All right, welcome to the Fourth Quarter 2025 ISG Global Index call.
I'm Bryan Bergin with TD Cowen and
I'd like to thank the team at
ISG for their valued work in the
Industry and for asking us to host this call today. ISG has been hosting these index calls on the IT and business services industry for more than 20 years and influences $200 billion of technology spending each year.
Which gives them deep insights into the.
Industry as well as key changes in enterprise demand.
So we always appreciate their insights and.
Particularly amid everyday uncertainty that we have today.
Right now I'd like to turn the.
Call over to Steve Hall, Chief AI Officer at ISG to get into all the detail here today. Steve.
Awesome. Thank you Bryan and Happy New Year to you and welcome everybody to the 93rd consecutive ISG Index call. With me today we have Kathy Rudy who's the partner and Chief Data Analytics Officer at ISG Namratha Dharshan, who is our Chief Business Leader for ISG India, Mark Smith who's our Chief Software Analyst and Alex Bakker who's our distinguished analyst at ISG. Again, welcome 93rd ISG Index. We're so excited to host it. Welcome so many friends back. But for those of you that may be on the call. This is your first call. Just some quick background. The ISG Index measures the overall health and growth of the technology industry which includes both managed services and cloud based software and Infrastructure Services.
So we do this by tracking and analyzing annual contract value or what I'll refer to as ACV as really the leading indicator revenues are likely to be in the future. So think of ACV as a bit of bookings. So let's go ahead and take a look at the market. So 2025 closed year for the market overall, but more importantly it marked a clear shift in where the market is coming from and how enterprises are buying. The Americas led the market growth in 2025. The region crossed $23 billion in managed services ACV for the first time. That supported strong ITO activity and a rebound in BFSI and continued momentum in infrastructure. While the fourth quarter softened a bit, full year performance confirms that America remains the anchor of global growth.
EMEA showcased renewed momentum with ACV up 20% for engineering. Cloud demand accelerated, and deal sizes expanded, while the full year managed services in EMEA finished roughly flat. The strong Q4 suggests stabilization, improving confidence. Heading into 2026, total contract value increased meaningfully as deal durations extended and clients committed longer-term programs. TCV for the year was up 17%. Mega-deal counts declined, but activity shifted towards large sub-mega deals. So think of that sort of in the $80 million-$100 million range and multi-year multi-tower engagements. Engineering services emerged as one of the cleanest growth signals. ER&D grew 35% year-over-year with larger deal sizes, more global scope, and strong momentum in EMEA. Finally, AI is now a dominant driver, not a future theme. Hyperscaler growth accelerated sharply.
Infrastructure Services delivered another record year and SaaS demand held up well in the platforms tied to infrastructure, analytics, IT Service Management and collaboration. If we take a look at the global broader market in the fourth quarter, the global combined market reached new all-time highs, closing in on a strong year for the industry overall. During the quarter, the combined market generated $34.3 billion in ACV, up 16% year-over-year and marking the fourth consecutive quarter above $30 billion. For the full year, the combined market grew 18% versus 2024, adding nearly $19 billion in incremental ACV, which is the strongest annual growth we've seen since 2021, and as we discussed throughout the year, that growth was really being driven by the as-a-service space. In 2025, the as-a-service space grew 29% globally while managed services grew at the forecasted 1.3%.
SaaS now accounts for 66% of the total combined market. ACV continuing a steady shift towards cloud, software and consumption-based services within the software, service, and infrastructure structure. As-a-Service remained the largest growth driver. Investments in cloud infrastructure continues to be fueled by AI workloads, data platform expansion and enterprise cloud modernization. SaaS also delivered solid performance in 2025 with growth areas across collaboration, IT, service management, analytics and cybersecurity. But we did see a different story with managed services. While managed services remains large and resilient, growth was constrained in 2025 by fewer mega-deals, volatility and smaller discretionary awards and continued pricing pressure. The fourth quarter reflected some of that unevenness with managed services dipping slightly from Q4 2024 year over year, even though the full year finished still in positive territory.
If we take a look at the managed services TCV, the managed services growth was constrained in 2025. There are some positive signals for the segment that sometimes flies under the radar. That's really the long-term impact. The growth that we see in the TCV deal durations is up 12% on average. Every deal size band we track except for the mega awards, we saw durations increase in 2025. Even though ACV is largely flat in 2025 with durations up, it means that the total contract value is up as well. One of the key reasons this is happening is because we see more transformation happening on deals. In order to get the 30%, 40%, or 50% savings that we talk about, enterprises are changing how work gets done when they outsource.
That means transformation and transformation projects take time, and we're seeing that reflected in the deal flow. So let me go over the managed services as a reminder. Our managed services ITO space includes application development and maintenance, infrastructure, managed services, network and cybersecurity. In the fourth quarter, the ITO segment generated $7.8 billion in ACV, down 6% year over year. And this marked the second consecutive quarter of the year over year decline, something we really hadn't seen since 2022. When you look at the full year though, the picture is much more constructive. For the full year, the ITO market generated $32.5 billion in ACV, up 2.4% versus 2024, finishing the year to really a record high. The number of awards was already a record year, with almost 2,100 ITO contracts signed. ITO making over $100 million declined in 2025.
But that shift was more than an offset by the strong growth in the $80 million-$100 million segment, with ACV up roughly 130% year to date in that sector. In total, there were 43 deals over $80 million in 2025, up from 36 in 2024. And many of these transactions landed just below the mega-deal cutoff. So rather than representing sort of a decline in the mega-deals, we just saw a little bit on the lower end of that as we go forward by region. The growth was concentrated entirely in the Americas. The Americas generated $18.3 billion in ITO ACV in 2025, which was up 15% over the year. In contrast, EMEA finished the year down 5% and Asia Pac declined by almost 30%. Looking to industry verticals, several sectors posted strong gains. Energy and healthcare and pharma were both up by more than 30% in 2025.
Financial services finished up modestly, but they did add roughly for most of the overall growth in the ITO market. On the downside, manufacturing, telecom, retail, CPG all declined. And finally, if we look at the functional area, performance was mixed. ADM finished slightly up year over year, but remained below its 2024 peak. Infrastructure outperformed, generating $9.1 billion in ACV, up 2.3%, marking a second consecutive year of growth. We also continue to see strength in bundled ADM and infrastructure work, which is up 13% in 2025. Let's take a look now at our engineering segment. So the engineering services include software engineering, embedded engineering, mechanical engineering, manufacturing engineering and network engineering. In the fourth quarter, the engineering space generated $918 million in ACV, which was up 28% year over year.
This marked the fourth consecutive quarter above $800 million, continuing what has been a very strong year for the sector. Looking at the full year, engineering was the fastest growing segment in the market for 2025. Engineering generated $3.6 billion in ACV, up 35% versus 2024 and growth was driven primarily by large integrated multinational providers including HCLTech, TCS, Infosys, DXC and Wipro. As a group, these providers captured 51% of the total engineering space and 44% of all engineering deals during the year. We're seeing some clear signs also that engineering deals are scaling. The average ACV per engineering deal increased by 21%, rising from $12.3 million in 2024 to $14.9 million in 2025. In addition, deals with ACV greater than $20 million represented almost 17.5% of the overall engineering awards in 2025, which was up over 12.5% from a year ago.
Regionally, EMEA really led the engineering services this year. The ER&D spend in EMEA was up 86% for the year, with every quarter exceeding $300 million. This is a level that hasn't been reached. Prior to 2025, the Americas was pretty stable, finishing up 8% year over year with annual ACV remaining in a relatively tight range by industry. Engineering posted really strong gains across several sectors including transportation, telecom, manufacturing and energy, all of which set record ACV levels in 2025. By scope, software engineering remained the largest category, accounting for over 40% of the ACV and finished the year up 17%. Embedded engineering though, was the fastest growing segment up by 60%, while mechanical, manufacturing and network still grew by at least 25%. So engineering services in 2025 continue to scale both in size and strategic importance with larger, more complex and more global programs.
So let's turn it over now to Namratha and go through BPO.
Thank you Steve. BPO includes back office processes like finance and accounting, HR, procurement, facilities management, supply chain and front office process like customer engagement. It was one of the best quarters for BPO in two years where this segment has generated over $2 billion in ACV and that was up 13% year on year. The ACV growth in BPO segment this quarter was largely driven by Americas and EMEA, where Americas was up 13% year on year while EMEA was up 25% year on year. On the functional side, the industry specific BPO was up 17% along with improvements in finance and accounting and HR. However, the facilities management was the strongest with over 40% growth on a full year basis though BPO was down by 14% annually and generated about $7 billion in ACV. All three regions were down.
Americas was down nearly 13%, posting its lowest annual BPO ACV since 2020, and EMEA performance was better but finishing down by 8.6%, while there was broad-based weakness across industries, particularly in BFSI. Travel and manufacturing down by double digits. Energy and Healthcare finished strong, where Energy posted a growth of 17.5%, while Healthcare was up 7% in 2025. Most of the functional segments were under pressure on annual basis. Facilities management is the only segment to have posted growth, generating more than $1.5 billion in ACV, that was up 21%. Largest functional area, industry-specific BPO was down 11% annually, and customer engagement declined 14%. So while the fourth quarter showed signs of stabilization, on an annual basis, the BPO segment was down.
The BPO market continues to be in a reset mode with growth increasingly uneven and concentrated in specific functions and industries, but we anticipate that the market is going to improve. Particularly the industry specific BPO will be a key growth contributor as the market is shifting heavily towards this segment. Also, as we mentioned during our last index call, ISG's pipeline indicates growth potential this year for this particular segment, with that handing it over to Kathy for regional updates.
Thanks, Namratha. Let's start with the Americas. In the fourth quarter, managed services ACV generated nearly $5.6 billion that was down 6% year over year. This broke a fourth quarter streak of year over year gains and marked the first pullback since the third quarter of 2024. However, looking at the full year, the Americas remain the strongest managed services region globally. For 2025, managed services in the Americas generated $23.5 billion in ACV which was up 9% versus 2024. This was the highest annual managed services ACV ever in the Americas supported by over 1,600 contracts awarded during the year. In the fourth quarter, we saw a slowdown in smaller discretionary work, particularly in the $5 million-$9 million ACV range, falling to its lowest quarterly level since mid-2024.
The full-year managed services was still constructive with all managed services deal categories under $30 million ACV finishing up for 2024 and most posting double-digit growth. BFSI rebounded meaningfully in the Americas in 2025, finishing the year up 18% and contributing roughly $1 billion of incremental ACV, despite a weaker fourth quarter. If we move on to EMEA in the fourth quarter, managed services ACV in EMEA reached $4.6 billion. This was up 19% year over year, making it one of the strongest quarterly results we've seen in the region in the past few years. Performance in the region though was mixed. DACH was up 38%. We attributed this to strong activity across all sectors, including one mega-deal. The Nordics were up 26% and the U.K. posted a modest gain of 2.5%, with ACV once again exceeding $1 billion.
France, however, declined 22% in the quarter. Despite the strong fourth quarter, full year performance remained slightly negative in 2024. Managed services ACV in EMEA totaled $16.7 billion. This was down 1.4% versus 2024. Award volumes declined 10% and mega-deal activity was down 15% for the year. BFSI finished the year down 5% following a sharp decline from 2024. Finally, Asia Pacific. Asia had a very challenging year in managed services. In the fourth quarter Asia generated just $849 million in managed services ACV. This was down 36% year over year. This marked the fourth consecutive quarter of decline with award volumes down 13.5%, driven largely by a 20% decline in the smallest deal category. For the full year, managed services ACV in Asia totaled $3.3 billion. This was down 27% versus 2024. Most markets declined sharply with ANZ down 42%, posting its lowest ACV since 2019.
India was the one bright spot. It finished the year up 4% and one of the few times it outpaced ANZ. This was buoyed mainly by the GCC activity in the region. By industry, BFSI declined 34% in Asia while manufacturing was down 15%, mainly due to 5 megadeals in the fourth quarter of 2024. Telecom was one of the few sectors to post growth, finishing up 10% for the year. In summary, managed services performance in 2025 was highly regionalized with continued strength in the Americas, a volatile but stabilizing EMEA and sustained pressure across Asia Pacific. Next, let's look at closed deal activity by industry and as we've done in prior quarters, we'll focus on a few key industries. To see the full industry results, you can reference this on the appendix on the ISG website.
First we'll look at financial services. Banking and financial services took a step back in the fourth quarter. It was down nearly 20% year on year, which resulted in the sector being flat for the full year. That said, results were not consistent across the globe. BFSI in the Americas was up nearly 18% for the full year while down in EMEA by 11% and also down in Asia Pacific by 34%. Moving on to energy, the results were strong. In 2025, ACV was up 33%, generated by a record number of awards in the sector. Unlike the FSI, energy was strong in EMEA with ACV up 31% for the full year. Finally, let's look at manufacturing, which makes up about 15% of the ACV in the market. ACV was weak in the fourth quarter, down 35%.
However, on the full year, ACV was down 4%, driven by weak activity in Q4 and tough comparisons. Year on year, the Americas were slightly flat while EMEA was down slightly. Next, we'd like to shift gears and move on to our As-a-Service analysis, starting with SaaS and IaaS, and that's going to be with Mark, so over to you.
Thanks Kathy. For the software industry, the SaaS segment includes applications, tools and platforms, but does not include software infrastructure like cloud services. In the fourth quarter, the SaaS segment generated $4.9 billion in ACV, up 6% year over year, while growth decelerated compared to earlier quarters in the year. This marked the sixth consecutive quarter of year over year growth, averaging nearly 15% growth over
Year.
SaaS delivered solid performance. For 2025, the SaaS market generated $19.3 billion in ACV of 16% versus 2024. While AI disruption dominated much of the narrative around enterprise software last year, bookings and demand remained resilient, particularly for platform-oriented offerings. Regionally, all markets contributed to growth in 2025. EMEA and Asia Pacific both posted 19% annual growth while the Americas grew 15%, its strongest annual SaaS growth rate since 2021. The Americas continues to represent the largest share of the SaaS global ACV market at 53%. Among providers, the top 10 SaaS providers outperformed the broader market, posting 19.5% growth in 2025, about 1.2x faster than the overall SaaS index. Larger, diversified software providers with broader end markets were better positioned to navigate shifting AI-related dynamics. Overall, SaaS exited 2025 with steady growth, but public market scrutiny led to significant valuation.
Multiple compression questions on the durability of growth from AI and experimentation with pricing models related to AI driven workloads, consumption based economics and the rise of digital labor. For SaaS trends first, AI-centric software including data and analytics posted a 24% ACV growth in 2025 driven by the continued evolution of platforms infused with generative and agentic AI and it exceeded $1.5 billion in ACV during the quarter. IBM announced $11 billion acquisition of Confluent and Databricks. A late-stage $4 billion investment propelled its valuation to an estimated $130 billion. Second, the application segment grew 11% in 2025 fueled by widespread announcements of AI agents and agentic platforms like those found with Oracle AI agents, while front office applications such as CRM experienced a sluggish 2% ACV 2025 growth. Collaboration software emerged as the fastest growing SaaS segment with 55% ACV in 2025.
The expanding role of AI and agentic workflows like seen in Microsoft, Salesforce and Zoom is accelerating a transition towards conversational and action oriented AI experiences. Back office applications posted a modest 6% ACV growth overall, but underlying performance varied significantly by subsegment. IT Applications grew by 44%, ERP Financials grew 10% while ERP Services declined 6%. HCM rebounded sharply in Q4 posting a 24% ACV growth although it finished for the year down 2% overall. Finally, IT software including ITSM recorded 44% ACV growth in 2025 supported by continued market consolidation. Notable activity included Vista Equity's acquisition of LogicMonitor and ServiceNow's $12 billion investment program in 2025 encompassing acquisitions such as Armis and Veza and also Veeam's $1.7 billion acquisition of Securiti announced in Q4.
As AI continues to reshape SaaS, providers are experimenting with a range of pricing models to align monetization with AI driven value, resulting in increased complexity for enterprises. Next I'll move on to Infrastructure Service which delivered another record year. The IaaS and cloud infrastructure area in the fourth quarter delivered a strong quarterly performance ever. IaaS generated over $18 billion in ACV up 32% year over year. This marked the fifth consecutive quarter of 30% plus year over year growth, although growth did decelerate slightly compared to the third quarter. Looking at the full year, IaaS continued to accelerate. For 2025 the IaaS market generated $64.7 billion in ACV up 33% versus 2024. That compares to 21% growth in 2024 and a 14% decline in 2023. Underscoring how sharply the market has rebounded regionally, the performance in the fourth quarter was mixed.
The Americas and EMEA posted growth of more than 43% year over year, with Americas showing acceleration. Momentum Asia Pacific grew by 8% for 2025 but declined 6% year over year in the quarter, marking its only quarter of pullback in 2025. Overall, the IT demand in 2025 was driven by continued investments in AI workloads, cloud infrastructure expansion and enterprise modernization, with hyperscalers capturing the majority of the incremental ACV. Now let's talk about IT trends. The continued innovation in cloud infrastructure fueled competition across public, private, hybrid and sovereign cloud stacks. At the provider level, the big three AWS, Microsoft and Google represented roughly 75% of the total ACV and posted a 37% year over year growth in the fourth quarter. While that marked a more modest deceleration from Q3, the top three hyperscalers continue to outperform the broader market.
Several of the most substantive cloud computing AI announcements in Q4 were unveiled at the major annual events hosted by AWS, Microsoft and Oracle. Regionally, enterprise demand for digital sovereignty continued to push both EU focused and global hyperscalers to invest into AI and data intensive workloads. Finally, this segment's future potential is increasingly interconnected with AI demand, large scale data center commitments and substantial capital investment. The shift for AI data centers into capital intensive strategic infrastructure came under heightened and substantive scrutiny in Q4. For those interested in Industry As- a-S ervice results and where all segments grew by more than 20% ACV, please review the details in the appendix. Now over to Namratha for the leaderboard.
Thanks Mark. As a reminder, providers are listed in alphabetical order and positioning is based on annual contract value signed over the past 12 months. The companies new to the list are denoted with an asterisk and a reminder that the regional leaderboards can be accessed on the ISG website. In the largest group, we continue to see relative stability with many of the same providers maintaining their leadership positions. This quarter we'd like to call out Cognizant, which rejoined the top 15 following a five-year deal with BayWa, a German agribusiness conglomerate. Under this agreement, Cognizant will take over management of core IT services, including infrastructure, application management and service desk and workplace services. We'll also highlight Infosys, which secured a deal with Metro Bank in the U.K., working alongside Workday to modernize finance operations.
The engagement focuses on transitioning Metro Bank from legacy systems to a unified cloud native finance platform. Moving to the Building 15, LTIMindtree joined the leaderboard which followed its large Archer Daniels Midland win earlier in the year with a $585 million contract with a major media conglomerate. The work centers on modernizing company's IT infrastructure, incorporating automation and supporting a broader vendor consolidation strategy. In the Breakthrough 15, there was a notable turnover this quarter. New entrants include AFRY, an engineering services provider, and TTEC, a customer engagement specialist. We'll also highlight Neusoft, which continues to build momentum following multiple large smart cockpit controller deals with Chinese automakers, reinforcing its strength in automotive engineering and software-defined vehicle platforms. Finally, in the Booming 15, turnover was more limited this quarter, but we did see Sonata Software join the leaderboard.
Sonata focuses on modernization engineering and digital transformation services. We'll also call out Tata Elxsi, which inaugurated a global technology center for medical devices with Bayer focused on co developing advanced radiology devices and diagnostic technologies. Congratulations to all the providers featured on the Managed Services leaderboard. Mark, over to you to walk us through the as a service leaderboard.
Thanks, Namratha. In the Big 15 we continue to see large hyperscalers and diversified software providers maintain their positions, including Oracle, which continues to gain traction across AI and cloud infrastructure and its applications, including Oracle Health. In the Building 15 we saw Snowflake continue a strong momentum in AI and data, and it reported in its last earnings call it had an RPO that grew 37% year over year to almost $8 billion. In the Breakthrough 15 we'll highlight Databricks which announced the Toyota Motor win using the Databricks Data Intelligence Platform. Finally, in the Booming 15, we'll highlight continued activity among emerging infrastructure, data and security providers as demand for cloud, AI and cyber continues to scale. Congratulations to all the software leaders featured across this quarter's leaderboard. Alex, over to you to take us through new findings from the 2026 ISG IT Budget Study.
Thanks, Mark. So we recently completed some research on looking forward at 2026 budgets with a group of large enterprises. I'd like to take you through three key findings from that study. I think we'll give a good view into how 2026 is evolving and how the demand for AI is changing. First, let's take a look at the provider ecosystem and how organizations expect to change that over the coming year. They're continuing on the path they set last year with consolidation in their largest providers, largely to drive cost efficiencies and to gain more leverage into consolidated and simplified operations. Next, with those niche providers, they're really looking to gain agility, access specialized expertise, and drive AI adoption and innovation. And finally, organizations are still generally trying to reduce the number of total providers in their ecosystem.
Again, that simplicity and kind of reduction of management overhead driving those decisions. Where that really puts pressure is on the middle of the market, where providers with smaller spend with each client are more likely to get consolidated, especially if they're delivering undifferentiated or primarily capacity driven work. Next, we'll take a look at how AI is continuing to dominate the spending for 2026. Like in 2025, AI growth continues to be the largest change year on year on a percentage basis at an average of 5.6%, followed by cybersecurity solutions at 4.1% compared to last year's study. These are almost the same numbers for this sample, which we focus on a large enterprise group. That growth represents an incremental $4 million spent on new AI projects. Based on our view into the market.
That spend represents only the tip of the iceberg for how AI will continue to infiltrate organizations as that budget is not going to include the AI adoption driven by their SaaS services, the infrastructure offerings or the services that are brought to bear by the managed service providers themselves to improve service delivery and capability. And finally, of that 5%-6% growth, the way that we broke that down was that 4% of organizations were kind of reducing their AI new spend, 19% held their AI budgets flat, and 77% indicated that they were going to grow their spending. So of that 77%, when we looked at the reasoning behind their growth, what we found is that the majority of the budget growth was going to drive new projects. You can see 60% here, new projects and innovations.
From our previous study in the fall on AI adoption, we showed that there was a huge variety in the use cases to date and that this data really confirms that organizations still believe the market has a lot of growth and a lot of potential. They're still willing to spend and experiment and are not waiting on the sidelines to get AI value. On the other side, 26% of organizations have said their spending was to accelerate their existing programs. Those organizations are really doubling down on the use cases they already have. Again, looking back to our use case study from the fall, we saw that use cases were finally starting to trickle into production. We see this allocation of budget meaning that organizations are going to start getting more ROI from those use cases that go into production.
Steve, I'll turn it back over to you to close us out with the summary and the forecast.
Fantastic, Alex, and thank you for the great update and the great study on the IT budgets, so as you've heard 2025 was really a solid year for the outsourcing market. Growth though was concentrated in cloud, infrastructure, engineering and AI-related demand, while more traditional labor-centric services remained under pressure. On the managed services side, the fourth quarter was a little soft with some year-over-year declines even as the full year finish was modestly positive. And we did see some brighter spots in EMEA. ITO closed the year at record levels supported by infrastructure and bundled work, while BPO showed signs of stabilization in the fourth quarter, but continued to face some structural headwinds for the year. The as-a-service market, you know, as Mark said, continued to tell a very consistent story.
Both infrastructure and software as a service delivered strong results in 2025, really driven by the hyperscaler investments, AI workloads and continued cloud adoption. The as a service market is now firmly the growth engine of the market, reflecting enterprise prioritization on platforms, consumption based models and of course AI capabilities. At the combined market level, 2025 stands as one of the strongest years since 2021. Growth was really driven overwhelmingly by the as- a- service market, which now represents roughly two thirds of the market activity. As we look ahead to 2026, I think we're seeing some new opportunities and a few constraints. From a macro perspective, enterprises are navigating policy, uncertainty around tariffs, continued weakness in Europe, and potentially a leadership transition at the Federal Reserve. These factors are not stopping investments, but they are shaping behavior.
I think you're seeing more deliberate phase commitments over, you know, over large irreversible bets as we go forward. At the same time though, AI is really shaping demand faster than managed services economics are adopting. AI continues to accelerate growth in the cloud infrastructure and platforms while putting pressure on traditional labor based pricing and margin structures and managed services. Finally, we're going to continue to see some material differences in spending across regions. The Americas remains strong with tech spending increasing across multiple channels, while EMEA and Asia Pac continue to face some economic headwinds. Against this backdrop, our outlook for 2026 reflects sort of this divergence. Managed services growth is expected to remain modest. We're forecasting 2.1% growth while as a service is forecasted at 20% supported by continued cloud migration, AI adoption, cybersecurity investments and platform led consumptions.
The outsourcing market in 2026 is positioned for continued growth. The winners will be those who can align AI-driven outcomes, flexible commercial models and disciplined execution, and increasingly selective enterprise demand. So that brings us to the end to the formal call. We'll now open it up for questions. You can type your questions in the comments at the bottom of the screen. And Bryan, would you like to join us and ask the first question?
All right, great. Appreciate all the details. Always a lot to think about here. Let's start with the managed services market. And I just want to compare and contrast. So you're thinking about 2025 versus 2026. So you know, your forecast for 2025
Hit the mark 1.3%.
Looking ahead to 2026, you're forecasting now 2.1%, so some improvement, but not too much improvement here.
Despite some optimism recently.
Some vendors talking about some more pockets
Of discretionary spending, some excited about the AI scaling.
So maybe just talk about the puts and takes, the key factors that influence that 2026 forecast versus something perhaps a little bit hig her.
Yeah. So Bryan, we were, we started off last year with a bit of a higher forecast and we saw a really strong first half. We saw a little bit of pullback in Q3, which we adjusted for. And then we saw that, you know, grow again in Q4, especially in Europe. I think what we're seeing is we're sort of on this cusp right now of $11 billion to sort of $11 billion-$11.3 billion per quarter. And there's consistent spend in that. Even as we see AI deals pool, you know, cost savings and other things, we're seeing so many more deals come to the market. So that deal volume is hitting record highs. We're seeing that come across all sectors.
A couple key things we really think financial services is going to be back much stronger. As we've talked about, it's been pretty, you know, sort of 2024, 2025. And we're seeing really, really strong signs on the BPO side. So while it will probably stay in that area, I think BPO will continue. And of course you saw the growth on engineering and that's going to accelerate. We put all that together just like you guys. We run our magic, you know, circles around it and everything and chug out the numbers. And we're seeing a really solid 2.1% for the year.
Okay, okay. How about the contracting push and pull?
So you mentioned that you have 20%
30%, 40% in some of these larger multi year strategic deals.
Curious what you're seeing on the ground.
As far as it relates to how the vendors are, you know, what, they're.
Willing to commit to it.
These sound like pretty outsized levels. Do they have the ability to deliver on these in hand now? Are they taking a bit of a leap of faith in getting to some of these outsized productivity commitments and maybe on the other side of it, talk about the procurement teams, the comfort with.
New terms and conditions and how they're.
You know, their acceptance of new models is progressing.
Yeah, let me, I'll take the first piece and let me turn the second piece over to Kathy on the pricing component piece. I think in general, we've seen a lot of maturity over the last sort of six to nine months, if you will, in the adoption of AI and the AI platforms. So when I look at clients now and I look at service providers, they are making big productivity gains in the numbers, and we're seeing that fall all the way through. But I would say there's much more confidence in those numbers than there probably was this time last year. Again, the Agentic AI platforms are coming on board. Everybody sort of understands now the impact of AI and we're seeing that move from sort of pilot to really embedded into deals.
To your point on procurement, multiple deals that we're leading across, we're seeing organizations and procurement step up. We've got new language, we've got new pricing mechanisms, what we're calling autonomy level pricing. We've got new ways of thinking through it, but procurement is really getting on board with those and we're seeing that carry through. But, Kathy, you want to comment on the productivity and some of the pricing that we're seeing?
Sure. I think that you're right, Steve, that there is some consistency, but I believe that we'll see a pivot. So in talking to service providers, some of them are looking at unit pricing, some of them are looking at, you know, agent pricing or agentic pricing. I think what's happening is the procurement organizations are pushing something that they know and they know FTE pricing, so they're trying to translate that to agentic pricing. I think we might see this for a while until we start to educate those procurement teams on really how AI is impacting pricing overall. As Steve mentioned, we're looking at, from an autonomous level pricing. So, you know, zero is none and five is the most automated. I think as we. Oh, excuse me. My voice just decided to go. So I think as we mature with the providers. I can't talk.
Hey, Kathy, I'll jump in for you. Yeah, sorry about that. I think as we see the pricing mature, we're going to see those cost curves come down, Bryan, and there is this period where we're going to see different models. I think, as Kathy said, so many people are looking at this as just an FTE reduction when it's really brand new models that are coming in on how it's going to be applied across organizations and enterprises.
Something I'd also like to jump in and add here because I think it's natural to compare this wave of AI adoption and managed services to previous waves like RPA where providers again made forward commitments to productivity and price improvements. And I think there is a big difference here. With RPA the prevalent model was that you would be able to automate on top of existing systems. One of the things we see with the duration change in the deals here is that organizations aren't making that same assumption with AI. They're really looking at durations to drive longer term, more structural transformations than their technology. And I think that makes me much more optimistic that not only is AI a more powerful tool than RPA was, but it's going to be paired with fundamental modernization in the core technologies at enterprises which will improve productivity going forward.
Okay, okay, last one for me. Any big surprises or top surprises here as 2025 came to a close and
Managed service or as-a-service market just as the year ended.
Anything stand out to you as we kind of close the book on the year?
You know Mark, I may tee this up for you because clearly the biggest surprise is we couldn't forecast high enough on the as a service space. As you recall. Q4 Bryan, we increased our forecast to 25% and we thought we had pretty good visibility. You know it ended up at you know, just under 29%. The growth of cloud being 33%. I mean what we're seeing on the growth rates on cloud again with AI driven workloads is just phenomenal. That was surprising. Now we lowered the four forecasts a little bit just because the numbers are getting so high.
But I think what we're seeing on the SaaS side, the readjustments there, but really on the cloud side. It really kind of took us by surprise on the side we're good at. On the managed services we did see some really good pockets of strength. Again I think BPO is going to be a rising star in 2026. We're seeing all the right signs there. I think spending in banking, financial services is coming back and energy and utilities will continue to be a really good space. But Mark, any thoughts on the surprises in the as-a-service market?
Yeah, I think on the infrastructure side, you know, listen, the big three hyperscalers and Oracle, you know, all delivered strong performance and they continue to reinvest and expand out there their cloud platforms to deliver on the autonomous AI strategies that we're all moving towards. So that was pretty big, created big demand, big opportunities for all of them. So that's the big race on the SaaS side. HCM came back in the fourth quarter, started really slow in the year. It was down 2% for the year, but up 25% in the fourth quarter. So I think that you saw, you saw some tepid behavior at the beginning of the year on some of the application side and trying to determine how long should they wait, can we build AI agents, is the pricing model is going to change.
So, you know, a little bit of a swing back from some of the apps. While we expected that the collaboration, you know, and AI and data platforms would perform quite well, you know, the Databricks, the Snowflake all did quite well for the year.
Excellent. And thank you, Bryan. So we have quite a few questions coming in, so let me just tease some of the questions up that are coming in. Alex, I think I'll send the first one to you. What do you see as a reason for increasing deal durations despite the fast-moving AI market?
Thanks, Steve. So I think my previous jump in there answered a little bit of that, which is organizations are extending durations to help kind of smooth the cost of transformation efforts in their deals. But one of the things we've also heard quite a lot from providers recently is alongside the modernization work needed to improve the core technology and to identify ways that AI is going to improve outcomes, drive cost savings, there's a significant organizational change management effort on the side of the clients. And what we've seen is that a lot of employees don't have a lot of AI exposure or maturity yet. Organizations don't really know how to evaluate what changes those employees are going to have to make, both in their comfort with new technologies and also the changes in their roles.
The service providers I think are working with the clients to extend durations to give more time for everything to be successful, be phased in its rollout and kind of ensure that we don't end up with a situation where technology investment vastly exceeds the timeline in which technology adoption can happen.
No, that's, that's very good. Namratha, we've got a couple questions on BPO here. Can you provide some more insights on our optimism and what's driving the BPO growth and what's your perspective on what this means for hiring in the BPO sector?
Thanks, Steve. I think you touched upon the promising growth that BPO will have this year. A couple of things I think. One is, of course, AI has opened up a lot of opportunities, especially in the BPO segments because we have, there are a lot of use cases which are really ripe for disruption. There's domain led transformation. So some of the functional areas like finance and accounting, AI over here I think is beyond experimentation and a lot of it is actually fully implemented. The second piece that we see is the need for hyper personalization on the customer experience side which is actually going to drive a lot of more focus on the industry specific BPO like KYC for banking or you know, revenue cycle management for healthcare. And we see a huge uptick in more industry specific BPO that's driving the growth.
But I think the most important thing is that it's always been a traditional outsourcing, but now most of the clients are also looking for AI transformation, which means that for the service providers it, even amongst their existing clients there are a lot of new opportunities which did not exist a year back has kind of opened up and that's like additional scope which will drive a lot of growth in this segment. And on the hiring side I think we are seeing a slight uptick in the fresher hiring and most of the companies are focused on and of course the talent crunch and specialized areas like AI and cybersecurity continues to grow. So there's a lot of focus on the fresher hiring and reskilling and upskilling to kind of build that AI and you know, some of the other specialized skill talent pipeline.
So we'll see, we'll continue to see that happening in this industry.
Excellent Namratha, I'm going to stick with you just a second as well because we've got a question on GCCs that I think the two of us can address. This is also really relevant to what we see in the BPO and the changes in the GBS space. The question is, are we seeing more clients showing interest in GCCs to be included in their global delivery models? The second part of that question is, is it part of the managed services deals? Let me take the last part of the question. Yes, we are seeing more, but typically those numbers are not included in the Managed Services ACVs that we track. Where they are tracked is if a large technology provider is supporting the creation of that GCC or there's a large deal that's announced in support of that GCC.
So absolutely clearly rising and will increases the overall spend and allocation. Namratha, you want to give some insights and then maybe Alex, you can add that because I know you've got some analysis on the spend on GCCs as well.
Yeah, the demand on GCCs, I think they continue at least the last couple of years is one, a lot of the enterprises are also looking for some amount of consolidation, some also looking for location consolidation. Second is also looking for the transformation consolidation which you know, most of the providers are building their GCCs. Most of the enterprises are building their GCCs to drive transformation from one location, which is also leading to growth in the last six months and in our conversations with the providers, this continues to be a promising sector for a lot of the providers and there's a huge focus because more and more providers are also focused on restructuring their organizations, their sales organizations to delivery organizations. Just completely focused and curated to cater to the GCC market. So there is a lot of demand that continues.
Excellent, excellent. And then Mark. Oh, go ahead Alex. Sorry about that.
Yeah, let me just jump in on that too to kind of follow on what Namratha is saying. I think another interesting thing here, and we started to see this more in about Q2 of last year, but it's obviously continuing, is I think organizations and providers are figuring out that a GCC is not an alternative model to a managed service in all cases, but more a collaborative model with a managed service provider organizations. I think initially, maybe in early 2024, we're thinking them as a kind of owned alternative and would displace managed services spending.
But what we saw from our results last year was that organizations are more willing to collaborate with managed service providers, specifically in places where the managed service provider can help with hiring, running an HR process in a location where many enterprises don't have a previous operating history or specifically with things like end user compute and office space buildup and things like that, where again, starting with a GCC from a bare patch of earth and building an office building first is not an accelerated approach and many of the providers have stepped in to really make that a specialty where they can support their clients.
Excellent. Mark, let me come to you now. There's a question on the overall HCM software demand environment and any expectations or highlights that you can have for 2026.
Yeah, thanks Steve. You know, as I mentioned earlier, a rebound in fourth quarter 25% growth in ACV, but down 2% for the year. I think. You know, you know HCM is one of those segments is, you know, how long do you wait and you know, typically in the fourth quarter what are you going to invest in for the following, you know, the following 12 to 18 months had some impact. I think HCM you look at CRM, there's some questions on how much money you should be spending considering the, the innovation agentic workflows and how all these AI agents can take care of traditional tasks that you might have used a more form based web application for and now can get to your conversational, you know, AI experiences.
So I think it's going to be a tough year as we look in 2026 for many of the application providers who don't reinvent their AI agents, their agentic platforms and frankly react, reinvent their pricing models to adapt to this digital labor path because that's clearly where procurement's looking and saying, you know, how can we, you know, compress the spend on our SaaS providers and how do we get more intelligent and what our priorities are for the year?
Excellent. Thanks Mark. And Kathy, let me come back to you. There are a couple questions about some of the pricing models, especially some of the value based or outcome based models that we're seeing. With transformation becoming such an important part of the managed services agreement. Can you give us some aspect on pricing?
I think that the pricing aspect is one part of it where organizations are looking to make sure that they get the year on year improvements because of the AI adoption through the transformation. I don't know that it's the thing that's really holding up or being the main question. The main question is how should we change our operating models? How does that impact where we go through this transformation? I think the AI pricing is something that they're looking to get guidance on. And as Mark just said, we're kind of stuck thinking in the old paradox of people FTEs and heads where we need to really be thinking about values and outcomes. And I think as we mature into the way that we look at AI and how it can impact an overall transformation, we'll move in that direction. But for now there's a little confusion.
This is where advisory can come in and help you really sort out what is valuable, how to get to those pricing levels year on year and what that really means for your organization.
Excellent. We've got time for just a few and we've got a lot coming in here. But let me go to this one for you, Alex. We're starting to see, let me just make sure I understand this. When we're starting to see some key trends about the functional value provided by Gen AI and agentic AI and I know you did a big study in September on both of these, do you see some hesitancy in investing and can you give us some insights on what we saw from the spending study that we did and sort of what the cost value is as we see the rise of Gen AI and agentic AI?
Sure, Steve. Yeah. So I think there's a couple ways of thinking about this. Most use cases for AI are not going to deliver value until they're in production. So first and foremost, the questions about ROI prior to production are generally, I think, misguided. Organizations have a lot of work to do to build out their use cases. And what they're looking at a lot of is kind of evidence from the pilot stage that there is value to chase. And I think we see evidence that they are doing that to a great extent. Another way of thinking about it though is from our study, the organizations that were building out these use cases tended to be pretty realistic about their expectations for top line and bottom line impacts. I'd say for the most part they were fairly in line with their expectations.
And I think what's happening is organizations are getting a little bit more comfortable evaluating what the opportunities are. And I think the best case in point there is if we looked at the top kind of five major use case categories that we looked at, all of them tended to really focus on sales. And one of the reasons for that we hypothesize, is that sales is one of the more direct impacts you can have on a business that is measurable. And I think when we kind of dig into the data, we see that organizations are spending more on areas of the business that are easier to measure so that they can kind of evaluate how AI is working in use cases where kind of measurement and that closed loop to organizational ROI is the easiest to determine.
We expect some of the more complicated use cases to take a little longer to come to market and to be measured and evaluated.
Yeah, I think that's very fair. Well, let me close the call with a big thank you. I hope everybody had a great start to the year. Bryan, thank you again so much for hosting. Please tune in to our next call, which is on April 16, where we'll have the second quarter results by then, and everybody have a wonderful day. Thank you.