A report published this week by the technology research and advisory firm Information Services Group (ISG) shows global demand for managed services began to recover in the fourth quarter of 2020.
In that quarter, annual contract value for managed services deals in excess of $5 million reached $7.2 billion. A total of 455 contracts, including five deals that alone added up to $1.7 billion, were signed in the quarter, up 6 percent year-over-year.
This is the first time the MSP segment exceeded the $7 billion since the fourth quarter of 2019, the report noted. Within the managed services segment, the report finds IT outsourcing grew 14 percent to reach $5.7 billion for the quarter, while business process outsourcing (BPO) dropped 27 percent to $1.4 billion.
Managed services, at $26.6 billion, was down 4 percent for the entire year thanks mainly to activity in the fourth quarter. For the year, IT outsourcing was up 2 percent, to a record $21.4 billion, while BPO slid 23 percent to $5.2 billion.
Obviously, ISG is tracking deals across the higher end of the MSP market but the numbers suggest a broad recovery is underway. ISG is forecasting demand for managed services will increase 3 percent in 2021.
Cloud computing has been a double-edged sword
In the fourth quarter, demand for cloud-based services increased 24 percent to a record $8.8 billion. Most of that growth came from infrastructure-as-a-service (IaaS) platforms, which grew 32 percent to reach $6.5 billion. Software-as-a-service (SaaS) rose 5 percent to $2.3 billion.
The challenge many MSPs face is that demand for managing on-premises IT infrastructure is declining faster than they can land new cloud contracts to replace that revenue. ISG president Steve Hall noted that issue was exacerbated by the COVID-19 pandemic which made it difficult for MSPs to land new business. In addition to businesses that downsized during the economic downturn brought on by the pandemic, Hall noted it’s difficult to earn the trust of a new customer over a video conference call.
In most cases, MSPs have been weathering the COVID-19 pandemic by focusing on cost cutting initiatives, added Hall.
Looking ahead into 2021
It’s a little too early to forecast with much certainty what 2021 is likely to bring. However, as distribution of COVID-19 vaccines continues to ramp up, the number of MSP salespeople engaging customers directly should increase in the back half of 2021. In the meantime, the fourth quarter seems to indicate that demand for managed services is once again on the upswing.
The real question, of course, is whether or not the overall percentage of IT that is consumed as a managed service will increase into 2022 and beyond. More organizations during these uncertain economic times will at the very least, be revaluating their approach to IT in the months ahead.
That should create a unique moment in time when more organizations than ever are simultaneously trying to determine to what degree they should rely on internal versus external expertise, at a time when IT environments themselves are becoming more complex to manage with each passing day.
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