Hi, welcome to the third quarter 2026 ISG Global Index call. I'm Sumeet Jain, tech analyst with CLSA, and I'd like to thank the team at ISG for their valued work on the industry and for asking us to introduce this call today. ISG has been hosting these Index calls on the IT and business services industry for more than 20 years. ISG influences $200 billion of technology spending each year, giving them deep insights into the industry, as well as key changes in enterprise demand. I will turn the call over to Stanton Jones, distinguished analyst at ISG. Over to you, Stanton.
Thanks, Sumeet, and welcome everyone to our 96th consecutive ISG Index call. With me today is Steve Hall, ISG Chief AI Officer, Kathy Rudy, Partner and Chief Data and Analytics Officer, Namratha Dharshan, Chief Business Leader for ISG India, and Alex Bakker, ISG Distinguished Analyst and Head of Primary Research. For those of you that may be on your first Index call, just some quick background. The ISG Index measures the overall health and growth of the technology industry, which includes both managed technology services and cloud-based software and infrastructure services, and that's what we call our as- a- service market. We do this by tracking and analyzing annual contract value or ACV, and that's a leading indicator of where revenues are likely to be in the future. Just think of ACV as bookings.
We combine that bookings data with our primary research on enterprise buying trends, along with our on-the-ground experience advising G2000 firms on their technology and sourcing strategies to provide you with the insights you're about to see here today. Okay, let's go ahead and start off with a level set on the market. Steve, over to you.
Great. Thanks a lot, Stanton, and, thank you, Sumeet. Let's just start right off with the big headlines. AI infrastructure boom is absolutely accelerating. I think the core message this quarter is the infrastructure cycle is still gaining momentum. IaaS ACV reached roughly $35.5 billion in Q3, which was up 100% year-over-year and more than 30% sequentially. The hyperscalers continue to post strong growth and are still committing extraordinary levels of capital to new capacity. I think that matters to the market, though, because it still doesn't look like it's supply led. It looks really demand led. Providers are continuing to build because enterprise demand for compute storage and AI capacity remains exceptionally strong. The implication is that the infrastructure cycle has lots of room to run, and we're not yet seeing a clear peak on where that goes.
I think also the second big news is AI is reshaping the SaaS market, not killing it. I think the more extreme disruption thesis around SaaS is not playing out in the way the market expected. AI is changing the software economics. It is changing product design, user interaction, pricing, and the role of the application itself. But SaaS demand remains incredibly resilient. What appears to be happening instead is that the software platforms are becoming one of the primary distribution layers for enterprise AI. The companies that own the workflow, the data, the user relationships, are embedding AI directly into those environments. The winners in SaaS will be the platforms that use AI to deepen their control of the workflow enterprise data, not simply bolt on an assistant to an existing product. That brings us to managed services.
Technology spend is surging, but services growth is just not keeping pace. I think we are seeing this widening disconnect between the overall technology spending and traditional managed services growth. Combined market ACV is growing at an extraordinary rate while managed service is expanding only modestly. Enterprises are clearly spending. The issue is where that spend is going, and right now, much of that incremental investment is flowing into infrastructure, platforms, and software, all driven by AI rather than traditional outsourcing and managed service contracts. This is going to create a challenge for the service providers. They are participating in the transformation, but they have yet to capture the same growth economics as the technology providers underneath them. The implication is that the services firms really need to move beyond simply using AI to improve delivery or improve productivity.
They really need to turn AI into differentiated offerings, new commercial models, and measurable client outcomes. The fourth big thing is AI investment is accelerating, but at the enterprise level, I think we are going to see a reckoning on the ROI. AI investments continue to accelerate, but enterprises are becoming more selective and more demanding. The conversation has really moved from experimentation to economics. Boards are asking much harder questions around productivity, cost reduction, governance, adoption, and measurable business value. We are seeing evidence that the sourcing behavior is becoming more concentrated as well, and award volumes in ACV are flat. That really suggests enterprises are making fewer, bigger bets and focusing capital on initiatives they believe can materially change the operating model.
The next phase of AI adoption is less about the number of pilots and more about which investments can scale, deliver measurable returns, and justify continued funding. We showcase the disconnect between value and investments in our latest State of Enterprise AI report, which was just released. Alex Bakker is also going to discuss this later to really show how we are in a process re-engineering phase to help drive that. Let us go ahead and take a broader look at the market. First, we are going to talk about the combined market. As a reminder, the combined market is the as- a- service market, which is cloud and SaaS, and the managed services market. The combined market reached $52.4 billion of ACV in the third quarter, get this, up 63% year-over-year.
That's the highest year-over-year growth rate ever for the combined market, and year to date, the combined market is up 45% versus 2025. As-a-service continues to drive most of that growth. The as-a-service market reached $41 billion this quarter, which was up 95% year- over- year and up 68% over 2025. Managed services was up 2.1% in the quarter, which is what we forecasted in the Q2 call. The forecast is working, but you really see this large explosion on the hyperscaler side. As you can see, the technology services demand is rapidly expanding, but most of that expansion is happening in the as-a-service segment. Within it's primarily from the IaaS, which we'll talk about in more detail. Alex, why don't you walk us through the details?
Thanks, Steve. ITO generated $8.4 billion of ACV in the third quarter, which is essentially flat year- over- year. Year to date, ITO, which includes network, EUC, ADM, data center, and multi-tower deals, was down 3.5%, which marks the first year- to- date decline for this segment since 2019. As you can see here, the Americas was down over 9% year to date, primarily due to weakness in ADM and data center builds. Europe was a different story, where data center was up 11.4%, likely driven by data and AI sovereignty concerns. But like the Americas, saw weakness in ADM. ADM overall was down double digits through the first nine months. There were 15% fewer ADM awards compared to 2025. Globally, infrastructure continues to be resilient, ending up 1.4% year to date. Now let's dive a little deeper into some of the reasons behind the weakness in ADM.
Last month, we released a study on enterprise adoption of AI. One result that we wanted to highlight here, which is AI adoption activities generated the most value for enterprises over the last 12 months. The AI value comes from process re-engineering and data analysis and workflow automation, not the standalone use of individual AI tools by individual people. This poses a problem for the application sector, specifically because application development work has to be downstream of that process redesign. So there may be way less capacity constraint on software development with the improvements from AI, but the difficult work is still a blocking step before the development can continue. Our bookings data on infrastructure spending is up slightly. While AI may be the driver of infrastructure utilization, the demand we see to build data centers has a secondary effect, driving up individual costs for hardware.
RAM, hard drives, and GPU shortages are all driving up infrastructure costs for clients. This is contrasting with their need to contend with AI demand and also to modernize their legacy hardware and make the required changes to address emerging cybersecurity threats, also largely from AI. This creates opportunities for service providers, where automation and contract consolidations are driving savings of around 40% on average over their deal terms. Now let's take a look at our second service line, engineering services. Engineering ACV and contract activity were both flat year- over- year and year to date. But the big difference in this segment of the market right now is on a regional basis. EMEA continues to be very strong. ACV was up 21% year to date, supported by strong growth in the number of engineering awards. The Americas, however, is going in the opposite direction.
ACV was down 17%, and the award counts were down 7% year to date. Given the alignment of results here between EMEA engineering and the infrastructure results we saw, we expect that a lot of the physical engineering work is driven by the build-out of European data centers. In software engineering, there's a slowdown that is likely driven by the same forces weighing on ADM, where process redesign is blocking progress. Let's look at some of our recent study results on engineering to dig deeper into why enterprises are struggling to modernize their engineering processes. As we said, the engineering services volumes are flat. In our recent study here, we see that engineering modernization has many of the same limitations as ADM. Integration complexity and legacy technology are the largest impediments to adopting AI and making progress.
Once again, before AI drives value, this time in engineering, organizations need to rationalize their legacy footprint and design their future state. This work may be aided by AI, but is not replaced by it. Over time, though, the net reduction of tech debt to enable AI will have long-term benefits and in our view, will create more opportunities in the future as projects will not have this legacy tech debt factor that weighs on the price and time to deliver these projects. Now let's turn it over to Namratha to talk to us about BPO.
Thank you, Alex. This is the fourth consecutive quarter of double-digit year-on-year growth for BPO. It was up 12% year-on-year and nearly 35% year to date, and that's the fastest year- to- date growth since 2021. However, the sequential declines in the last two quarters in BPO is largely attributed to the sharp decline in HR after several strong quarters. Also decline in multi-process BPO and F&A contributed to quarter-on-quarter decline in ACV. On the year- to- date results, industry specific BPO continues to be very strong. It's up nearly 27%. Given the growth in GCCs and emerging focus on building or expanding data centers, facilities management also contributed to 77% growth year to date. We continue to see decline in customer experience, and it's down nearly 20%. However, we are seeing strength in multi-process BPO.
That's where more than one BPO offering is bundled with another. For example, ISG sees more back office BPO being bundled, especially in areas like F&A, procurement, and supply chain. That said, the BPO industry is witnessing an interesting shift as the buyers are increasingly moving away from labor arbitrage models, looking for a holistic business process transformation, especially with AI making inroads relatively faster in this space. Also, the scope of these business transformation deals are evolving and are becoming much broader and have started to include elements of IT that are integrated into them. Speaking of transformation and AI in BPO, as per our most recently released BPO study, 56% of the respondents said that their BPO contracts have significant AI-focused automation infused into their contracts.
BPO processes and workflow redesign have been happening since before RPA days, and most of these processes are now mature enough to adopt AI. Like I mentioned, enterprises are no longer looking for labor arbitrage, but instead they are looking for partners who can enable business process transformation by combining people, process, and technology. Technology focuses around analytics, cloud, automation, GenAI, coupled with deep domain expertise and industry vertical expertise. At ISG, we are seeing that shift across most of the BPO deals we advise. Changing nature of these deals is also paving way for a lot of IT providers to enter the space with technological strength, while BPO providers continue to reinvent themselves by investing and expanding their tech capabilities to address these evolving requirements. This is obviously changing the provider competitive landscape in the BPO space. With that, let's turn to our regional update.
Kathy, over to you.
Thanks, Namratha. As Steve mentioned earlier, this quarter, and honestly the entire year, has really been a story about strength in EMEA, combined with weakness in the Americas. The Americas was down nearly 6% in the third quarter, with declines in three of the past four quarters for the region. That said, the third quarter did see a slight bump, which might indicate recovery. CPG and retail and telecom were strong in the Americas in the third quarter, but the two biggest industry verticals, BFSI and manufacturing, were both down double digits. The number of awards in the Americas was down 11%, and that's the fourth consecutive quarter that award counts have trended negative in the Americas. As you can see here, year to date, the Americas is down 5.5%. However, Europe is a different story. ACV in the third quarter was up nearly 12%.
That's three of the last four quarters. But the two biggest industry verticals, BFSI and manufacturing, were both down double digits. The number of awards in the Americas was down 11%, and that's the fourth consecutive quarter that award counts have trended negative in the Americas. As you can see here, year to date, the Americas is down 5.5%. Europe, however, is a different story. ACV in the third quarter was up nearly 12%, and that's three of the last four quarters that have seen double-digit growth in ACV. Manufacturing was very strong in Europe in the third quarter, up 74% year-on-year, which is the best result for this sector since 2020. U.K. and Ireland were strong again in the third quarter with over $1 billion of ACV awarded, and DACH was also very strong, which has helped the sub-region turn positive year to date.
While France was up 10% in the quarter, the smaller markets like Nordics, Southern Europe, and Benelux were down at least 25% year-on-year. As you can also see, year to date, Europe is up 13% compared to 2025, and that's the best year-to-date growth rate since 2021. Finally, in Asia Pacific, ACV was up 16% year-on-year on a second quarter consecutive $1 billion quarter. The smaller markets of Southeast Asia and Korea supported this growth, while larger markets like ANZ and India were flat to down. Year to date, the Asia Pacific region is up 12% versus 2025. Now let's move on to our industry update. This quarter, we're looking at BFSI, manufacturing, and CPG retail. These three segments represent over 50% of the ACV in the market.
If we start with BFSI, as you can see, ACV is down 20% year-on-year, and that's the lowest quarterly ACV since 2020. It's also the third quarter in the last four that has seen a year-on-year decline. As we discussed, the decline here is in the Americas. It accounted for the entire decline pullback for BFSI on a global basis. On a year-to-date basis, BFSI ACV is just down over 5%. Industry insight shows banks remain under pressure from rising funding costs, deposit competition, and uneven loan demand. Many institutions are focused on cost efficiency and operating leverage, while AI- enabled middle and back office transformation to reduce structural costs. However, this is not translating into any increased demand for sourcing, as AI is often creating what we're calling a build in source before outsource mantra.
If we turn now to CPG and retail, ACV in the quarter was up over 100%. Q3 was the best quarter ever for the combined segment. Award activity was very strong here, with the number of awards in the quarter up over 60%. On a year-to-date basis, CPG and retail is up 56%. As Namratha pointed out earlier in her segment on BPO, we are seeing a market shift away from pure BPO. Much of the demand tied to broader, what we're calling enterprise business services, these engagements that frequently include legacy IT and technology modernization, and the AI-driven solutions increasingly are combining business process technology, operations, and legacy systems into an integrated transformation program. Think about examples like customer care and marketing operations, where technology platforms and AI are reshaping where historically we had labor-based services.
Now let's close out with manufacturing, which represents 20% of the ACV in the market. ACV in the quarter was up 13.5%, and it was the first $2 billion quarter since the second quarter of 2025. However, contracting activity did slow slightly on the third quarter, and on a year-to-date basis, overall manufacturing is basically flat. Thinking about just manufacturing clients and what we see, they continue to really face macroeconomic and geopolitical supply chain risk. These enterprise buyers require clear improvements in cost, performance before signing new business. We also see manufacturing clients pursuing solution-specific initiatives and technical debt reduction, all while rebalancing a large set of providers. So in summary, across all of our industries, we are seeing a few key themes. We're seeing shaping up.
But the headline is cost pressure, which is creating demand for transformation, and AI is really changing how buyers pursue it. Instead of broad labor arbitrage outsourcing, clients are consolidating their providers, bringing capabilities in-house, focusing on targeted transformations, and combining their processes, technology, and AI into larger service programs. This all supports why we see a change in the distribution of services, while enterprise executives remain intensely focused on operating cost reduction. We are now going to shift over to our as- a-s ervice segment, and Stanton, I will turn it over to you for an update on software and infrastructure as- a- service.
Thanks, Kathy. As Steve mentioned in the market level set, AI is reshaping the SaaS market, not killing it. We have been writing about the fact that the SaaSpocalypse fears were overstated for a few quarters now, and I think you will see that in the results here today. As you can see, SaaS ACV is up 21% year- over- year. That is a 560 basis point increase from last quarter, and it is the fastest growth this segment has seen since 2021. On a year-to-date basis, SaaS ACV is up 12% compared to 2025. As you can see on the right-hand side of the chart, just about every category we track here in SaaS is up year to date as well. A big reason for that is, as Steve mentioned earlier, software platforms are becoming one of the primary ways that enterprises are adopting AI.
For example, in IT service management, which as you can see is up 7% year to date, AI is really moving this category from triage to resolution. We are seeing platforms with agents that are investigating and remediating problems, not just reporting on them. CRM, which is up 15% year to date, is a good example of how AI is gaining enterprise traction through new AI architectures. With Salesforce, for example, you can now set up an MCP server that can access Salesforce workflows and data and governance, that kind of stuff, but through other applications like Slack, Teams, and Claude, for example. In analytics and BI, which is up almost 36% year to date, we are seeing lots of new entrants here.
For example, Golden Analytics is new, kind of coming into this segment, and they, for example, and other smaller providers like them, are using AI to compete with more established players. Finally, in HCM, which is up almost 10% year to date, agentic AI has really become a core expectation for HR buyers with new agentic capabilities from companies like Workday, Darwinbox, and Paylocity, for example. On the ground with our clients, we are seeing an increase in investment in the frontline workforce. For example, areas like voice-enabled self-service, high volume recruiting functionality, and time tracking. All of that said, while we very much believe that the SaaS disruption from AI has been overstated, one area we are keeping an eye on is the fact that growth is slowing for the top 10 SaaS vendors.
You can see here on the far right-hand side of the chart, year to date, they are up 6%, but this time last year, the top 10 SaaS vendors were up 13%. Let's take a look at infrastructure as- a- service. Again, as Steve mentioned, the AI infrastructure boom is very much accelerating. Infrastructure as- a- service ACV is up 115% year-over-year. That's the best ever quarterly result for IaaS by a margin of almost $9 billion. On a year-to-date basis, IaaS ACV is up over 85%, and the big four hyperscalers, so those are AWS, Microsoft, Google, and Oracle, are up 98%. This explosive growth is not just isolated to the Americas. All the regions we cover here are surging, as you can see. Given these really unprecedented results, we're going to use our ISG AI Index to dive deeper into these results.
Steve, over to you to talk about what we really see driving this growth.
Yeah. Thanks a lot, Stanton. As a reminder to everybody, we started the ISG AI Index two quarters ago. It really has two segments. The first segment kind of looks at the quantitative aspects. The second segment looks at the qualitative aspects of it. If I look at the index this quarter, there's sort of three things that jump out. Infrastructure, one, isn't just growing, it's accelerating again. As we said at the beginning and as Stanton just talked, we're really just seeing tremendous growth through that market. SaaS is really looking a lot healthier than it did a couple of quarters ago, and some of the bigger problems on the software platforms are starting to show real momentum as we go forward. Managed service is recovering a bit in the market, but the underlying economics are still tough. Let's walk through each one of this.
I think the story has changed. On ISG AI Index, we're now showing up 254% since the AI inception point. But what really stands out is that rate of change. The index is up 60% year-over-year and 24% quarter-over-quarter, and our broader ISG ACV data is growing more than 100%, as Stanton just talked through. The hyperscaler growth is really accelerating, and you look underneath the hyperscaler results, I think there's three things driving it. The first is obviously the frontier model companies. The scale of compute being committed by companies like OpenAI and Anthropic is extraordinary, and we're now talking about multi-year, multi-gigawatt commitments, custom silicon chips, and very large capacity reservations. There's certainly some circular financing going on in that market. The cloud providers are investing in model companies.
Model companies are committing significant portions of that capital back to the cloud infrastructure, and those commitments are showing up in the backlog in future demand. I think there is more to the numbers. I think the second driver is really enterprise adoption. When we pull back the numbers, Microsoft is a great example. Nearly 90% of its cloud revenue is coming from customers outside the frontier model companies. This quarter, all of the sequential growth and commercial backlog came from non-frontier companies. Google Cloud grew 82%, and importantly, Google says the majority of its $514 billion backlog is typical GCP contracts from a broad mix of customers. Existing customers are also consuming more than 50% above their contracted commitments, and AWS grew almost 37%, its fifth consecutive quarter of acceleration and its fastest growth in 18 quarters. I think the third driver is ultimately the most important.
I think we all understand that AI is pulling traditional cloud consumption with it, and when companies move AI workloads into production, they do not just consume GPUs, they consume CPUs, storage, databases, network, security, all of the other services around those workloads. AWS talked explicitly about these relationships. As customers increase AI spending, AWS is seeing corresponding increases in core cloud consumption. We are also seeing enterprises accelerate cloud migrations because they increasingly want their applications, their data closer to their AI workloads. AI is effectively creating a second catalyst for the cloud migration cycle. I would be careful about calling this simply an AI infrastructure boom. We are actually seeing AI demand, enterprise cloud migration, and core cloud consumption beginning to compound on one another. That is why the infrastructure growth curve is steepened rather than flattened. Now there is some risk in the system.
The scale of investments and some of the circular financing around the frontier model providers means we should not assume every dollar of backlog represents sustainable end user demand. Equally, the enterprise data tells us this is not simply financial engineering. From my standpoint, the key takeaway is the infrastructure cycle is not peaked. The more interesting question now is how much of the current acceleration is frontier model capability build-out, and how much represents the beginning of a much broader enterprise AI consumption cycle. On the SaaS side, we have seen a nice recovery. The SaaS sector is up 78% from its inflection point. Reminder, that was December 2022. SaaS is also getting more interesting with the SaaS AI Index up around 17% year-over-year and up 7% quarter-over-quarter, and the forward indicators really remain healthy.
More importantly, we are starting to see some of the larger platforms put up very strong quarters. For example, ServiceNow continues to show strong subscription growth. Salesforce is showing better momentum in AI and data. Snowflake continues to post strong product growth. Adobe is seeing growth in AI related ARR. At the more aggressive end, Palantir continues to show what happens when AI moves into real production workloads. A few quarters ago, the question was SaaSpocalypse, whether AI was going to disintermediate large parts of the software. I think today it is which software platforms are going to use AI to strengthen their position. The companies that own the workflow, the data, and the enterprise context still have a major advantage. Think of this as a system of records.
SaaS is moving from resilience into recovery, and in parts of the market, we may already be seeing re-acceleration. Finally, on the managed services side, it is just a bit more complicated. The overall index is down 4.3% since the inception date. The stock performance in our basket improved materially quarter-over-quarter, so investor sentiment has clearly recovered from where it was. Revenue growth, though, remains modest. Profitability is still under pressure. Revenue per employee is improving, which tells us some of that productivity is moving in the right direction, and that is really where the tension is. If the revenue per employee is improving, but the top-line growth and margins are still relatively weak, then part of the productivity benefit is probably being competed away, and we are seeing that in the pricing. Clients expect lower prices.
Providers are taking labor out, and at the same time, providers are spending heavily on AI platforms, tools, and upskilling. So you get a productivity improvement without necessarily getting the same lift in revenue and margin. I think that is probably one of the more important things to watch in services. I think as we see it, AI can absolutely improve productivity. I think the question for the service providers is whether it is keep enough of the value to improve the economics of the business. Now let us take a look at the confidence analysis. So this quarter, we took a different look at AI sentiment. Rather than focusing only on the providers in the market commentary, we look specifically at enterprise sentiment and how the discussion around AI is changing over time. It does not even need to be said, AI is a permanent boardroom topic.
Mentions are still running at more than six times the level we saw before the launch of ChatGPT. That matters because it tells us this is no longer a temporary innovation cycle. AI has become embedded in strategic planning, investment decisions, and operating model discussions. But more interesting story is what happened to confidence. Confidence declined through 2025 and into the first quarter of 2026, even as the volume of AI discussions continued to rise. Enterprises were not losing interest in AI, they were becoming more skeptical about the near-term economics. The conversation really shifted from excitement around what AI could do to a much harder question around what was actually working, how much was it costing, and where the measurable value was showing up. What we see now is that confidence has begun to recover.
The rebound is important because it suggests enterprises are starting to move beyond the first wave of experimentation and into more grounded phase of adoption. In 2025, again, the conversation was dominated by execution and commercialization, with a relatively small share focused on risk and governance. In 2026, the share of discussion around cost, risk, and governance has increased materially, while execution remains the largest category. I would characterize the current market as moving from AI enthusiasm to AI accountability. That does not mean the opportunity is getting smaller. It means the bar for investment is getting higher, and that is exactly what we should expect as we move from experimentation into the core operating model. Now, I do have a gift for everybody today, and so before I hand it off to Namratha, I want us to take us through the leaderboard.
We did publish the annual State of Enterprise AI Adoption report last week. This is our annual report. Great job by the team, really identifying it. I will give you just a minute. Scan on the QR code. You will automatically get a free downloaded copy. This year, the focus was really on value. The value enterprises are, maybe even are not getting as they are realizing that from AI. As I mentioned in the market level set, the ROI reckoning has begun for enterprises, and this report goes into that in detail. Hopefully, you were able to snap that and enjoy the report. Namratha, over to you now for the leaderboard.
Thank you, Steve. 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 saw very few changes to the leaderboard, with the top companies maintaining their strong positions. This quarter, we will highlight Accenture, TCS, HCLTech, and some of their high-profile contract signings. During the quarter, British American Tobacco agreed to transfer 3,500 roles to Accenture with its Fit-to-Win AI transformation program, targeting GBP 600 million in annual cost savings by 2028. The deal impacts operations across multiple countries globally.
In a similar move, we saw HCLTech acquire Guardian India and sign a seven-year strategic agreement with Guardian Life Insurance Company of America, absorbing 2,000 employees into a new dedicated business unit. The transaction creates a HCLTech strategic business unit focused exclusively on Guardian's insurance, retirement, wealth management, and employee benefits operations. Similarly, in another deal, we also saw TCS took over U.S. retailer Best Buy's India GCC, which includes taking over 450 employees working across engineering, data, and AI capabilities to redesign workflows, develop AI-based solutions, and transition into an AI capability center over time. In the Building 15, we saw several new providers join the leaderboard. Principal among those was Bechtle and Indra Sistemas. Bechtle is a German-based IT provider that combines IT strategy consulting and managed services with direct e-commerce sale of hardware and software solutions.
Indra Sistemas is a Spanish technology and consulting firm specializing in aerospace, air traffic management, digital transformation services. We also highlight Genpact, who won a transaction at Mondelēz International to build an enterprise-wide agentic operating model across their source-to-pay processes, spanning procurement through accounts payable. In the Breakthrough 15 group, we observed a slight turnover this quarter. New to the leaderboard is customer engagement provider, Firstsource Solutions, as well as Danish IT services provider Netcompany. Netcompany signed a four-year deal with the Norwegian transport group, Vy, for product development and digital solutions, taking over several tasks previously managed by another supplier. Finally, in the Booming 15, we did not observe as much turnover as we normally are accustomed to. We did see Birlasoft rejoin the leaderboard.
Based in India, Birlasoft is an IT services consulting company that provides cloud computing, AI, data analytics, and digital transformation solutions. Stanton, over to you for an update on our as-a-service leaderboard.
Thanks, Namratha. In the as-a-service segment this quarter, we're going to start with Microsoft. It signed an agreement with 3M to deploy Microsoft's AI capabilities in key areas of 3M's transformation roadmap, including customer service, finance, sales, and marketing. In the Building 15, we're highlighting Workday and their deal with BMO. The bank scaled Workday's self-service agent from a 500-employee pilot to all 55,000 employees. In the Breakthrough 15, business software provider Visma won a deal at U.K. bank NatWest and also renewed their deal with Brazilian banking group Bradesco. In the Booming 15, insurance software firm Guidewire announced that Belgian insurance group Ethias had gone live with their software. The implementation was done by Deloitte, Ethias' IT subsidiary NRB, and Guidewire Professional Services.
Finally, West Bend Insurance Company announced the successful deployment of its claims operations on Guidewire Cloud and deployed ClaimCenter to establish an AI-driven foundation for its regional business. Congratulations to all the providers featured on the ISG Leaderboard this quarter. Steve, I'll turn it back over to you one more time to close us out with the forecast.
Great. Well, thanks a lot for standing in, Namratha. Again, congratulations to everybody who's on the Leaderboard. That is not an easy accomplishment. As we wrap up, let me leave you with a few observations from the quarters. On managed services, we had another record quarter for ACV, but the underlying growth remains fairly modest. The market is still healthy, but it's uneven. We're seeing stronger performance in EMEA and Asia, while the Americas remains softer. At the same time, AI-driven productivity is starting to have a more visible effect on the economics of the services model. Providers are improving revenue per employee, but they're also dealing with price compression, lower labor intensity, and continued investment in AI capabilities. For that reason, the overall market health, we're going to keep our 2026 managed services forecast at 2.1%, essentially unchanged from the year.
SaaS is a really different story. Infrastructure growth continues to accelerate as AI infrastructure demand and traditional cloud demand reinforce each other. We are just seeing extraordinary levels of hyperscaler investment, and demand continues to run well ahead of what we would consider a normal cloud cycle. SaaS is also improving, and the recovery is becoming more evident across several of the larger software platforms with better revenue growth, stronger backlogs, and increasing evidence that AI is helping strengthen rather than disrupt the software model. Because those two markets are now moving at very different speeds, and because hyperscaler volatility has become so significant, we are really going to change how we present the forecast this quarter. Rather than relying on as- a- service number, we are going to break it out into its two components.
For SaaS, we are going to keep our 2026 forecast at 12.5%, unchanged from Q2, still really healthy growth. For IaaS, we are raising the forecast materially to 80%. That takes the overall as- a- service forecast to 60%, which is a significant increase from Q2. I would say the one caution on the IaaS market, it has become really difficult to forecast the hyperscaler market.
We are really confident in the managed services and the SaaS forecast, but the scale of the hyperscaler investments, capacity commitments, and circular financing across that ecosystem is just creating more volatility and more distortion in the traditional demand signals. While we are moving as- a- service forecast up substantially, I would say the forecast risk is still to the upside. We probably cannot forecast high enough right now on what we are seeing with the cloud providers. More broadly, the market remains really strong.
The growth is increasingly concentrated. As we spoke about, infrastructure is still the clear growth engine. SaaS is improving. Managed services remains resilient. I think the key takeaway for Q3 is that technology demand remains extremely healthy. AI is changing the shape of the market and the pace of growth across segments and the economics underneath it are all improving. That brings us to the end of the formal call. We will now open it up for Q&A. Please type your questions in the comments at the bottom of the screen. Sumeet, can I invite you to start us off on the Q&A?
Yeah. Hi, team. Thanks a lot for a very insightful presentation. My first question is around the demand for the managed services space. We have seen throughout the year the macro has been deteriorating with the geopolitical issues, as well as elevated level of food prices and inflation. The 2.1% managed services forecast, which I would suggest has been constant since the beginning of this year. I just want to understand how much of that is because of adverse macro and how much of that is actually because of the AI-led deflation and compression to the overall IT
Yep. Stanton, do you want me to take that one?
Yeah, go ahead. Why don't you kick us off?
Yeah. I think, Sumeet, you've hit a really key point on the ISG Index this quarter. There's clearly some macro things on slowdown in certain sectors of work, coupled with this big investment that organizations are making in AI. When I look broader across the managed services business, you get a bit of both. Financial services, as an example, it's typically 25%-30% of the market, and we've seen pullback there. That pullback isn't just because of AI, it's because of some macro things where those deals haven't flown through, and that clearly impacts it. We did some analysis and we said, "Hey, if BFSI was just at its normal rate, not even where it is right now, the ACV would have been up 7%." So we would have seen really good growth across those others. But that's not how we look at the market.
We look at it much more broadly. When you have, whether it's macroeconomic, geopolitical, different segments going on right now, you definitely get those headwinds in the managed services market. You couple that with the AI piece, tremendous amount of investment from all of the major service providers on, we call it harnesses, but essentially they're platforms to deliver AI services. With those investments, obviously there's going to be margin compression to do that. Labor's a little bit higher, so you got some subcontractor things coming into there. The revenue just isn't growing because IT budgets aren't growing. So they're moving stuff away from, whether it's managed services or other categories of IT, into AI and cybersecurity, quite frankly, and as Alex can probably talk about, hardware as well. So you're seeing this compression from multiple angles.
Yeah, Sumeet, I think we kind of talked about this on the pre-call, is just right now we are in that phase where it is sort of this mix and you have the deflationary pressure that we talked about around managed services pricing. We are talking about a 40% reduction over the term of the deal, which is typically going to be a three-year deal with typically a three, one deal, is what we would call that. At the same time, you have very strong demand for cost optimization. Service providers are really, really good at that, but that optimization is increasingly looking like transformation in order to get that 40%. You are not going to get that through labor arbitrage. They have already gotten that through that one-time benefit. That is one of the reasons we think contracts are getting longer, because there is more transformation happening.
Alex hit it really well when he was talking about a lot of these prerequisites that have to happen before we start to see the real benefit of AI, especially in areas like apps and engineering. It is a huge amount of process integration, operating model work that is going to need to take place in order to get this benefit around AI. So that would be the volumes that we talked about going up. There is an unlimited supply of legacy tech that needs to be modernized, but ultimately, the productivity of the developer is only one part of that. I just think we are in this phase, and I think we are going to be here for a while. It is the pressure around pricing, but then the opportunity of greater volumes of what AI is going to be able to deliver.
Right. No, that is very helpful. So maybe my next question is around more of gazing the crystal ball next year. I know you guys give the outlook for next calendar year, typically in January. But let us say right now we are in almost middle of October with midterm elections in November. If one has to ask you the managed services outlook next year in terms of direction, would it be higher than calendar 2026 or would it be lower? Understanding or weighing the AI deflation as well as the macro factors, where would you set the direction, higher than 2026 or lower than 2026 in 2027?
Steve, you want to take that?
Yeah. Sumeet, I'll say about the same for 2026 that we see right now. Again, we'll do all the analysis as we come out of the fourth quarter and really get a good perspective. All the indications are right now is that IT budgets will continue to move towards AI, hardware, and likely security. We're not seeing enough top-line growth in organizations where they would increase their IT budget significantly. So you're probably going to see some dampening on both software, probably network, and managed services you go through, and that's where I would sort of see it. So if I'm setting expectations on, what are we, October 8th, I would say about the same as 2026.
Got it. Maybe last question from my end is around the BPO space. We saw year to date activity was pretty strong, but into the quarter, into 3Q, it has been slowing down. Obviously, we are hearing the narrative that with infusion of AI, there is a lot of demand for redesigning of workflows. The BPO companies in India are actually seeing a very strong demand tailwinds. So I just want to understand why the BPO ordering activity has been slowing down in the last two to three quarters.
Yeah, Namratha, do you want to take a first stab at that?
Yeah.
Yeah, go ahead, sorry.
I can do that. I think what we observed on a quarterly decline was more of the HR. For the last few quarters, we have actually reported very strong numbers around HR. That has been one of the driving factors as far as BPO growth is concerned, and that has kind of slowed down for the last few quarters. On a quarterly basis, of course, F&A has also kind of been a bit on the fluctuating side, so that is also kind of driving the quarterly declines. Customer engagement, I think that is something that has been on a decline path for several quarters now, which is also driving the growth. But the interesting thing is we did see activities around procurement, supply chain also picking up this quarter.
On a year- to- date basis, I think compared to some of the years where we have been reporting it, since I have been reporting, we have had a decline in BPO for a number of quarters now. I think now we have been kind of seeing on a year to date the growth that is kind of increasing. Primarily, I think also because a lot of the processes, particularly on the back office and front office side, it has been so mature for AI transformation, like you said. So that is also picking up. But fluctuations more on the quarterly side.
Yeah, and I would just follow that up. As Sumeet said, kind of reinforcing some of the points that Namratha talked about, we definitely see it is always going to be kind of lumpy. I think the data explains sort of the quarterly decline, but in terms of the data and what we are seeing on our advised deals, there is something big happening in what we would traditionally call BPO, but it is BPO plus technology. It is the integration of all these back and middle office processes into end-to-end solutions supported by technology. Whether you call that BPO, ITO, BPaaS, business transformation, does not really matter. That is happening, and we are advising a lot of that work today. A lot of times, and I know Sumeet, we have been doing this for a very long time.
Sometimes the categories that we use to talk about things do not match exactly with what is happening on the ground. This is a perfect case of that right now. There is a huge amount of that activity happening right now, and that is one of the things we are working through is, okay, what should the new name of that be potentially, in order to reflect that? It is in the numbers, it is just kind of spread out.
So maybe just a follow-up there, Namratha and the team, whether the verticalized BPO players specific into BFSI or retail or manufacturing, are they doing better given that they know the context of the client very well? Or is it that the horizontal BPO players, like you mentioned around F&A or HCM, are they better poised to do well? So where should the demand will tilt going forward?
I think the numbers speak for itself in terms of the industry specific BPO growth that we've been seeing. It's actually been one of our strongest segment in the BPO that's been driving the growth for BPO. So I would say that I'm actually seeing a lot of the providers also categorizing their offerings around industry verticals because the demand for industry vertical expertise is growing. And to Stanton's point, the transformation is not limited to just the front office or just the back office. It's about driving the end-to-end transformation. And that context and knowledge is becoming very important to be able to drive the outcomes because a lot of the enterprises are now more keen on the outcomes as opposed to just the basic measurement metrics. And those outcomes are more like banking, KYC or revenue cycle management for healthcare.
I think that's the language today that is being more spoken about in BPO. And I see a lot of the horizontal players also getting into the vertical space and building accelerator solutions, advisory, everything around the industry vertical.
That's all from my end. Thanks a lot, team.
Okay
for giving us this opportunity to host the ISG Index call.
Thank you.
As always, Sumeet, thank you very much. Really appreciate it. We have some time left for some questions, so Kathy, I am going to come to you first because we actually have a question about what we talked about on CPG and retail. I guess that is kind of a follow-up to Sumeet's industry specific question. So what is specifically driving that growth in CPG and retail?
Yeah. Looking at that in the analysis, we saw more deals, obviously, as well as a few really larger deals. When I looked into the larger deals, it goes right back to what Sumeet was asking. It is a lot about future readiness and transformation across the enterprise, and it is really driving real change in the terms of the business context. So they are setting themselves up. Some are starting with getting all of their data in ready for what they want to do in terms of driving back office, middle office, front office changes across an organization. But really the key themes I saw was AI transformation, AI readiness, future readiness, and all within, Stanton, as you put it is hard to segment, right? Because it is flowing across an entire organization.
Right
and not just very specific. Those are the types of deals we are seeing across CPG, and they seem to be really embracing that. Let us go forward with a full transformation legacy, business process change. It is just really end to end, and that is what is driving some of those bigger deals as well as the smaller deals too, as they figure out where they want to go next.
Okay. Alex , I am going to come to you next. We have got a question on BFSI. So there seems to be a disconnect between IT providers being positive on BFSI and the slowdown in BFSI ACV. What explains this?
Yeah, so I think there is a few different things that are kind of colliding here for BFSI. First, BFSI is the biggest industry overall in the market by ACV. So many providers have a lot of exposure to the market just by the nature of it being typically about a quarter of the market. The next one is BFSI companies tend to have the largest provider landscapes by a pretty wide margin. In some of our studies, we have shown BFSI companies having about 2x as many service providers in their environments as other industries. So they have a lot of provider exposure, and one of the things they have been leaning on is the same thing that has been happening in the whole industry in the last two years, is consolidation of provider contracts.
Typically what is happening is mid-spend providers for individual banks would be consolidated into larger contracts, and that is kind of creating a lot of opportunity for many of the big players in the market. That is that contract consolidation drives savings. Then one of the things we saw in our recent infrastructure survey was that 71% of the BFSI respondents to our study said that they would reinvest some of their automation savings in additional or higher value managed services. So I think there is a lot of promise in the market right now to the providers that banks are going to take the savings from the big consolidated contracts and roll them forward into new work with their managed service providers.
Yeah, Alex, I agree. I'm just looking at some of the banking data, and it's kind of a mixed signal right now because if you look at the banks, earnings are at record high. All the kind of fundamentals look good, the capital ratios, loss provisions, but the stock price is underperforming. Not necessarily a direct one-to-one correlation between that and outsourcing activity, but I would say if you think about what's happening on the ground as we talk with our BFSI teams, there definitely is a proclivity towards we need to figure out how to do this ourselves using AI and then potentially using our GBS GCC, and then if that doesn't work, then potentially we're going to outsource it. I think that that's probably driving some of that as well. Okay. Let's see. We've got a question on GCC.
Namratha, I'm going to come to you next. A lot of GCC. You mentioned some GCC activity in your ISG Leaderboard update. I'm sorry, a lot of GCCs being taken over. Is this a new trend?
Yeah. I think, yeah, this trend is picking up for sure. As I mentioned in my ISG Leaderboard as well, we are seeing a lot of activities over there. I think where some of the divisions are becoming hard to justify in terms of cost, and especially if their alignment is along the tech, where service providers are obviously very strong. We do see some of those activities happening where service providers are taking over, and that particularly, I think, it's basically the service providers' sweet spot. In some cases, I think most of the GCCs are still retaining a lot of their core activities. It's more of the cases where the headcount has grown, cost justification has become much more difficult. I guess that's where we are seeing a lot of the GCCs taking the help of service providers to being able to manage them.
We do expect some of these activities to pick up in the market, looking at some of the trends and conversations that we're having.
Okay, thanks, Namratha. Okay, last question, and Steve, I am going to come to both you and Alex on this. Steve, maybe what you are seeing on the ground with clients, and Alex, what we are seeing in the data. Major impediment to AI adoption, and then how can service providers break through that? How can service providers help break through those impediments? Alex, I will come to you first.
Sure. What we see in our data is the big barriers to getting your AI projects working and the big barriers to realizing value from AI are all on the data. It is modernizing your data, and this does not mean just upgrading the systems and the databases that host the data, but really connecting it differently, thinking more about data dictionaries, semantic meaning, all of those connections, and then ensuring that it gets integrated across the business. There is a lot of pockets of isolated data, places where the data is not compatible, a lot of tech debt that prevents integrations from working effectively. What I see is a big opportunity for service providers to do a lot of that work. That is that process redesign and remediation work we saw on the apps slide earlier.
But it has a lot of room to grow as clients increasingly realize they have to pay down the tech debt to get AI value.
Steve?
Yeah.
Steve.
I am going to take it just slightly different. I think we need to really make sure that we are focused on value and get out of this use case and pilot mode that we are in right now. We have spent two years talking about pilots, moving pilots to productions and use cases, and I think that whole conversation needs to shift to value streams and complete workflows and how do you reimagine work. That can be reimagining from the front end of the business to the back end of the business. We need more of that thinking and more of that reinvention, if you will, and rethinking through the entire process as you go forward with that. Where we see the growth with service providers in the broader market, that is absolutely the position that is being taken.
When we see clients struggle, they struggle because they are still trying to prioritize individual use cases and look at value across individual use cases and pilots. So to Alex's point, data becomes an issue because you have all of these different challenges all over the place. It feels like you have to get the ontology right, you have to get the semantics right, you have to get your industrial knowledge graph right. All of that is true, but you can also do an awful lot of value by thinking through the value streams and thinking through and bringing a lot of those use cases and pilots together.
Awesome. Thanks, guys. Okay, we are going to go ahead and close out the call. Thank you all very much for taking the time to join us today. Sumeet, as always, thank you very much for hosting. Just a reminder, make sure and download a copy of the AI Enterprise Adoption report that Steve mentioned, and we will see you on the fourth quarter ISG Index call in January. Thanks.