Information Services Group, Inc. Status update
Review the key takeaways and the transcript of this earnings call.
Transcript
Preview the first fifteen paragraphs, organized by speaker.
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.
FULL TRANSCRIPT
Continue the full translated transcript in StockNow.
Access every statement, the English original, and speaker-by-speaker history with StockNow Pro.
View the full transcript with ProCall participants
6 people spoke on this call — only 1 are shown here.
PARTICIPANT LIST
View participant details in StockNow.
Log in to see executives and analysts, their roles, and complete speaking history.
Log in to view all participantsKeep exploring