Nearly Half of Managed Services Contracts Have Digital Scope, ISG Finds

Nearly half of all managed services contracts have a digital component, up significantly in the last two years to a record high of 48 percent in the third quarter, research from Information Services Group (ISG) shows.

The ISG Index analysis of trends in the global technology and business services market shows the percentage of digital scope in traditional managed services contracts has grown, in relative terms, 42 percent since 2017, and 26 percent since last year. The average annual contract value (ACV) in deals with a large digital component now exceeds $18 million, up 14 percent since last year. Digital scope is defined as some form of cloud computing, analytics or automation.

"The data show that are fast becoming the new normal for the industry," said Steve Hall, president of ISG. "We're clearly in a hybrid cloud world, and we're seeing an acceleration of workloads moving to cloud, along with broad cloud adoption. There's a bigger movement to the cloud than most of us think. What we call managed services is really digital."

Hall said the provider industry is seeing a decline in its traditional IT outsourcing (ITO) infrastructure, or hosted data center, business as more workloads are moved to the cloud. ISG believes, however, that providers will make up for that lost revenue over time with cloud management platform (CMP) services. "All the major providers are talking about digital as the way of life now," Hall said. "They know they have a major opportunity to help enterprises manage their hybrid cloud environments with CMP services."

"Companies are modernizing their infrastructure and creating digital products, despite hints of recession," Shafqat Azim, partner, ISG Digital Strategy & Solutions, says. "Our research shows the top quartile of enterprises most effective at value realization are recognizing well over 10 percent annual revenue growth and well over 10 percent operating expense reduction from digital transformation."

The underlying research behind the ISG Digital Value Assessment service shows enterprises that are seeing a higher-than-average annual increase in revenue from digital transformation "are regularly assessing the impact of automation on their employees, processing and analyzing IoT data streams, and co-creating digital products with customers and partners," Azim noted.

"This presents an enormous opportunity for providers to add value with meaningful metrics and measurement strategies for digital ROI," he said. "Comparative analytics and visibility into the effectiveness, pace of adoption and business impact of digital technologies and transformation programs are critical tools for enterprises as they make business decisions."

ISG also found meaningful metrics are important in the face of another trend identified in the third-quarter ISG Index, namely that being an incumbent provider is no longer the advantage it once was.

"Our research shows incumbents lost some or all of the deal scope in more than 70 percent of the cases in which contracts were put out to bid," said Victor Medeiros, market leader for ISG Canada. "To protect incumbent business, providers should continually measure client satisfaction, take a more active role in contract governance, and build trust and collaboration across third-party relationships."

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