, which is healthy for the market.
Extension or renewal ACB remained at elevated levels during the fourth quarter and for Q 'twenty three the restructuring segment of managed services market was up 34% year over year.
Since the onset of the rising rate environment, starting at the beginning of 2022, and the resulting focus on cost optimization, we've seen some of the largest quarters ever for contract restructurings six of the eight quarters since the beginning of 2022 have seen restructuring ACB surpassed $3 5 billion.
The high restructuring market appears to be associated also with the late decision, making and risk reduction just think about it it's easier to stick with the existing provider than try to change horses midstream.
From an as a service market. This segment has seen a decline both year over year and annually contrasting it with previous growth trends. The ACB is stabilized around 13 billion, suggesting a potential new baseline after recent declines.
So if we look ahead these trends indicate a maturing market, particularly in the as a service segment, which is navigating its first annual decline after consistent growth.
The managed services market, however has demonstrated resilience and steady demand.
Now, let's take a look at the IPO and BPL market.
The IPO market really led by applications ended the year strong quarterly HCV and <unk> 23 in the IPO market generated $7 7 billion up 12% year over year, but down 5% quarter over quarter.
The annual ACB for the full year in the IPO market saw $30 4 billion in HCV, a 13, 3% increase from 2022, which set a new record for the global market.
Contract Awards, we saw a total of 2007 IPO contracts awarded in 2023, which was up 7% from 2022, marking the highest number of IPO deals ever awarded in the year.
ADM, our application development and maintenance achieved nearly $20 billion in HCV up 22, 5% for the year with each quarter really setting a new record applications accounted for 65% of the ACB awarded in 2023 infrastructure contrasted with a slight decline was down.
<unk>, 8% from 2022 totaling $10 5 billion in HCV.
From a b P O perspective, the quarterly ACB in four quarters 23 was was $2 3 billion down 25% year over year, but up 6% quarter over quarter.
The full year saw $10 3 billion in ACB, a 14% decrease from 2022, but still the second best year for BPM processes.
The market delivered 763 bps contracts down 18% from 2022, yet again it was the second best year in terms of the number of contracts.
Industry specific BPM <unk> experienced a 28% decline in HCV to $2 6 billion.
Engineering, which includes research and development saw a 13% decrease in HCV to $2 3 billion, but once again. This was the second best year on record for the engineering space.
Customer engagement declined 14% annually with the Americas really showing a 20% decrease other back office processes, including M&A procurement, both declined while HR ROE really grew and multi process PPO had its best year since 2017 and.
In summary, 2023 was a year of contrast in the global market with the IPO market achieving record highs in ACB in deal count led by really strong growth in ADM and a mixed performance in infrastructure, the bto market faced challenges, particularly in the Americas and industry specific BPM segments. Despite.
It being the second best year overall for the bto processes.
The decline in certain <unk> areas was offset by growth in others. For example, HR O in the multi process PPO, indicating a shifting landscape within the bto market. Kathy you want to give us an update on the regions.
Kathy: Thanks, Steve let's start with the Americas in the fourth quarter annual contract value was up 5% year on year and most of this was driven by an extension and renewal activity.
Kathy: The full year, the Americas posted its best results ever managed services Adv of 21 billion, which was up over 6%.
And of that 21 billion, 40% of it was extension renewal activity.
Kathy: That's the most extension and renewal activity ever in the Americas.
As Steve mentioned earlier, when we see a lot of extension and renewal activity as opposed to new scope awards. That's off any sign that we're in an environment, where enterprises are focused on reducing cost and risk.
Kathy: Large deals were also important the Americas in 2023 18 Mega deals were awarded last year, which added incremental $1 billion in ACD each of the region on.
Kathy: On an industry basis within the Americas, the energy healthcare and telecom sectors, each set record highs for ACD lifestyle.
Kathy: Our financial services and manufacturing were both down double digits.
Kathy: Looking forward at the first quarter, we do see some continued slowness in decision, making in the Americas as clients remain cautious about the economy. However, we also see pockets of strong demand in areas like energy and utilities.
Kathy: In Europe fourth quarter ACB of nearly 4 billion was up 7%, but unlike the Americas. Most of this growth was driven by new scope awards, which had its best result ever in over a year on a full year basis EMEA had its best year ever with ACD of nearly $16 billion, which was up 4% versus 2022.
Kathy: On an industry basis in EMEA financial services and energy posted very strong results.
Kathy: Most of the remaining sectors weighed on results with manufacturing telco travel and transportation all down on the full year.
Kathy: On a regional basis, the UK posted its second best ever.
Kathy: Here the Benelux region was the only other market in positive territory in 2023 on the other hand, France was down 4% in the dock region was down over 20% for the full year.
Kathy: Looking at the first quarter, we think we'll continue to see strong demand for cost optimization in EMEA with more focus on extension and renewal activity than new scope, we think demand in south Europe, let's say similar to the fourth quarter levels. However demand in the dock region in the first quarter will likely be down given the immense cost pressure many firms are under.
Kathy: In Asia Pacific ACB of $800 million was down again to $1 billion quarter in the fourth quarter of 2022.
Kathy: On a full year managed services generated $3 five of ACB and that was up one 5% versus 2022 and it was the second best year ever for managed services in Asia Pacific.
Kathy: On an industry basis, most verticals pulled back in 2023, except for manufacturing and telecom.
Kathy: And on the sub reason basis, the largest market of ANZ was up 5% year over year, while the second largest market, India was up nearly 90% year over year.
Kathy: We believe demand levels will be similar in Q1 to what they were in Q4. However, we are seeing a shift in the mix between traditional outsourcing toward more transformational projects, especially ERP.
Let's look at the managed services industry.
Kathy: For our industry update we're going to take a look at the combined market results for the full year, which gives a better picture of overall technology spending and each industry.
Kathy: As you can see here the combined market in BSI fell 4% year over year as we discussed in the regional update BSI was actually positive in EMEA in 2023, but it was down in the Americas and in Asia Pacific, which pulled the global results down.
Kathy: And when you break the BSI results down by managed services versus cloud managed services basically a flat and cloud was down nearly 9% versus 2022.
The performance of the entire sector in 2024 will be dependent on the turnaround in banking and financial services as we mentioned last quarter. The sector is impacted by the effect of central banks and their monetary tightening policies, which typically take effect after 12 to 18 month lag.
Kathy: So we expect to be ssi sector to improve materially with any easing of monetary policy.
Kathy: Moving on to the telco media sector. The combined market also struggled in 2023, it was down 4% versus 2022.
Kathy: Regionally telecom was positive in the Americas, but weighed down our results in EMEA and Asia Pacific and on the service line basis managed services was up 10% for the year, but much of that growth came from large contract awards I was 50% of the ACB awarded in media and Telecom came from deals within ACB of greater than $50 million, while at the same time the number of award.
Kathy: It was down.
Kathy: Looking into 2024, there is some potential headwinds ahead for the sector the slowing pace of decision, making the lack of smaller discretionary work and the fact that much of the growth in 2023 came from large awards, which may not be repeated in 2024.
Speaker Change: <unk> over to you for an update on what we're seeing happening in big deals.
Speaker Change: Thanks, Kathy as we wrote about on the Index Insider last week Mega deal activity was exceptionally strong in 2023 and just as a reminder, a megadeal is an outsourcing award with an annual contract value of 100 million or more.
Speaker Change: There were 34 Mega Awards in 2023, which generated nearly 6 billion of annual contract value. That's the most Mega Awards and the most Mega Award HCV in almost 10 years.
Speaker Change: And that 6 billion represents about 15% of the total ACB in the industry, how that's up 9% from last year, but it's down from nearly 25% in 2014.
Speaker Change: And we think this is a good thing for the industry.
Speaker Change: Today, the industry is much less dependent on a small number of large deals, which makes it less likely that the industry will be negatively impacted at those large deals dried up for a quarter or two.
Speaker Change: 18 of the Mega deals were in the Americas 12 in EMEA and four in Asia Pacific and most of those deals were in the BSI telecom and manufacturing sectors.
Speaker Change: So let's talk briefly about the reasons for the increased Mega deal activity.
Speaker Change: First enterprises continue to be laser focused on cost optimization as Steve mentioned and this is not small cuts here and there. Many firms are looking for fundamental change in their cost structure and outsourcing as a lever they can pull to make that happen.
Speaker Change: And it's important to note here that for the most part we're no longer talking about your mess for less type outsourcing.
Speaker Change: A lot of technology and process modernization required to get the savings companies need.
Speaker Change: Mega deals today include a lot of transformation, which is different from Mega deals 10 years ago.
Speaker Change: And the second reason for the increased level of Mega deal activity at that providers have really started to focus on shaping large deals.
Speaker Change: And using creative financial engineering to create value for their clients.
Speaker Change: So that means that mega deals are not always RFP led often the deal is proactively shaped by the provider through incumbency and through relationship building.
Speaker Change: And that process can sometimes last months or even years.
Speaker Change: So of course this means that account incumbency is an advantage when it comes to winning megadeals, but incumbency is not a requirement. So we did some analysis recently on some large awards with a T CV of $500 million of greater and when that Mega deal was awarded a quarter of the time it did not get awarded to a provider of that.
Speaker Change: Already own a significant portion of the T C V at that client.
Speaker Change: So given the continued need to optimize cost in 2024, and the fact that more providers are focused on growing their big deal teams.
Speaker Change: And their deal shaping capabilities, we expect 2024 to be a conducive environment for Mega deals.
Speaker Change: Okay, let's move on now to what we see happening with cloud demand as we discussed moat for most of 2023 cloud bookings were under a lot of pressure given the slowdown in discretionary spending and the intense focus on enterprises on optimizing their costs.
Speaker Change: So that pattern repeated in the fourth quarter with infrastructure as a service a TV down nearly 10% year over year that was the fifth consecutive quarter with a negative year on year result for infrastructure as a service.
Speaker Change: On a full year basis, <unk> generated $38 billion of annual contract value, which was down 16% versus 2022, and that's the only time that I asked has turned negative since we started reporting on this market way back in 2015.
Speaker Change: And by provider category as you can see here the big three Hyperscale ours were down even more than our broader index a C V for the big three was down 22% on the full year.
Speaker Change: That said, we think these declines may have peaked in the third quarter of last year and while the fourth quarter was still negative the rate of decline slowed and we think is starting to reverse course.
Speaker Change: But we still think it'll be one or two more quarters before we move past the difficult comparisons and before enterprises will start moving from optimization mode, which is really where they've been over the past 12 months to 18 months and back into build mode, and we think a lot of that build mode will be driven by demand for AI and we'll hear from Dave here in <unk>.
Speaker Change: A minute on that topic.
Dave: Let's move on to software as a service.
Dave: So unlike infrastructure as a service we think a few segments within SaaS have already found their bottom and are already on the upswing.
Dave: If you look at the fourth quarter SaaS generated nearly 4 billion of HCV and that was up 4% year over year and that's on the back of another positive quarter from the third quarter of last year. So we've now had two consecutive quarters of year on year growth in SaaS and that's what we mean when we say that SaaS has already likely found its bottom.
Dave: That said on the full year SaaS was down it generated $15 5 billion of HCV and that was down 3% versus 2022 and like infrastructure as a service. That's the first decline in SaaS ACP since we started reporting on it.
Dave: By App category of human capital management continues to hold up well against the difficult macro environment. ACB has continued to grow steadily over the past couple of years.
Dave: Collaboration had a good year it was up 11% and finally analytics and B I. It service management and ERP have stayed relatively buoyant throughout most of this SaaS downturn and Theyre now finally rolling over against some tough comparisons.
Dave: There was one area, however that bucked the negative ACB trend and that's the top 10 SaaS providers, we talked about this a lot last year, where we see consolidation that's happening in this space as CFO and CIO look to lower their total cost of ownership and software.
Dave: And the top 10 SaaS providers benefited from that.
Dave: For that group was up six 5% compared to the 3% decline for the broader SaaS index that I just mentioned.
Dave: And we think this consolidation wave will continue in 2024 as generative AI features are added to software, which will in turn increase prices and drive even more focus on tcl.
And speaking of prices, we actually just wrapped up a really interesting new buyer behavior studies, specifically focused on AI.
Dave: And one of the questions. We asked was what level of price increase enterprise leaders would accept across various software categories in order to get access to these AI features.
Dave: And the range was between six and 9% increase on a per seat basis, depending of course on the application category.
Dave: So we think this is a good indicator of how strong the demand is for AI features right now but of course this has yet to meet budget reality.
Dave: And if you recall from our top 10 trends that we published before the holidays, we think that the increased spending on AI features in 2024 could have an impact on other areas of the it budget as it stays relatively flat as a percentage of revenues.
Speaker Change: So staying on the Red Hot topic of AI, that's dive a little deeper Dave over to you.
Dave: Thanks, Dan.
Dave: The first observation I'd like to share is that AI workloads are taking place primarily in the cloud.
Dave: These workloads are resource intensive models are more accurate when many historical data points can be considered and with the advent of generative AI unstructured data has become a more significant source of input and AI processes.
Dave: Text images audio and video are much more voluminous and simple transaction data.
Dave: Given the computing resources required to process. All this data chip manufacturers have been advancing capabilities via Gpus, which while more powerful are also more expensive in gpus.
Dave: Cloud platforms offer the potential to keep Gpus more fully utilized and kept the data centers and therefore can lower the effective cost of utilizing gpus.
Dave: In addition, given the data volumes and fluctuating demands of model building versus inferencing.
Dave: The cloud resources make a lot of sense.
Speaker Change: Yes, it workloads could drive additional demand for hyperscale or possibly reversing the recent trends of decelerating growth, but we also expect to see more diversity in AI workloads in the future.
Speaker Change: Second observation is that enterprises need more skilled resources to effectively utilize AI.
Speaker Change: Developing and fine tuning AI based analyses required specialized skills that are not readily available in today's workforce.
Speaker Change: Only one quarter, 23% report that they have the skills they need while two thirds, 65% report they need more skills.
Speaker Change: And Unfortunately enterprises are having the most difficulty finding and retaining those with AI skills.
Speaker Change: Finding and retaining those with cloud platform skills and those with data and database skills are also among the top five most challenging.
So I'll chat GPT. It makes it appear that AI is easy. It's also exacerbating the demand for skills that are in short supply.
Speaker Change: Service providers that Buildout AI practices to fill the gap that enterprises are facing can grow their businesses, but it's important to understand that AI skills alone are not enough.
From our most recent buyer behavior study on AI published earlier this week the number one area where service providers fall short as having a holistic understanding of the business needs. The business context is critical to successfully applying AI.
Speaker Change: Third observation is that generative AI is not replacing predictive AI yet.
Speaker Change: Generative AI is making many tasks easier, but it's not completely replacing predictive AI at least not yet.
Speaker Change: The most common tasks were generative AI is being applied include natural language processing, such as chat bots assistance extracting information from in summarizing documents and assisting with software development tests, such as cogeneration and application migration.
Speaker Change: Our research shows generative AI is expected to have a bigger impact in these areas than predictive AI at least within the banking industry.
Speaker Change: However in areas such as credit risk fraud detection algorithmic trading and even customer acquisition predictive AI is expected to have a bigger impact.
Speaker Change: Part of the reason as noted previously as a predictive AI is hard fought.
Speaker Change: Tuning models requires knowledge of not just the algorithms, but also the various parameters and the data preparation techniques data scientists must also understand biases in the data and issues in the training process, such as over fitting or poor sampling.
Speaker Change: Once developed a model must be monitored constantly to see if it has drifted from reality.
Speaker Change: Finally, one must understand that models are never 100% accurate and must evaluate the risk of false positives and false negatives.
Speaker Change: So while AI tooling is getting better including use of generative AI to make modeling easier.
Speaker Change: Still want Stanford trained biomedical phds, developing and tuning any predictive personalized medicine models used in my clinical care for the foreseeable future.
<unk> over to you to talk about how these AI trends will impact the ITN business services industry.
Thanks: Thanks, Dave as Dan mentioned enterprises at experimenting the agenda to be unpredictable.
Thanks: We believe this experimentation and deployment will continue to accelerate over the next few years, which represents a massive opportunity for the IP services industry.
Thanks: Estimating at least $175 billion additional annual IP services revenue from AI by 2020.
Thanks: That said in 2024, and we expect it will continue to be more project based work and optimization and then gradually expanding into larger transformation of engagement over the next few years.
Thanks: One area, where we can see a significant adoption of more predictive engendered EMEA isn't the banking sector.
Speaker Change: Yes, one of the hottest topics in this sector right now that more than 90% of the banking leaders using or planning to use AI in the next 24 months to mitigate fraud modest customer behavior and optimized sales and marketing.
Speaker Change: Similarly in manufacturing, 75% of the respondents maintained and increased investment in <unk> in 2020, and in the insurance industry or 80% of the leaders field agenda.
Speaker Change: Have a positive impact on customer service by making functions like claims and policy management much easier since.
Speaker Change: Since the demand for <unk> enabled transformations is extremely strong today, we observe similar investment patterns across other industries too.
Speaker Change: These data are an important point and Devin there's no doubt that the demand for aia's cause it's considerably higher as.
Speaker Change: As we look across our buyer behavior studies and as we interact with our enterprise clients enterprises looking to nearly double the number of AI enabled applications by the end of this year given the rapid growing clients are facing challenges in finding and retaining and analytic skills.
Speaker Change: But enterprises that have a lot of options as service providers are actively investing in building that AI capabilities, including training millions of employees to meet the expected demand for.
Speaker Change: Your line is they're also using Jennie I and predictive AI that says to stay ahead of the curve and also build use cases for the planes.
Speaker Change: Steve mentioned cost optimization continues to be a key focus for the integrated enterprises have been have increased expectations on service providers.
Speaker Change: And one day, we believe that will manifest itself in 2024.
Speaker Change: We'll start to see significant improvements in price performance on both ICU and VP of contracts in 2024.
Speaker Change: And in many cases those prices are going to go down because of the productivity improvements that the providers are getting to the David this year, especially in areas like application modernization and call centers.
Speaker Change: Moving onto a liter bullets now as a reminder.
<unk> listed in alphabetical order and positioning is based on annual contract value signed over the past 12 months. The company's name to the list that you noted with domestic and also a reminder, that says easement need both can be accessed on the ISG website.
Speaker Change: And the largest group eviction steam visa very little tunnel, the leader board as the leaders have exhibited a strong volt and top 15 positioning those in.
Speaker Change: Noteworthy deals signed during the quarter.
Speaker Change: Essentially signed a new partnership with Vodafone to invest 150 million euros and have commercialized it shared services operations excellence.
Speaker Change: Extensive and provide technology.
Speaker Change: Transformation services, such as digital solutions and platforms and also bring expertise.
Speaker Change: Well, that's what IBM signed a five year agreement does in banking and insurance group benefits, but infrastructure and security services.
Speaker Change: In the building 15, we saw a couple of new funds Allied joined the board as a company bag newer work at Fedex BMW and <unk>.
Speaker Change: So Steve you have rejoined the Nida board after signing large Cds contracts at National savings, where they are and manage frontline contact centers to assist customers with distant self service injection as well as providing back office services, including managing end to end Internet banking in.
Steve: And the breakthrough 15 group last quarter or so called for a smaller group to this category and this quarter, we saw LNG technology services leverage that consistent success to scale up this category Ashwin.
Steve: During the quarter entity has signed several large deals notable won a multi year engineering services partnership with BP to focus on engineering data management and services for sustainable initiatives.
Steve: We also sought to SaaS providers VIP window seat.
Steve: And cybersecurity vendors up to join the meter what has been.
And finally in the booming 15 group visa, India based product Engineering company charter technologies joined to lead.
Steve: They recently filed for an IPO, and then Deanna and Tata Motors S. T claims.
Steve: We also saw some other software signed several deals at by it as well as Amiga group specializes in can be events in power transmission and finally, the features and telenet.
Steve: On the leaderboard, which one network services deal at Ethernet, Nowadays largest oil and gas company.
Speaker Change: Congratulations to all the companies that manage the leader board and on that note, let me hand, it over to Steve to close adopted the forecast.
Steve: Thanks, a lot and I'm Rafa, so 2020 three was really a challenging year for the tech sector really even the broader macro environment. There were challenges across different markets. So, let's take a summary of the key trends.
Steve: Overall performance the managed services had a really strong year with the global market up by 5% setting a record of HCV of over 47 billion.
Steve: Regional success was seen in both the Americas and EMEA regions and really showed some positive results with their own record IC vs as well.
Steve: The IPO market was driven by a surge in application activity. The ADM space segment set record highs each quarter and captured a larger share of the <unk> IPO activity now accounting for over 65% of the total HCV awarded in 2023.
Steve: There was a prevalence of contract extensions and renewals as enterprise focus on cost optimization. The sector also witnessed 34 Mega deals the most since 2014 as Sam walked through.
Steve: You know there were some challenges, though despite the overall growth banking financial services and insurance saw decline and there was weakness in smaller discretionary deal categories.
Steve: The SaaS market was highlighted by diversity within the SaaS market, while some segments like human capital management or HCM maintained positive result, others were in the process adjusting to higher interest rates and the environment.
Steve: The big three Hyperscale, there's also faced challenges, but they are close to facing software compares for early 2023.
Steve: Indicating a potential technology reacceleration aligned with reduced cost optimization and of course, the impact to generate on degenerative AI for the cloud hyperscale or <unk>.
Steve: And thinking of generative AI. It was really emerged as a significant tailwind for both as a service and the managed services sector, we're going to see accelerating investments in 2023 that will continue into 2024. Its adoption is still in the early stage, but I think if we're going to expect to see it drive manav.
Steve: Nation into the coming decade.
Steve: We take a look at the macro trends the global inflation is on decline leading to a prediction of earlier and more aggressive rate cuts by major central banks and this scenario is likely to create a conducive environment for increase enterprise spending and capital deployment.
Steve: <unk> high levels of spending are anticipated to continue in app modernization and business transformation projects, particularly those led by generative AI.
Steve: Public cloud spending is also expected to shift from optimization to reacceleration.
Steve: Recovery is anticipated in smaller discretionary deals and a rebound in the financial services sector potentially catalyzing financial further market growth.
Steve: So, let's just jump right into the forecast.
Steve: Our forecast for as a service in 2024 is projected to grow by 15%.
Steve: The growth forecast for managed services in 2024 is forecast to grow by $4 two 5%.
Steve: In conclusion, 2023 was really a transformative year for Tac with different sectors adapting uniquely to the macro environment challenges. The outlook for 2024 is optimistic with expectations on growth driven by emerging technologies like generative AI.
Steve: Balanced that with favorable macroeconomic conditions, we should see a resurgence in market questions.
Steve: So that brings us to the end of the formal call. We'll now open it up for questions. Please type your questions into the comments on the right side of the screen.
Steve: Brian would you like to start the questions.
Brian: Uh huh.
Brian: Yeah.
Brian: Alright, very very good I always appreciate the insights. Thank you there are a few questions before we jump into the audience Q. So maybe we start at a high level with with 24. It budgets can you kind of talk about what you just touched on this already but maybe what are you seeing.
Brian: In that enterprise it budget cycle for 24 do you expect those to be firmed up by the end of this month or may that be more drawn out due to uncertainty in I guess in general when you think about budget sentiment right now versus one year ago, maybe share some color around what you're seeing there too.
Speaker Change: Yeah. Thanks, Brian for the question and Thanks again for hosting I think a lot of the budgets are pretty firmed up for 2024, that's usually sort of October November piece, there is probably a little bit of a pullback this year than past as far as the timeline just because of little bit of the uncertainty, but I think that's getting more stable.
Speaker Change: I would suspect the tech budgets are going to be remain fairly flat for 2024, what we're seeing what we're hearing but I think the allocation of that budget will change.
Speaker Change: So when I look at cost optimization is still sort of being a major driver for managed services I think we'll continue to see IP, even bto continue to use those as the driver helps to managed services and will reduce costs for the enterprises.
Speaker Change: I think the SaaS budgets really on the software side are likely to go up and I think the reason for that is really as we've talked about gen. AI I think there's going to be a big push to integrate AI solutions into the software, especially into the SaaS side I think organizations are likely to do that whether that's you know.
Speaker Change: Call it 6% to 9% increase I think we're probably going to be in that range for that so I would expect to see that as we go forward.
Speaker Change: And then I do think that there will be a recovery.
Speaker Change: Likely call it the back half so it may be the end of Q2, where we see more discretionary spend really come back I don't think we are in the same pent up demand situation that we were at for Covid that I think clearly sort of the last 18 months with the economic uncertainty, we're starting to get a bit more certainty around that.
Speaker Change: Think what we'll see as enterprises starting to spend.
Speaker Change: There's so much technology as we've just talked through the narrow bodies talking through that's going to change that really transform organizations I think everybody wants to get involved in that.
Speaker Change: Kind of give you a perspective.
Speaker Change: It does yes for sure.
Brian: I'm, Brian I think.
Brian: As Steve mentioned the impact of AI.
Brian: I think if you think about the fact that we talked about on the SaaS update you know potentially a 6% to 9% increase per seat.
Brian: Of course, the Hyperscale guys are integrating generative AI into their services right. Those services themselves are going to cost more and that's not going to be free.
Brian: So I think it's going to be a really interesting year for budgets because one of the things we've talked a lot about the fact is as generative AI gets added into as a feature or as part of our service offering from the Hyperscale.
Brian: It's still relatively new right huge demand for it there's a kind of a fast track to gen III adoption through SaaS and through the Hyperscale.
Brian: But that's not yet been reconciled through the IP budgets because of how fast this has come up so lots of demand.
Brian: But budget is still kind of looking maybe like they did a year ago as Steve mentioned kind of flat as a percentage of revenue so it's going to come from somewhere.
Brian: But that's also one of the reasons that we think we're going to continue to see a lot of this caught up cost optimization focus through outsourcing in order to fund a lot of this transformational AI work.
Speaker Change: Okay. Okay. That's helpful. It kind of dovetails with that with a follow up question I wanted to suppose around managed services outlook in signings right bookings.
Speaker Change: So managed services ACD add up 5% in 'twenty three year forecast here for 'twenty four.
Speaker Change: Slightly lower rate of contracting is 425 I believe maybe you can talk about a little bit is there a <unk>.
Speaker Change: A so the moderation that you have in that forecast is there anything you would point too because you did talk about cloud optimization than potentially ending here. So I'm. Just curious is it maybe a moderation of mega deal strength, what's driving just maybe that slight downtick.
Speaker Change: Yeah, I wouldn't read too much into the downtick, though we do think it's going to be a little bit lower and a four point to five we kind of backed it down because we see some good signs, but there is still we think that you know of.
Speaker Change: Again, probably two quarters system some headwinds to go through.
Speaker Change: The big piece that we see as really the recovery of DFS. It was down in the Americas Theres still some headwinds there we think that will recover but we really need to see some of that recovery to it in BFS is still call. It 35, 30% to 35% of the market. So that that has to recover and we know that theres a little.
Speaker Change: Back there.
Speaker Change: Think we see really strong.
Speaker Change: We see strong signs in healthcare life sciences, even in energy, but we still see some struggles in manufacturing, especially on the European side. So when we looked at the whole Brian sort of across different verticals, we sort of saw some pull back.
Speaker Change: If we go I think we will hit 10 $5 billion to $11 billion of HCV per quarter for 2024, So I think that sort of some new heights. We did have 34 Mega deals is stanton walked through apps. The most that we've had since 2014.
Speaker Change: We see some more but what we really see as mega deals changing and they're really being shaped in the market versus just being.
Speaker Change: Make up one morning, and decided to go with an RFP some of those take some time and some of those are going to continue to shape. As we go forward. So I think we're just being a bit cautious at the beginning of the year. We're excited about what the fed bank of England, others. We think are going to do we think that really reduces the stress there.
Speaker Change: Again, we think the tech spend the flattish is going to change. So we think that's a good sign especially on the cost optimization side.
Speaker Change: Okay, Okay understood and last one I have for you all.
Speaker Change: We turn it over to the Q just as it relates to that Jen AI revenue opportunities at the $1 75 billion by 2030, when you're talking about the largest service activities or maybe the underlying categories of work and that assumption I'm curious does that include a significant amount of readiness component versus the model element deployment things like that if you can kind of cut or the law.
Speaker Change: Right.
Speaker Change: But we knew that we'd get some headlines when we published the 175 billion because that is a big span and when we looked at it we really looked at it across sort of let me call. It four major segments Theres a segment of the SaaS providers, where AI is going to be integrated into most of the SaaS products, whether it's salesforce.
Speaker Change: The service now to workday. They are all going to be AI infused in AI enabled and that's going to drive more spend to the to the SaaS providers quite frankly.
Speaker Change: There is also a really big part of the market that's going to be more about data data legs, API AI, driven so think of a data bricks.
Speaker Change: Sorted that host of players in that space, that's going to drive a lot of that activity is going to drive that activity to get the data right that to create data products to integrate data products across the board.
Speaker Change: The third one is really the cloud providers all the cloud providers and Hyperscale orders are clearly moving forward with integrated AI solutions and how they think through that that again is a big <expletive> Psi opportunity.
Speaker Change: And then the fourth one we're going to see a big push towards more models more integrated <unk> organizations that are going to really integrate their own data with multiple third party L. L. Labs. So you have everything from the training of that data the validation and testing, but still just the.
Speaker Change: Integration of that work going through and I think what youre going to see is a really big resurgence of SRT activities because of what we're going to see coming through and I think that that Te is really really good for the overall tech sector as we move forward.
Speaker Change: Let me add some comments as well.
Speaker Change: What we see happening right now among the various software providers is that they're incorporating the AI capabilities on behalf of their users AI is difficult as I said in my presentation.
Speaker Change: AI is difficult and so the vendors have more opportunity to add features to their products that are more or less invisible. They just they just add and extend the capabilities of the product, making those products more useful and more productive and that's where we see this desire or willingness on the part of the organizations to pay.
Speaker Change: More for those different software products. So we think that'll have an impact on the opportunities both for the.
Speaker Change: Service providers, we're helping organizations adopt these tools as well as the SaaS providers themselves.
Speaker Change: Alright, very good thanks, Jim over to the audience for you.
Speaker Change: Awesome. Thanks Bryan.
So we've got a bunch of questions to get through so let's go ahead and start with.
Speaker Change: I'll take this first one Dave I'm going to come back to you. So I've got a question about HCM software, so I guess kind of.
Speaker Change: Linking back to what we just talked about on SaaS. So how is the demand environment for HCM software. Currently what are you anticipating for 2020 for growth relative to 2023. So I can tell you a little bit about on the demand side and then I'll.
Speaker Change: Pass it over to Dave more around when he sees around emerging capabilities on the demand side as I mentioned in the SaaS update HCM is actually the category. That's really held up best during this downturn the SaaS downturn that we've seen over the past couple of years.
Dave: ACD in or just a reminder, as we're talking about ACB positive or negative it's an indicator of revenue accelerating versus a negative ACB as an indicator of revenue decelerating, we're not talking about <unk>.
Dave: Declines in revenue here, it's an early indicator of revenue growth.
Dave: So out of all the SaaS categories that we've talked about HCM has actually performed the best only had negative revenue negative ACB growth for one quarter.
Anticipate that continuing we see a lot on the HR side and on the HCM side or the HRS side still a lot of consolidation happening some of that in response to cost pressure, but that's trend that we've kind of been talking about for the past couple of years, just generally with HR organizations more moving towards a shared services model.
Dave: Some in sourcing and some outsourcing, but as that consolidation happens and argue that favors our.
Dave: Software, because it's going to rely on more of a consolidated south software platform to accelerate that consolidation or to support that consolidation. So we think that that trend will continue for HCM software, Dave any commentary on what you see happening in terms of capabilities sure I mean, like I was saying, it's about enhancing the software products, making them easier to.
Dave: Use, but but there's a very specific thing that generative AI is able to do it's able to help personalize the experience and personalized experiences for the workers.
Dave: Generally translate to better experiences for the customers happy employees. There then.
Dave: Giving their customers and clients better service, so things like how do I fix scenario my time sheet. What's my next assignment when will I get my first paycheck right. These things are are personalized to the individual and makes them more productive you don't have to open a ticket.
Dave: It's much more a much less friction in the organization.
Speaker Change: Got it.
Speaker Change: Thanks, Dave.
Speaker Change: Okay, Kathy I'm gonna come to you.
Kathy: What savings do you expect our pricing decreases as a result of providers integrating generative AI into their Ato operations and ATM services.
Well, we've been looking at this pretty closely and we then doing a couple of different things. One is looking at deals that were part of it to see where pricing has gone down another is actually going out and talking to the providers about what they're expecting.
Kathy: And we're we're kind of landing right now is about a 30% decrease in pricing.
Kathy: We'll continue to watch it and obviously, we will continue to collect data on it to validate that but our sense is right now it's about 30% and that's across you know IPO when im referring to so that infrastructure as well as application maintenance and development spend.
Kathy: On the application side I think there's a more significant impact because of generative AI, whereas on the infrastructure side. We've had AI. That's part of how we deliver those services in the past, so really where I'm focused right now is on the application side and watching how quickly we're able to integrate generative AI and <unk>.
Kathy: Development, and fixing and testing and looking at where we see that flattening out or big decreases in the market.
Speaker Change: Got it thanks, Cathy us Dave I'm going to come to you next we have got a question about <unk>. So will be F. S. I spending come back in 2024.
Dave: I think that's what we all want to know.
Dave: Well, what I would say in general I think it's going to be the back half now interestingly BFS XI was stronger in Europe, this quarter and over the year than it was in the in the U S as far as our growth rate in <unk>.
Dave: What we did.
Dave: I think theres going to be challenges in both markets. When I look at the change the business, where we have the discretionary impact I think we're going to continue to see some headwinds and probably some some back half of the year before we see that really going forward.
Dave: I think on run the business so cost optimization will continue to be a big driver.
Dave: BFS is such a big part of the overall outsourcing market in managed services market.
Dave: We do expect to see the spend come back.
Dave: And it's not down that much I mean, we talked about it being down but it's still a really healthy segment, it's still three.
Percent plus I think it's just a discretionary spend that we need to see come back. So the revenues are more in line with where we see the managed services bookings.
Speaker Change: Yeah I agree I mean, if you look at the data David and it's really only down a percent.
Speaker Change: Five year.
Speaker Change: And in response to what's happened with the fed from 2022 actually that's a really positive result to see it only be down a percent time will tell for like I said, we think it's going to be.
Speaker Change: Tight in the first half given the comparisons but.
Speaker Change: Actually a pretty positive result, given what we saw happen with interest rates, Yeah, I would agree I mean, the bookings in the bookings in BFS have been strong and continued to be strong again, just 1% in this environment isn't a bad outcome.
Speaker Change: Especially when you look at the overall market being up 5% for managed services, it's pretty good.
Speaker Change: Think we're all just filling the disconnect between the bookings and the revenue and again this sort of disconnect that we have on what's happening on the discretionary feels like we're drawing down some older deals. It feels like there's some app things that haven't been turned on yet. So I think those will move forward, we just need that changed.
Speaker Change: The business from that discretionary spend to really kick in on the banks as we go forward.
Speaker Change: Okay, Nimroz I'm going to come to you next we have got a question on <unk> on hiring hiring has considerably slowed down do we expect it to pick up in the near future.
Nimroz: Thanks Duncan and.
Nimroz: I think the cost and the margin pressures containers in the industry with all the hiring especially that happened in the last couple of years. There was a surge in hiring to meet the anticipated demand, but right now given the current scenario. We think there is a large part of focus from the service. The way. It is today and you have seen and that's been some of that will persist.
Speaker Change: Ah, yes, because we've spoken to all about that bill spoke about the challenges in terms of hiring and retaining the right.
Speaker Change: So given the potential of growth in that space for instance, I.
Speaker Change: We think theres going to be a huge focus on just getting some of the sausage, making sure that they're comfortable with not just.
Speaker Change: On the technology side, but in terms of usage and deployment et cetera, I think both of those are some of the areas that's going to be a focus.
Speaker Change: The thing with all of the IP services.
Speaker Change: That's kind of softening a little longer decision, making cycle is a huge focus in terms of also getting existing because this also has to be like a fully productive and utilized some fancy the utilization rate for them to kind of getting better and I think.
Speaker Change: But some of the pieces that we spoke about them.
Speaker Change: The presentation is that we are going to see probably and I'm glad you lose some of the larger transformation teams to start kicking.
Speaker Change: And Steve just mentioned that there could be some amount of recovering the second half so potentially we could see a hiring coming back later, especially because some of these key skills.
Speaker Change: And then I think what's also important is I don't have them pick up all probably did provide is that just going to go back into a just in time hiring model. So that they can actually address the demand like sub contracting Latam habit.
Speaker Change: Yeah I'm.
Speaker Change: Sorry, I was confusing.
Speaker Change: Rough it feels to me that.
Speaker Change: We're not really moving to a non linear revenue model now with AI or theres really any impact of AI on the hiring yet that really it's sort of the demand side, that's impacting the higher does that make sense or do you see anything different there.
Speaker Change: I think that's the solution start materializing, there could be a potential that the hiring could potentially go up but at the moment I think given the fact that its still at a nascent stages in terms of POC then describing the use cases.
Speaker Change: Don't see that kind of a demand in terms of bringing on board a workforce to be able to meet those demands potentially the Devonian kicking in it might probably start seeing some of those surgeon holiday.
Speaker Change: Yeah, and I think I think Steve a lot of it we've talked about this with the no really significant slowdown in campus based hiring that we've seen over the past year or so.
Speaker Change: I still think I'm very much still linked to demand.
Speaker Change: And I think my personal view is we're still.
Speaker Change: A ways away from that non linear growth that.
Speaker Change: I know the industry has been after for for many years, but I think one thing that is interesting to watch and we've written about this a couple of times is when that discretionary spending as we talked about probably more into the second half of 2020 for when that starts to come back what.
Speaker Change: What will that look like for providers.
Speaker Change: If they are running.
Speaker Change: It's a very tight market right now in terms of because providers have really slowed down hiring and haven't necessarily backfill for attrition.
Speaker Change: What will that rebound look like into number at this point is that going to be more of a traditional model or more of a just in time model, where they start tapping in back into lateral hires in the subcontracting channel like what happened.
Speaker Change: After COVID-19, not saying that that's going to be that same kind of boom I think that's going to be a really interesting thing to watch over the next 12 to 18 months.
Although there are a couple of providers will have gradually started canthus title so that could be some signs of that labor.
Speaker Change: Okay. We've got a question on cloud and what's the rationale behind our forecast 15% for for cloud I think there's a few factors here, we kind of talked about this on the call I mean, there's just there's like a market technical reason so the comparisons just get easier as we move into 2024, we are anticipating.
Speaker Change: The macro situation to get better potentially if the fed starts to lower interest rates, that's favorable for discretionary Spendings. We've talked a lot about the fact that there's just a lot of optimization work happening right. Now we think that that will start to ease up in favor of more build work as we've talked about on the call a lot of that focused on AI.
Speaker Change: And then AI and generative AI as we talked about that as being added into all of the cloud hyperscale or services and theres going to be tremendous demand for that for AI infused software and other services in 2024, that's really kind of the driver behind why we are forecasting 15% growth back to positive.
Speaker Change: AC ACB growth in cloud.
Yeah.
Speaker Change: Okay.
Speaker Change: Kathy I'll come back to you've got a question about you mentioned increased market activity in India, but that's up 90%, so what's driving what's driving that.
Kathy: Yes that was a little bit of a surprise to us.
Kathy: I'd look at that now and it's not a huge market so $300 million.
Kathy: But three consecutive quarters of growth, which we havent seen in India in the past so.
Kathy: We looked in and there's 12 really large deals in India. Most of those I think eight or nine where ikea related the remainder where ADM.
Kathy: And then for new deal activity, So we see India as a economy to watch and to continue to track in terms of growth in the sourcing market. So not just deliveries of the service that now consumers of the service so mainly IPO as I said, a little bit of application maintenance and development, but because of that.
Kathy: Consecutive growth.
Kathy: In India.
Kathy: What are you kind of put a little focus on it and we'll continue to track and report that out.
Speaker Change: Awesome. Thanks, Scotty Okay. I think we've got time for one maybe two more so Dave I'm going to come to you. We've got a question.
Dave: Excuse me on AI, so what areas should service providers focus on their their AI efforts as they build out AI practices.
Speaker Change: Sure I think there's a real opportunity.
Speaker Change: Driven by this shortage of skills.
Speaker Change: Many organizations don't have the skills that they need and obviously, it's going to vary by specific.
Speaker Change: Innovation.
Speaker Change: But the thing that those organizations can't do or build the custom models, the customer <unk> and the custom predictive models and so theres an opportunity for the service providers to help organizations do that.
Speaker Change: And perhaps even build practices around industry specific models that they've developed so they can't even develop some of their own IP and use that IP in their engagements with customers.
Speaker Change: Yes, I think Dave the.
Speaker Change: The industry specific <unk> I think that that as Steve mentioned earlier I think that's really where we see a lot of the systems integration work coming over the coming years.
Speaker Change: I think weather whatever specific industry that then that's where I think we believe a lot of that systems integration opportunity will be for service providers, which of course means as.
Speaker Change: As you talked about having that business context.
Speaker Change: There's going to be absolutely key right, we talked about this and we'll just keep hammering homeless point that.
Speaker Change: Having the AI skills is not enough, it's having the AI skills combined with the business context, that's really what we think is going to differentiate.
Speaker Change: Provider, so providers that have that industry expertise and that ability to have those conversations oftentimes outside of it because that's probably where a lot of this work is going to start.
Speaker Change: It's going to be Super important.
Speaker Change: Yes, I think.
Speaker Change: Oh go ahead, Cathy Yeah sure I was just going to say and it's not just the provider, bringing those business contact skills. It is the business participating with the provider or the internal technology team. The it'll be there's a model an operating model of some size I believe.
Cathy: Well its.
Cathy: Well, you're right I mean, it's like many aspects of technology. If you don't tie it back to the business. What's the point I mean, we're not just doing this.
Cathy: It's interesting we're doing this because it helps organizations operate more efficiently operate more effectively so it's really important to tie it back to the business.
I agree with Dave I think that's the best message that really I think it's hard not to be on the AI high training, a little bit, but we clearly see a rapid adoption, we see what it means for organizations and enterprises, we looked at a study in December and I think the study was 76.
Cathy: Percent of Cio's, who we all know dumped jump on the high trainer fairly cynical think that gen AI exceeds or far exceeds expectations. So I think they're experimenting they're driving value through the drive value to their businesses and I think we will see that you know and I'd much rather.
Cathy: And pace throughout 2024.
Speaker Change: I agree with Dave as a former CIO, it's exceeding my expectations.
Speaker Change: That's good.
Speaker Change: Okay, we're going to go out and close out the call Brian a huge thanks to you and your team for hosting the call today. As a reminder, you can access a copy of the slides that we showed you today as well as the regional leader boards on the ISG website.
Brian: Thank you very much for sharing some of your time with us and we'll see you on the first quarter 2024 call on April 11.
Brian: Thanks.
Brian: [music].