Information Services Group (NASDAQ:III) said technology demand continued to expand sharply in the second quarter, driven primarily by cloud-based software and infrastructure services tied to artificial intelligence, while traditional managed services remained in low-single-digit growth mode.
On its 95th consecutive ISG Index call, the advisory firm said the combined market for managed services and “as-a-service” offerings reached $42.3 billion in annual contract value, or ACV, in the second quarter, up 43% from a year earlier. Stanton Jones, Distinguished Analyst at ISG, said it was the first time the combined market crossed $40 billion in a quarter and represented the highest growth rate ISG has recorded.
As-a-Service Growth Outpaces Managed Services
Jones said as-a-service continued to account for most of the market’s growth, reaching $31.5 billion in ACV during the quarter. First-half as-a-service ACV rose 53%, accelerating from 28% growth at the same point last year.
Managed services showed a more muted picture. ACV totaled $10.9 billion in the quarter, up 2.7% year-over-year. First-half managed services ACV also rose 2.7%, down from 3.9% growth in the first half of 2025.
“Technology demand is very much still expanding, but most of that growth is happening in infrastructure and software, while managed services remains in its traditional low single-digit growth mode,” Jones said.
Steve Hall, ISG’s Chief AI Officer, said enterprise demand is expanding, but a meaningful share of current growth is tied to model providers such as OpenAI and Anthropic purchasing large amounts of compute capacity. He said that concentration is accelerating hyperscaler growth.
New Scope Activity Hits Record High
Hall highlighted new scope activity within managed services as one of the quarter’s clearest market signals. New scope reached an all-time high of $8.2 billion, up 14% year-over-year, and represented more than 75% of managed services bookings in the quarter.
ISG said the activity suggests enterprises are reshaping sourcing portfolios, consolidating providers, expanding scope and aligning work with AI, modernization and cost-optimization strategies. However, Hall cautioned that some of the activity may reflect work shifting between providers rather than entirely new demand entering the market.
Within IT outsourcing, or ITO, first-half ACV declined 6%, the first first-half decline for the segment since 2022. Standalone application development and maintenance remained under pressure, down 12% in the first half, while bundled deals combining application development and infrastructure rose 15%.
Jones said large language models have found “strong product market fit” in software development, affecting application development and software-heavy engineering work. Engineering ACV declined 3% in the first half, with software engineering down 27%, though network, mechanical and manufacturing engineering rose by double digits.
Business process outsourcing rebounded strongly. BPO ACV reached $4.8 billion in the first half, up 47% from a weak first half in 2025. Back-office BPO nearly doubled, and industry-specific BPO rose almost 35%. Customer experience remained weak, down 16% for the first half to its lowest level since 2020.
Regional and Industry Trends Remain Uneven
Kathy Rudy, Partner and Chief Data and Analytics Officer at ISG, said managed services demand was uneven across regions. The Americas posted managed services ACV of $5.2 billion in the second quarter, down 12% year-over-year, and first-half ACV fell 5.5%, marking the region’s first first-half decline since 2019.
EMEA was stronger, with second-quarter managed services ACV of $4.7 billion, up 21% year-over-year. Rudy said new scope ACV in EMEA rose 32%, pointing to consolidation, share movement and larger transition activity. Asia Pacific improved as managed services ACV surpassed $1 billion for the first time in six quarters.
By industry, banking, financial services and insurance improved, with second-quarter ACV up 17% and first-half ACV up 2%. Energy ACV rose 21% in the quarter and 11% in the first half, reaching the highest first-half ACV ISG has recorded for the sector. Manufacturing declined, with ACV down 11% in the quarter and 8% in the first half.
AI Reshapes Pricing, Delivery and Competition
ISG said AI is changing deal economics and provider competition. Alex Bakker, Distinguished Analyst at ISG, said enterprises are consolidating work with their largest providers to drive cost savings while also expanding use of smaller providers for speed, agility and specialization. He described this as a “dumbbell-shape market” that squeezes mid-spend providers.
Bakker said ISG is seeing two emerging deal types: total cost of ownership deals, built around consolidated scope, longer durations and provider savings commitments; and internal rate of return deals, which are smaller, faster projects focused on accelerating outcomes, often with AI.
Namratha Dharshan, Chief Business Leader for ISG India, said global capability centers, or GCCs, continue to grow rapidly and are increasingly taking on work that overlaps with ITO and BPO services. She said 90% of firms with recent or planned GCCs expect to increase the scope of work handled by those centers in the coming year.
During the Q&A portion of the call, Rudy said AI is contributing to larger year-over-year price reductions in managed services deals. As one example, she said ISG would normally see procurement reductions of about 25%, but is now seeing reductions closer to 40%, while noting other variables may also be involved.
ISG Raises As-a-Service Forecast
Hall said ISG’s AI Index stood at 189, up nearly 90% since the firm’s AI inflection point in December 2022, up 4.6% quarter-over-quarter and up 25% year-over-year. He said infrastructure remains the biggest beneficiary of AI, with the IaaS Index up 182% since that inflection point.
ISG maintained its full-year managed services growth forecast at 2.1%, saying the market remains resilient but increasingly competitive and selective. The firm raised its as-a-service growth forecast by 500 basis points to 30%, citing continued strength in AI infrastructure and enterprise software demand.
“The market really isn’t standing still,” Hall said. “It’s just being reallocated.”
About Information Services Group (NASDAQ:III)
Information Services Group, Inc (ISG) is a leading global technology research and advisory firm specializing in digital transformation, sourcing strategies and technology-driven business operations. Headquartered in Stamford, Connecticut, the company leverages deep market insights and data analytics to help clients optimize cost structures, accelerate growth and navigate complex technology landscapes. Since its founding in 2006, ISG has cultivated expertise across industries including financial services, healthcare, manufacturing and the public sector.
ISG’s core offerings include sourcing advisory, managed governance, market intelligence and research services.
