Q1 2024 Information Services Group Inc Global ISG Index
As we've discussed on previous calls and E. S. S. I goes so goes to the market.
It's especially true in 2024 is a recovery or a pickup and deemphasize technology spending is predicated on the easing of the monetary policy.
Central banks chose to stay high for longer it will likely continue to weigh on the sector's performance and in turn overall market performance.
Let's turn to the combined manufacturing market. It struggled in the first quarter with a C V down 6% compared to the first quarter of 2023.
This was a broad based decline with each of the three regions and the negative in the first quarter.
Both managed services and as a service were down and managed services. We saw a lot of pressure on smaller deals those between five to 10 million ACB and these were down 18%.
57% of the combined market ACP comes from at the service segment and this is up 54% from a year ago, but like the other side. That's a result of sluggish managed services results.
On a positive note the institute for supply chain management noticed the ISR manufacturing index rebounded in March the first expansion in 17 months.
The report showed strength in new orders production and employment, notably for the largest manufacturing industries food beverage and tobacco products fabricated metal products chemical products and transportation equipment, all saw growth, which is great news for the industry.
Speaker Change: Then over to you for an update on what we're seeing happening in cloud.
Speaker Change: Thanks, Cathy for those of you that have been following Nicole or the index inside a weekly briefing you know that we've been talking about the downward trend in infrastructure as a service for over a year now.
Speaker Change: While that changed in the first quarter of 2020 for infrastructure as a service generated $10 6 billion of HCV, which was up 11% year on year and that's the best result for this segment of the market since the third quarter of 2022.
Speaker Change: And we've had a number of inquiries lately around which industries are recovering fastest from the cloud downturn in.
Speaker Change: In Q1, telecom energy and travel and transportation side, the highest ACB growth rates.
Speaker Change: And looking specifically at the big three Hyperscale, which make up about 70% of our infrastructure as a service basket.
Speaker Change: <unk> was flat year on year, but it is important remember that for the last four quarters. The big three have averaged at 22% decline in HCV. So flat is yet another signal that infrastructure as a service is starting to recover.
Speaker Change: And finally, when you add in the fact that much of the cloud optimization that we saw happening over the past year with our clients is starting to come to an end and add in the incremental demand that we're seeing from enterprises to AI enabled their applications in the cloud.
Speaker Change: We think infrastructure as a service will have a strong year and youll see that reflected in our forecast from Steve here in a bit.
Speaker Change: Yeah.
Speaker Change: Okay now, let's take a look at software as a service SaaS ACB of nearly 4 billion was down 2% year on year.
Speaker Change: And most of that was due to the performance or lack thereof of the top 10 SaaS firms.
Speaker Change: <unk> was down 11, 5% and that's in contrast to what we saw in 2023, where the top 10 SaaS providers posted positive results for most of the year.
By App category last quarter, we called out human capital management or HCM is one that continues to perform better than the overall segment.
Speaker Change: As you can see here it was up 3% year on year and that continues a steady a fit for HCM that really started back in 2022.
Speaker Change: Collaboration and content management were also up this quarter.
Speaker Change: On the other hand, several categories continued to see ACB declines.
Speaker Change: It service management and ERP were both down against difficult 2023 comparisons and CRM continues to struggle. This is the sixth straight negative quarterly year on year result for this segment.
That said, we see lots of green shoots in SaaS as Alex discussed on the inside or a few weeks ago enterprises plan on doubling the number of AI enabled applications in their portfolio. This year.
Speaker Change: And in our view the fastest way that they're going to get there is there a SaaS applications.
Speaker Change: And they are also willing to pay more per seat to get access to these AI features potentially signaling that SaaS has pricing power even in this inflationary environment.
Speaker Change: Okay. That's it for our cloud update Kathy back over to you for an update on what we're seeing in pricing.
Kathy: Thanks, Dan.
Kathy: We look at pricing in two ways managed services pricing and timing materials project based pricing.
Kathy: First let's talk about managed services and analyzing the data and ICT pro benchmark pricing platform. We typically see a reduction in managed services are eased or resource unit pricing I'm about 2% to 4% on average a year, but when we look at the pricing data for 2023, we're seeing pricing closer to flat rather than decrease.
Kathy: In the areas where unit prices are increasing they're typically labor intensive services, requiring people resources to deliver or rely on third party software, which adds to the overall unit price or rate.
So prices are dropping benefit from increased automation I'll talk a little bit more about what we're seeing in relation to AI in general to that in a moment.
Kathy: Now, let's move to time and material and project work there, we're seeing 2% to 5% increase in base rates across the board.
<unk> in Europe. They are on the lower end of the 2% to 5%.
Kathy: And we're seeing higher percentage increases in India, where annual wage increases are typically higher.
Kathy: For Ensco and skills, such as big data AI and cyber were seeing rate increases as high as 12%, which in the past quarters with its highest 15%.
Kathy: Now, let's take a quick look at the impact of AI in general today I am pricing.
Kathy: Turning to you is the savings gains remain uncertain. Despite the surge in interest in AI. Following the introduction of gender to that.
Kathy: And study, where we collected over 140, new use cases for AI and <unk> from providers. We asked what was the expected savings for clients.
<unk> reported expected savings between 30% to 60%, however, which seem that filter into the market yes.
Kathy: We also feel this could be a heavy lift, especially from mature outsourcing clients that have already realized the benefits of labor arbitrage and the first wave of predictive automation.
Kathy: We'll be keeping an eye on it because we too are interested to see where generative AI can push not just use cases for <unk>, but also to expand the market for AI and genre.
And now it's over to Steve for more on AI.
Steve: Thanks, Kathy great update on the pricing and the impact of AI.
Steve: Further based use of this we have added a new section to the ISG index this quarter to reflect the growing demand in the AI market, we're primarily going to be tracking the activity with service providers and AI specific solutions, but will also provide commentary on the growth of large language models and the hardware and chip player as approach.
Steve: We will also make sure that we continue to have a special focus which Alex Walker, we will provide today on the market lands on AI buying patterns.
We all know we're on the high train in this market, but it's a market that's still evolving.
Steve: To put it in context, it's only been six quarters since the launch of chatter GBT, which democratize AI for the masses.
Steve: Over these past six quarters, we've accelerated accelerated through media mentions of capabilities investments in tools and training and finally within the last two quarters AI driven revenue.
Steve: And ISG, we began tracking the AI activities of the top 30 service providers, but everyone reports in the same manner, but we're starting to see scale with service provider offerings over the last 12 months over 6 billion was spent on AI projects investments remain in the $1 billion. This organizations continue to train.
Steve: Resources and rollout AI infused offerings for.
Steve: For example, Accenture reported bookings of over $1 3 billion in generative AI projects in just the past 12 months.
Steve: IBM Dfc cap Gemini CGI and cognizant, all publicly announced hundreds of projects that are scaling across our enterprise clients.
Steve: Wipro announced training over 250000 engineers and created AI at $3 60 to wrap AI into their offerings.
Steve: Tele performance another top customer experience firms are rapidly integrating <unk> into their solutions to enhance both the agent and the customer experience.
Steve: So AI specific projects represent less than 2% of the total market of the total service provider revenue today, we expect this decline and will report changes accordingly.
Steve: We're also watching the changes in the enterprise spin Alex do you want to give us an update on what youre seeing in the enterprise level.
Alex Walker: Sure. Thanks, Steve.
Alex Walker: In the short term enterprise AI initiatives are focused on cost reduction.
Alex Walker: In the longer term that focus shifts to revenue generation.
Speaker Change: In our studies, we see a substantial mismatch between the near term AI enablement goals.
Alex Walker: Fall into the it department and the long term revenue focus for AI champion by the CEO and the lines of business.
What we don't see yet an alignment between that long term demand for AI to drive revenue.
Alex Walker: And confidence in the ICU service Provider's ability to drive that business growth for their clients.
Alex Walker: It budgets have tended to be flat year on year, So AI investments come at the expense of other parts of the business.
Alex Walker: With cost optimization projects struggling to payback in rates flat rather than down most of the AI that it will be adopting is likely to come from discretionary project work and from their SaaS tools, many of which have already begun to rollout AI features.
Alex Walker: So, whereas the investment in AI to drive revenue coming from.
Alex Walker: And the data we have so far and is likely the lineup business budgets will spend on AI as well.
Alex Walker: While we expect many of these initiatives to ultimately be governed and managed by <unk>.
Alex Walker: We expect the CEO and lines of business to drive the strategy as well as the creation and evaluation of use cases.
Alex Walker: The it service providers need to balance the needs of departmental constituencies.
Alex Walker: CIO versus CEO time, horizons, short and long term and motivational cost savings versus productivity versus expertise.
Being able to align solutions to clients across these axes is critical to being able to identify the messages that resonate both within and across clients.
Alex Walker: Last but certainly not least AI represents a new frontier for the ways that it service providers and clients manage technology risk.
Alex Walker: Short term AI use cases can support the productivity of workers and a human in the loop capacity, meaning that the results of the AI are meant to augment workers.
Alex Walker: But also that workers are meant to provide quality control oversight to the results of the AI gives them.
Alex Walker: Most but not all of the production use cases, we have seen are doing this now specifically to avoid issues.
Alex Walker: With hallucinations like we have seen in several customer facing AI bots recently.
Alex Walker: Clearly for the long term revenue generation or long term cost savings AI will eventually need to be customer facing either to support new products or sales or to perform tasks in their entirety.
Alex Walker: For this to happen the technology will need to mature to incorporate more sophisticated approaches for results validation.
Alex Walker: But also for evaluating and assigning the risks of errors.
Alex Walker: As of now models training data implementation and end users all play a role in determining what response and AI can get.
Alex Walker: With all of the projects and proof of concept work going on in the market, it's easy to lose sight of enrollment scale and risk management have in the business case for AI.
Alex Walker: But for service providers or enterprises to focus focus on either revenue or cost savings the industry will need to agree on a framework for managing both responsibility and liability.
Nebraska: Nebraska over to you for an update on the leaderboards.
Nebraska: Got it.
Nebraska: As a reminder, providers I listed in alphabetical order and positioning is based on annual contract value signed over the past 12 months.
Nebraska: The company's name to the list that Dan I'll, just the domestic and also as a reminder, that we can meet the boards can be accessed on the ISG website.
Nebraska: In the largest move me observe maybe little thought an alleged in the leaderboard as the leaders have exhibited quite a strong call. It top 15 positioning this.
Nebraska: This quarter, we saw NTT data he joins the need aboard.
Nebraska: Let's look at some of the larger ones are once that got signed this quarter first up Tcs and a 15 year Mega deal that you can show that aviva to support their digital transformation and rationalize the system.
Nebraska: So let me so I missed the first sign of large multi year contract with Singapore specific international lines to help revamped that existing customer booking and deploy a scannable modern technology platform for them.
Nebraska: And finally, we highlight cognizance of what the font IP that they even provide cloud managed services across its suite of operating companies.
Nebraska: In the building 15, we saw providers such as UK based computer center and customer engagement provide a concentric rejoined the meter but.
Nebraska: And this group will also call out Genpact with signed a five year deal the Tropicana events during the quarter to re engineer the global business services and ultimately the widely annual convention finance and accounting services.
Nebraska: And the breakthrough 15 group, we saw wildly ends of engineering providers, such as AC Hilton and GTS persistent systems and <unk> make the leaderboard.
Nebraska: During the quarter <unk> announced a major theme logos, we met 100 million euros over 10 years to provide consultancy and yeah, and Andy services to Sydney in the Netherlands to support them with the development of energy infrastructure.
Nebraska: Finally in the booming 15 group, we also observed a handy that presentation of engineering films has been.
Nebraska: And this group, we see firms such as <unk> technologies endeavor.
Nebraska: Technologies, all make that need aboard.
Nebraska: Do you think the Cortez endeavor signed our last five year deal with equity to support the delivery of these product and engineering transformation.
Nebraska: <unk> was also in the news, maybe recently with BMW to form a JV, which will deliver the automotive itself threat, including software defined based on solutions for BMW group's premium Bacon.
Nebraska: They also are going to help the digital transformation for that entire business.
Nebraska: Beckman staff about 100 of it some place on this particular JV, but that number will go up soon too, but thousands lessened place.
Speaker Change: Congratulations to all the companies that made it to the leaderboard and on that note, Steve I will hand, it over to you to close adult with the forecast.
Steve: So as we stepped into 2024 the outlook was brighter than the previous year. Despite this optimism, though the managed services market slightly underperformed against the forecast, making a rare dip with a 144% year over year decline.
Steve: The sector is still delivered over $10 billion of ACB, though in the quarter and has been enjoying sustained growth, making the recent did more of an anomaly than a trend.
Steve: The Americas experienced an 8% decline with the BFS side vertical seeing an 18% drop which accounted for 72% of this decline.
Steve: EMEA grew 3% year over year, despite a deceleration in key markets such as Doc in France.
Steve: Asia outperformed both regions with a solid 1 billion plus quarter up 18%. Despite the downturn in the ANZ region.
Steve: Yes, the service market Battle mixed forces infrastructure as a service was up 11% year over year overcoming difficult compares the big three hyper scaler are moving beyond the AI hype cycle and really starting to see growth.
Steve: The SaaS market retreated slightly with previewed resilient sectors like Icf's am an ERP, joining CRM solutions in a prolonged downturn.
Steve: Looking ahead to 2020 for economic conditions are forecasted to be less volatile than the previous year, but we think challenges persist. The global economy is anticipated to slow down with growth rates easing golf. This monetary policies to combat inflation begin to take effect. This moderated growth is seen as a balancing.
Steve: Staring the economy towards a more sustainable expansion without triggering a sharp downturn.
Steve: Inflation, which has been a pressing concern is still expected to decline the bank of England has signaled confidence that inflation rates will move closer to the 2% target. Following the trend of easing price rises the federal reserve is similarly position with expectations set for normalization of interest rates by mid 2024.
Steve: If inflation continues its downward trajectory.
Steve: Service providers topline revenue remains flat with declining margins margins continued decline faster than forecasted revenue growth, but no major industry wide cost reductions have yet to occur as we've seen in the tech and consulting businesses from a broader marketing perspective, we will monitor service provider <unk>.
Steve: During activities as an early indication of their trust and a broader recovery.
Steve: Outsourcing could continue to see a boost as companies seek to balance the dual imperatives of cost management and service quality.
Steve: Enterprises will continue to see service providers that can offer innovative solutions like the integration of AI and automation to enhance efficiency and offset the wage inflation seen in their domestic markets.
Steve: Generative AI is posed to be a growth catalyst with large hyperscale or is expected to manage the increased workloads. The data layer integral for training AI models presents a prime opportunity for service providers enterprises will remain focus on data optimization.
Steve: Reeker should put leveraging AI technologies, and certain verticals, especially those with significant process components like financial services and media are on the cusp of extensive reengineering promising substantial long term payoffs.
Steve: In the near term a rebound in sectors, such as <unk> in the Americas and manufacturing in Europe is essential to the growth in the industry the market needs. The resurgence of smaller discretionary deals and growth in Standalone App deals key technology spend areas like cloud migration data modernization.
Steve: And cyber security are all expected to grow.
Steve: Given these factors and the headwinds of first quarter, we are lowering our 2024 forecast of 125 basis points to 3% for the year.
Steve: The lower forecast project stronger second half with some continued headwinds and delays in enterprise spending.
Steve: Our forecast for the as a service sector remains at 15% growth for the year.
Speaker Change: This brings us to the end of the formal call. We'll now open it up for questions. Please type your questions and the comments on the right side of the screen.
Speaker Change: <unk> would you like to start the questions.
Speaker Change: Yes.
Speaker Change: [music].
Speaker Change: Yes. Thank you so much Steve that was.
Speaker Change: Very very insightful as always.
Speaker Change: What I would love to kick off with is there are some very interesting data trends and the mix. This time contrary to last year as a services started picking up off a low base, but also is probably benefiting from AI adoption, while on the other side managed sauces and ideal within that seems to be under pressure and I.
Speaker Change: Guess some bit of base effect is also on the play.
Speaker Change: A large decline in Europe U S VLSI and small sized deals within managed services seem to be a bit concerning love to hear some color on each of these aspects and the reasons behind.
Speaker Change: Yes, absolutely Ritchie and thank you. So a couple of things done pack there.
Speaker Change: First of all I think the economic news just keeps changing quite a bit as people look so when we were first preparing until last week and thinking through all the data.
Speaker Change: CPI was at three seven expected to go lower it popped a little bit in the U S. As you know.
Speaker Change: And it's looking more likely that the fed won't be doing anything on the interest rates. So again, we're sort of looking at a mid to back half recovery on some of the demand side.
Speaker Change: It was a mixed message this period, especially on the managed services side, but the good news is we have another quarter that was over $10 billion of ACB. So as I said on the call. That's six consecutive quarters over $10 billion, which is which is really good I mean, it's still shows a lot of trade spend is coming from lots.
Speaker Change: Various outside of just IP, so it's not a zero sum game by by any stretch.
Speaker Change: But we're still concerned about the spend in banking in BFS more than more than anything as we've said before that's 35% of the market generally we did see a downturn in the U S market on banking that was much lower I think the number that Kathy reported was it was almost 70% of the decline.
Speaker Change: In the U S was due to due to banking.
Speaker Change: That's a big that's a big impact on that so that's a big sector, but we're still seeing really strong piece, Kevin you want to talk a little bit about the Americas.
Kevin: And in regard to banking, we are starting to see some increased activity there.
Kevin: Where we had in the past at the end of this of the first quarter.
Kevin: I don't know where that will go with the latest news yesterday on inflation.
Kevin: And I think everyone was really hoping that we would see a rate reduction.
Kevin: But I think there is some pent up demand and we just have to keep an eye on it we weren't really expecting it to move along and yesterday's news just license what we are expecting our wanting to hear in that space, but we have seen some pickup we really had and hopefully those deals will move ahead and again, there's just a lot of them delayed decision making across the board.
Almost every industry.
Kevin: That was that we're watching.
Kevin: I appreciate you mentioned on the last part of your question you mentioned the smaller deals. So that's something we've been tracking for the past several quarters as well so definitely a decline there I think a couple of things there.
Number one definitely a decline in smaller more discretionary type work or we've been talking about that for over a year now the pressure on.
Kevin: Discretionary works many times those smaller deals tend to be more discretionary, but I think it's also just important to keep in mind.
Kevin: Argue in some ways inflation is just having an impact on an award sizes as well. So some of those have just moved up.
Kevin: To a higher tier so.
Kevin: So I think it's a combination of both of those things that's putting pressure on the smaller awards.
Kevin: Understood.
Kevin: The other aspect is that theres been a lot of debate about <unk>.
Kevin: <unk> of global captives did ask.
Kevin: Generation and potential market share gains from in from the Iot Outsourcers can you give some insights on if GCC activity remains strong even now or is it slowing down.
Kevin: What kind of work is going to them and if this is one of the reasons for lower contracting activity for the outsourcing.
Speaker Change: Yeah, Great question Rishi, because we were going to talk about Gcc's again, but we felt like we're beating the drum so hard on over the last three quarters, we decided to bring in some other topics.
Rishi: We're still seeing really strong demand for gcc's and really strong growth across that it's coming up in all of our buyer intense.
Rishi: Strategies are what we call our ISG market lens, it's coming up in all the conversations that we're still having with clients.
Rishi: It's interesting, though because I have shared a couple of quarters ago is still just as many clients that want to create a GCC as there are clients that want to exit.
Rishi: And it's really balanced depending a little bit on the sector. The size of the organization and the types of things that theyre doing but non Robin do you want to add some color on what youre seeing on the hiring side or the GCC impact, especially in India.
Rishi: Yes.
Robin: Those on the fabric.
Robin: And then I'm comfortable hiring on the services side.
Robin: The momentum is still kind of going in and there's a lot of work around the the project based activities, which are going on as far as business is that kind of thing.
Robin: Which is kind of an opening opportunity for surfers Paradise Watson has said that some of the centers of excellence a lot of adjacencies at Natera and enjoy some housing some some amount of optimism activity data.
Robin: Data activities that they're trying to keep it within the GCC, having said that I think the hiring on the services side.
No.
Robin: We don't expect it to ramp up anytime soon.
I think it's been a muted growth on that front for a couple of quarters now and we anticipate that this is all done within the country I guess that a lot of our focus is right now.
Robin: The service providers are working on.
Robin: He's coming deadline sets of employees right now with the higher than the last couple of years, particularly in our kind of preparing them for the Jimmy I view that as kind of expected to.
Robin: Ramp up and having said I think that ultimately.
Working on the leasing on the Netherlands solutions like stealing from pharma, but also trying to implement them in house and improve efficiencies. So that's where the last part of the focuses so given all these new lines as we don't expect the hiring tool.
Speaker Change: Understood and maybe just one last one in North London, you shouldn't get solar without discussing yay.
Speaker Change: Read that you guys are.
Speaker Change: If you read that section assignment.
Speaker Change: Very insightful I just wanted to understand if you look on the right I mean, so there is you've talked about the number of projects that have gone up in how providers are focusing around it.
Speaker Change: Just from an enterprise perspective and from.
Speaker Change: The IQ in this perspective.
Speaker Change: How do you see the enterprises awarding contracting around AI.
Speaker Change: They are going to choose.
Speaker Change: Some of these vendors.
Speaker Change: Do you see some of the vendors coming out with that.
Speaker Change: <unk> differentiated ways of Av.
Speaker Change: Implementing AI and which vendors do you see doing it much better I know you talked about some of them in the slide in almost.
Speaker Change: So $6 billion of revenues is quite encouraging but would love to understand how the overall contracting activity <unk> is.
Speaker Change: Is shaping up.
Speaker Change: Thats good risks and I think as I shared with you I've got the new title within ISG is cheap AI officer. So I spent a lot of my time thinking and talking about AI. These days.
Let me put it in sort of two buckets and I'll have Alex jump in on the second piece as well.
Alex Walker: In general we see almost every service provider integrating AI Jan AI into their solutions today, especially from our cost optimization and efficiency standpoint, and we still expect quite a bit of cost savings associated with that as Kathy mentioned. So we did the study last September October.
Alex Walker: We were expecting to see sort of 30% to 60% savings all broken out by different towers and everything as we see.
What we're seeing right now is some hurdles primarily on the legal and the regulatory side to make sure before we go there we truly understand what the impacts could be whether its hallucinations for copyright or IP rights trademarks whatever the issues are how the model is trained and how those the data that the model is true.
And who owns that data and the insights from that data is still very much being worked through.
Alex Walker: So we're seeing a lot of work sort of at the project I would say, it's beyond the pilot level, but again as I said this is only six quarters into this and the expectations are through the roof, but I think also the capabilities are through the roof. So it's balanced.
Alex Walker: But I think youre going to see that in many services deals on the cost side, and then youre going to see enterprises start contracting for outcome based pieces, especially as they move more to the revenue generating components or the industry specific components, but Alex has done a tremendous amount of research in this and it's just crazy.
Alex Walker: They completed a market lens report on it Alex you want to share some of your insights.
Alex Walker: Sure.
Alex Walker: So I mean, one of the things that is really obvious from the data. We've gathered from enterprises is that by industry. There's a lot of variation and where the focus has been for AI and the use cases that they are applying service providers too.
Alex Walker: Maybe one of the interesting things is across industry as the only commonality.
Alex Walker: Application of AI to the analytics and bi programs generally.
Alex Walker: When we look beyond that.
Alex Walker: Chemicals and energy has very different focuses maybe on more enabling their BPL functions.
Alex Walker: BSI has really focused on the CX and health care and manufacturing, both really focused on Ics M enablement with AI.
Alex Walker: So theyre leveraging service providers to support different things on the it functions.
Alex Walker: But like I said earlier.
Alex Walker: There is a mismatch between what the it department is currently leveraging it service providers to support.
And what kind of a long term enterprise demand is which is to generate revenue and opened new businesses.
Alex Walker: And.
Alex Walker: Service providers have struggled too.
Alex Walker: Really support their enterprise clients in doing that right now.
Alex Walker: And so we still see that as a little bit further off.
Alex Walker: Good.
Alex Walker: And if I can ask you.
Yes.
Speaker Change: Im good. Thank you so much for the opportunity, let's open the floor for Q&A from the audience.
Speaker Change: Absolutely, where we've got quite a few teed up already and just remember if you have questions just put them in the right on the screen and and we will get to them. So the first question I think I'm a throw over to you and the question is can you provide a current state of the demand for the human capital management software.
Speaker Change: What's the changes in that competitive environment, and what do we see in that space.
Speaker Change: Sure. So we did call that out specifically on the SaaS portion because HCM compared to other categories within SaaS or software as a service has actually held up really well during this downturn. It was up 3% year over year that may not sound like much.
Speaker Change: <unk> bye compared to many of the other segments within SaaS, it's actually been positive for most quarters.
I think there was only one quarter during that south step SaaS downturn, where HCM ACB was down so that's very positive for that segment.
Speaker Change: I think if you look at what's happening within HR organizations, that's kind of a reflection of why demand remains steady in HCM continue to see a lot of centralization of HR.
Speaker Change: Due to cost pressure and that could either be in an outsourced environment or in a shared more of a shared services internal model. So a lot of centralization.
Speaker Change: And as companies centralize that that lends itself more towards scale and then buying a single system of record. So I think that's benefiting it there.
Speaker Change: And then also just we've talked about this a lot on the inside or Alex has his talent.
Speaker Change: Access to talent recruiting talent and retaining talent continues to be the number one challenge or at least in the top two to three across pretty much every study, whether it's industry or service line a region that we do so I think there's also a demand there for upgraded technology around human capital management to attract and retain talent. So.
Speaker Change: In our view, that's really the shining star within SaaS.
Speaker Change: The HCM segment.
Speaker Change: Nonetheless.
Speaker Change: Just one other.
Speaker Change: Improving the employee experience has been a really big push and I think that maybe another factor in HCM software, it's really just improve the overall experience for employees.
Speaker Change: Very good the next question.
Speaker Change: Ralph I'm going to give this one to you it's really focused on bto. What do you think drove the changes in bps. This quarter is this sustainable and what do you see as sort of this shifts going forward.
Ralph: Thanks, Dave I think.
Ralph: Yes, it is a nice little positive growth on that for the lithium market.
Ralph: As spoken enough about the cost optimization tool I call them. It continues to be the top priority of course honest with you given the scenario, obviously and prices are leaning heavily on service providers and technology.
Ralph: Implement automation and bring more process efficiencies and most importantly, also leverage automation to reduce the cost itself.
Ralph: Besides I think that will also service lines like in our customer engagement.
Ralph: We sold about 2% growth.
Ralph: Rich has seven use cases that are right for Jimmy I adoption and enterprises.
Ralph: We have noted this is Tom I'll pause.
Ralph: <unk> index has been is that enterprises have an appetite.
Ralph: The spend for <unk> itself and I think that's one of the other factors separately essentially feeling the growth as far as detail segmented.
Ralph: And I think what it all means is also that this doesn't jive immense amount of pressure on service providers, Alex just made a comment on.
Ralph: They're kind of pleasure that satisfy it does have to move up at a certain level of expectations in terms of driving and driving value in novel way and not just become a nice partner, but more than Tom just thinking about what kind of business outcomes. So that's I guess.
Ralph: And in my opinion, that's going to kind of drive growth and because there are some comments on the use cases and automation is there any one of the key drivers and differentiate us from before that might continue to kind of maintain a little bit of momentum.
Very good and then number up a lot more per unit and I think I know Rishi asked a similar question, but I'm just going to ask a click down what do you see more broadly for hiring and especially fresher hiring.
Ralph: This this next period, maybe the next two quarters.
Ben the talk of the media for some time, especially in the Indian markets Whats sort of your perspective there.
Ben: At least I think Steve like I mentioned at least for the next one quarter, we definitely don't see much of the fresher hiring all for that matter in hiring a closing of the levels to kind of pick up potentially if the demand picks up which is what they are anticipating hopefully in the second half of this year.
Ben: Do you see more deals and more.
Speaker Change: Yeah, I kind of thought there is coming in probably potentially see some amount of hiring and that said that he is spending and everything is going to happen, but at least for the next one quarter don't definitely Super high that's picking up.
Speaker Change: Yes, Steve I think just kind of piggybacking on what know Martha said, there I think it's important so obviously, we watch this really closely every quarter.
Speaker Change: We talk about the the supply side of our industry.
We are a people industry that is what drives the it services industry.
Speaker Change: So it is really important to stay on top of that as as.
Speaker Change: As I mentioned, we've talked about in inside we've had four consecutive quarters now of decreases in head count, but that's primarily because of lack of back filling for attrition.
And in my view this part of the overall tech sector has been quite resilient during a broader tech slowdown and we haven't really seen layoffs in the it services industry.
Speaker Change: So we're watching this closely.
Speaker Change: That will be kind of an indicator if we were to see that happen.
Speaker Change: If you start to think about what's happening with margins as we've talked about margins coming.
Speaker Change: Down revenue forecasts coming down, but some in some cases, that's happening faster than the other.
Speaker Change: If you start to see potentially head count reductions that could be an indicator that demand is going to take longer to come back.
Speaker Change: But we haven't seen it yet, but we're going to watch it closely.
Speaker Change: Yes, I think that's a great point Staunton, then I think when we look at that.
Speaker Change: Whether it's layoffs or the pullback, we've certainly seen that across a lot of the tech industry, we've absolutely seen it in the consulting and advisory business.
Speaker Change: Seen a fairly big pullback, there and I think youre right. The managed services are the core service provider business has been fairly resilient to it.
Speaker Change: Which speaks well for the market, even as we recorded a little down again, it's still $10 billion of ACB. This quarter 6 billion. All most of you know.
Speaker Change: <unk> spend over the trailing 12 months. So there are some good things that are that are coming out of that and I think we've got to continue to watch those signs. Thanks, Dan Let me stick with you just for a second.
Speaker Change: We saw a big uptick in travel transportation hospitality. So if we think about airlines hotels Carnival cruise lines.
Speaker Change: Our people back to traveling and we wanted to on Asia does that drive them I think the drivers on what's happening in the market I saw that question come in so some of this is more of a market technicals thing because anytime that when we have this first quarter call.
Speaker Change: We're comparing a quarter to quarter.
Speaker Change: And when because we're measuring annual contract value here those swings can be pretty significant on a quarter over quarter basis. So that's the reason that we had that it's up over 100% ACB is because we had a pretty big swing in the first quarter. So.
Speaker Change: So I would say from a data and a technical perspective, the first quarter of 2023 was pretty weak the first quarter of 2024 with strong that's primarily the reason we had 100% increase in HCV I would say as we kind of look around the demand roundup within the firm view as demand for technology.
Speaker Change: <unk> remains flattish fairly similar to what it was passed in Q4 is fairly similar to what we see in other areas and expectation of increased demand in the second half.
Speaker Change: And that travel firms continue to be cautiously optimistic.
Speaker Change: Okay.
Speaker Change: Kathy anything from you from the Americas on travel transportation is up sort of 30% of it looks like.
This five year average so it does feel like that that sector has recovered and starting to spend more.
Speaker Change: Obviously travel is back.
Speaker Change: And then in full force and so we are seeing some less.
Speaker Change: Less resistance to not spend and to move forward I think there was.
Speaker Change: Such a slowdown obviously from the pandemic, that's now passed and I think we're just seeing some some of the demand that they sat on for a while kind of trickle through and give us some more increase in either renewing contracts extending contracts.
Speaker Change: From a new contract activity as well, but I think it was just because there was so much that was put on hold during the pandemic that were now just seeing that released through into the market.
Speaker Change: Excellent no. That's good so I think we've got time for a couple more questions everybody and again, if you have questions just center a man on the on the screen.
Speaker Change: So Sam I'm going to throw this next one probably for you and Alex. So this one has to do with hyperscale or incentive programs.
Sam: It's more about what effect that we see on any sized project base work I know, we don't necessarily just look at the incentive programs, but when you think about the increase in the Hyperscale business are we seeing an equivalent increase in managed services business and what should we expect to see for the rest of the year there.
Sam: Alex you want to take a stab at that.
Sam: Sure.
So.
Alex Walker: Clearly application modernization and migration to cloud is what service what hyperscale ours are hoping to get.
Alex Walker: Extra capacity for.
Alex Walker: They are partnering with <unk>.
Alex Walker: And what we see is compared to two years ago. When we last had a big cloud migration study and.
Alex Walker: Then looked at the ADM study, we did back.
Alex Walker: At the beginning of the year.
Alex Walker: Theres been a shift away from kind of lift and shift modernization.
Alex Walker: <unk> activities.
Alex Walker: The hyperscale.
Alex Walker: And really enterprises moving towards SaaS first approach.
Alex Walker: We published an article on this about three weeks ago.
Alex Walker: And really saw large increases in the motivation to just rip and replace applications with SaaS, where possible because we've seen a lot of this kind of migration and modernization work slowing down.
Alex Walker: So as far as what Hyperscale are going to do with their service provider partners, they really need to figure out a way to drive better economics about application modernization as things move into the cloud and.
And that means shortening the time to value without committing to kind of long term high cost high utilization of our infrastructure resources from an optimized applications.
Alex Walker: Yes.
Alex Walker: Believe that we're going to see.
Alex Walker: Big play for Gen AI and.
Alex Walker: And we've talked about this earlier in the rip and replace but also in the containerization strategy for moving workloads to the cloud it's not just about building cloud native and started from scratch and all the work I think Jen AI. It's coding of build these its ability to give the story and that uses of the code itself is really going.
Alex Walker: To accelerate that with China, which I got to believe it's going to help drive even more efficiency on the App modernization front.
Speaker Change: And Steve I'll, just add one more quick point on that so as I look at the question. There is also a kind of a part of the question around.
Speaker Change: New incentive type models, rather than paying upfront more for <unk>.
Speaker Change: Outcomes upon successful project delivery.
Speaker Change: My sense is that the number of questions and inquiries coming in.
Speaker Change: Around output or outcome based.
Speaker Change: Contracting models or what we're seeing in the market thats increased pretty significantly over the past six months in my view.
Speaker Change: And.
Speaker Change: Ill provide the same answer here that I do every single time. It just to me that depend so heavily on the maturity of the enterprise their ability.
Speaker Change: To both released control to be able to move away from more of a time and materials approach.
Speaker Change: To more of a fixed price approach or even using a pod to go build a new product right that requires a maturity not just in the organization, but in the technology.
Speaker Change: The enterprise to be able to enable a service provider to deliver in that way.
Speaker Change: I think that's going to apply whether it's for a hyperscale or channel.
Speaker Change: Or in <unk> or to go build a new app. It just depends so heavily.
Speaker Change: On the maturity and willingness of the.
Speaker Change: Buyer, both their organization and their underlying technology platform that enables that outcome.
Speaker Change: Yes, that's good all right so I'm going to take the softball question guys and then Kathy I'm going to give you. The last question. So I'm going to Tee one up for you on what's the broader impact on the customer experience across major verticals, but the softball question that I'm going to take is are we seeing providers, leading regenerative AI in the sales process.
Speaker Change: Yes.
Unequivocally, yes matter of fact, you can't get into a meeting and I've got a countdown now it's usually about four minutes before somebody mentioned a porch nai.
Speaker Change: And then it's a conversation about what does it mean and how do we go forward.
Speaker Change: As I as Ive talked a lot over the past year. We are at the very early stages of AI, It's really the Cambrian explosion. Its the democratization of AI after chat GPT was launched.
Everybody from the CEO to the newest analysts such as been hired into the organization is trying to figure out how to really do it to make themselves more productive make the organization more productive and is being embedded in so many solutions as.
Speaker Change: As we said, we're not seeing it completely on the pricing side, yet, but we fully expect to and we think that will flow through so that was the easy softball, Kathy I'm going to end with you and the question is what are the prospects that you see for customer experience and be a thought BFS Si healthcare travel transportation and do you see a difference.
Kathy: On customer experience, whether it's the customer employee engagement between bto solutions or any other areas that are accelerating.
Very good question, but.
Kathy: When I think about customer experience or even employee experience and I think the supply.
Kathy: Cross industry is actually.
Kathy: It is meeting the customer and the employers whoever the customer may be where they are and I think where customer experience sales is certainly what the user or the customer wants and the people that are going to be successful.
Really bringing customer experience and a successful way is thinking about what their user's need and what they want at the time. So I'll give you an example.
Kathy: We all get emails from.
Kathy: You may do business with are they see you on the web and you get inundated with them and they send you lots of different touch points and think well maybe I don't want to call those touch points, maybe I just wanted to touch point or maybe I want specific touch points. So I think that is.
Kathy: Industries that can crack.
Kathy: Bringing the customer the experienced in days, specifically want in a unique and individual way will win instead of being broad based customer experience just.
Kathy: In GMO, bringing it to their either their users their customers whoever it may be I think it's going to be the individualization of that customer experience and I think AI and chatter today is going to have a big impact on that.
Speaker Change: Well. Thank you everybody for your expertise and insights and Stan over to you to close this out.
Stan: Awesome. Thanks, Steve.
Stan: We see a big thanks to you and your team for hosting the call today. As a reminder, you can access a copy of the slides and the regional leader boards that we didn't show you today out on the ISG website. So we will publish a summary of today's call on the index insider. So that'll be in your Inbox Tomorrow I encourage you to forward it to.
Stan: Your colleagues, if theyre not yet subscribed.
Stan: Thanks, again, and we'll see you on the second quarter call on July 11th.
Stan: Thanks.
Stan: [music].