ISG (III) Q3 2025: As-a-Service Surges 29% as AI and Cloud Reshape Tech Spend
AI-driven cloud and SaaS adoption powered a 29% as-a-service market surge, even as managed services lagged outside the Americas. The Americas’ tech services market showed resilience, offsetting EMEA and APAC softness, while new pricing models and regulatory shifts signal a rapidly evolving delivery landscape. ISG’s raised as-a-service forecast and stable managed services outlook highlight a sector leaning into AI and automation, with regional and functional divergences shaping the next phase.
Summary
- Cloud and AI Investment Drives Market Shift: Enterprise spend is consolidating around SaaS and AI-first platforms, redefining tech services priorities.
- Americas Outperform as EMEA and APAC Lag: Regional divergence intensifies, with U.S. and LatAm growth offsetting European and Asian contraction.
- Pricing and Talent Models Enter New Era: Automation, new visa rules, and “autonomy level” pricing are reshaping provider economics and delivery risk.
Performance Analysis
The global technology services market continued its upward trajectory in Q3, led by a 29% year-to-date gain in as-a-service (cloud and SaaS) annual contract value (ACV), which now comprises 65% of the total market. Managed services growth remained muted at 1.5% globally, entirely driven by a 15% jump in the Americas, with EMEA and Asia-Pacific regions weighed down by geopolitical uncertainty and delayed decision-making. Within segments, ITO (Information Technology Outsourcing) showed resilience, up 5% year-to-date, with the Americas up 25% and EMEA down 11%. Engineering services accelerated sharply, up 36% year-to-date, as larger deals and software-centric projects gained traction. In contrast, BPO (Business Process Outsourcing) continued its long-term decline, down 22% year-to-date, pressured by AI-driven automation and client hesitancy on large-scale transformation.
Software as a Service (SaaS) delivered an 18% year-over-year ACV increase in Q3, with EMEA and Asia leading regional gains. Infrastructure as a Service (IaaS) also rebounded, supported by hyperscaler (large cloud provider) demand and the AI compute arms race. However, pricing pressure intensified across IT and BPO, as AI efficiency gains and aggressive competition drove resource unit prices sharply lower, particularly in infrastructure and security services.
- Americas Managed Services Rebound: Best growth since 2023, propelled by financial services and mega-deals.
- BPO Under Structural Pressure: AI and automation are cannibalizing legacy BPO volumes, with only niche segments showing resilience.
- Engineering Services Scale Up: Larger, software-driven contracts signal a strategic pivot for providers and clients.
Segment and regional divergence is widening, with cloud, SaaS, and AI-centric offerings outpacing traditional services and reshaping the industry’s growth profile.
Executive Commentary
"We really continue to see enterprise shifting towards cloud-first platforms. The as-a-service market, which includes infrastructure and software as a service, was up nearly 30%. deals tied to AI. So the hyperscalers really saw amazing growth, as we'll talk through later."
Steve Hall, Partner and President, ISG EMEA
"The SaaS segment has quietly outperformed expectations with AI viewed as a strategic enhancement that augments rather than replaces enterprise software. The complexity of enterprise systems spanning security, compliance, integrations makes full AI disruption unlikely, and generative AI is instead boosting productivity through agentic capabilities."
Mark Smith, Chief Software Analyst, ISG
Strategic Positioning
1. Cloud-First and AI-Driven Transformation
Enterprise priorities have shifted decisively toward cloud and AI, with as-a-service models now dominating tech services spend. Hyperscalers and SaaS leaders are capturing growth as clients replatform core systems, invest in analytics, and adopt agentic AI capabilities. This is not just hype—AI is driving fundamental changes in both buying behavior and delivery models, as evidenced by the outperformance of infrastructure and data software providers.
2. Regional Divergence and Macro Sensitivity
The Americas are carrying the global market, with robust managed services and ITO growth, while EMEA and APAC remain subdued. Political volatility, energy costs, and tariff risks are stalling EMEA decision-making, especially in large economies like the UK, France, and Germany. Asia-Pacific’s slow AI adoption and cost-focused delivery strategies are delaying recovery, despite pockets of strength in India.
3. Evolving Pricing and Delivery Models
AI is accelerating a shift to new pricing frameworks, including “autonomy level” pricing, which aligns contract value with automation maturity and risk. This approach allows for flexible, benchmarked pricing as clients navigate regulatory and operational uncertainty. Meanwhile, the U.S. H-1B visa fee hike and prevailing wage rules are forcing providers to rebalance talent strategies, increasing offshore and nearshore delivery and raising cost barriers for onshore roles.
4. Segment Convergence and M&A Activity
The boundaries between BPO, ITO, and engineering services are blurring, as technology-led solutions become the norm. Providers are investing in data, AI, and industry-specific capabilities through both organic growth and acquisitions, with recent deals (e.g., Capgemini-WNS, Genpact-Exponential Data) signaling a race to build platform and engineering scale.
5. Industry and Functional Realignment
Sector performance is diverging sharply: Financial services and energy are rebounding, while retail and CPG face persistent headwinds. Cost optimization and modernization remain central, especially in sectors under consumer or trade pressure. Engineering services are scaling up, with larger, software-centric contracts, while BPO is pivoting to AI and data-driven solutions to offset volume declines.
Key Considerations
This quarter underscores a market in transition, with AI and automation driving both opportunity and disruption. Providers and clients must navigate pricing innovation, talent model upheaval, and regional volatility as the industry resets around new growth engines.
Key Considerations:
- AI-Infused Offerings Gain Traction: Providers must rapidly build and differentiate AI, data, and automation capabilities to capture growth.
- Regulatory and Policy Shifts Reshape Delivery: New visa fees and wage rules are forcing a rethink of global delivery models and cost structures.
- Pricing Power Under Threat: Hyper-competition and AI efficiency gains are compressing margins, especially in infrastructure and security.
- Segment Convergence Accelerates: BPO, ITO, and engineering are merging, requiring investment in platform engineering and industry-specific solutions.
Risks
Regional and functional volatility remains high, with EMEA and APAC exposed to macro and policy headwinds. AI adoption is disrupting legacy revenue streams, especially in BPO, while pricing pressure and talent model shifts threaten provider margins. Regulatory uncertainty, particularly around U.S. immigration and wage policy, adds further risk to cost structures and delivery continuity. Investors should monitor for execution missteps as providers race to adapt.
Forward Outlook
For Q4, ISG guided to:
- Managed services ACV growth of 1.3% for the full year, with Americas expected to remain the primary growth engine.
- As-a-service (cloud and SaaS) forecast raised to 25% growth, up from 21% previously, reflecting accelerating AI and cloud adoption.
Management highlighted several factors that will shape the outlook:
- Continued strength in financial services and energy, with Americas leading recovery.
- Persistent EMEA and APAC softness due to macro, geopolitical, and regulatory uncertainty.
Takeaways
ISG’s Q3 results reinforce a decisive pivot toward AI, cloud, and automation, with as-a-service models capturing the lion’s share of growth. The Americas are offsetting global softness, but pricing, talent, and regulatory risks loom large.
- AI and Cloud Dominate Tech Spend: Providers and clients that invest in AI, SaaS, and platform engineering will be best positioned for future growth.
- Regional Divergence Intensifies: EMEA and APAC lag, while the Americas drive global recovery and innovation.
- Watch for Margin and Delivery Risk: New pricing models and talent strategies will determine winners as the market resets around automation and regulatory change.
Conclusion
ISG’s Q3 call signals a market in flux, as AI and cloud reshape the technology services landscape. Investors should focus on providers’ ability to scale automation, manage pricing risk, and adapt to shifting regulatory and talent dynamics for sustained outperformance.
Industry Read-Through
The surge in as-a-service and AI investment is a clear signal for the broader IT and business services industry: Legacy BPO and infrastructure models are under structural pressure, while cloud, SaaS, and automation-centric offerings are capturing budget share. Hyperscalers and software leaders are consolidating gains, and the shift to value-based and autonomy-level pricing may spread across other service verticals. Providers in adjacent sectors should accelerate AI adoption and revisit delivery models to stay competitive as regulatory and macro volatility persist.