Outsourcing Contracts Grow in Value Despite Strong Headwinds

The value of global outsourcing contracts grew by a staggering 31% in the first quarter of this year, despite serious headwinds including a talent shortage and supply chain disruptions.

The sudden surge in the value of contracts was largely due to the soaring demand for XaaS solutions and managed services, said advisory firm ISG in its report.

“The global XaaS market broke through the US$15 billion mark for the first time ever in a quarter, reaching a record US$15.6 billion, up 43 percent,” the report explained. The ISG Index measures commercial outsourcing contracts with an annual contract value (ACV) of $5 million or more.

“The managed services market, meanwhile, continued its recent string of US$8 billion-plus quarters (four in a row), reaching US$8.6 billion of ACV, up 13% year over year, although flat against the fourth quarter of 2021.”

However, the advisory firm has warned that the IT and business services sector may face some challenges going forward, pointing to the geopolitical tensions, ongoing supply chain disruptions and inflationary pressure.

The talent shortage is also forcing providers to raise service prices, which according to the report are already up by 15% or more.

“Attrition is at an all-time high, and providers are having trouble finding people to handle both new projects and the backlog of existing work,” said Steve Hall, president of ISG.

With demand outstripping supply, both the buy and the sell side are feeling the impact, he added.

While enterprises are spending more money on technology services, IT providers are still wondering how to offset wage inflation and other headwinds. This may ultimately lead to a slowdown, the advisory firm has warned.

In the managed services sector, IT outsourcing is losing traction, largely due to a double-digit decline in infrastructure services across Europe.

However, the BPO segment is the biggest winner, with the industry recording $3 billion in ACV, an increase of 86%.