Information Services Group, Inc. (III) Earnings Call Transcript & Summary

Good day, and welcome to the Fourth Quarter 2019 ISG Global Index Presentation. This call is being recorded. And at this time, I'd like to turn the presentation over to the index host this quarter, Joseph Foresi at Cantor Fitzgerald. Please go ahead, sir.

Hi, and good morning, everyone. We were chatting earlier -- and welcome to the ISG Index Call. This is the 69th, I believe, consecutive call, and we were chatting earlier and joking that they're the potential Cal Ripken of these calls, and I don't want to be the person who ruins them. But quite an outstanding achievement there. And the format of the call is fairly similar to all the other ones. I will turn the call over to Steve now. At the end, there will be a Q&A. I'll kick it off with some questions, and then we'll open it up to the audience. Again, thanks, everyone, for joining us, and quite a remarkable amount of consistency out of ISG. With that said, Steve, why don't I turn it over to you?

Great. Thank you, Joe, and thanks to you and your team at Cantor Fitzgerald for hosting today's call. So my name is Steve Hall. I'm the partner and global lead for the ISG Index. With me today is Clay Calhoun, partner for ISG Sourcing Solutions; Owen Wheatley, ISG's lead partner in banking and financial services; Chip Wagner, CEO of ISG Automation; and Stanton Jones, our Research Director and Principal Analyst, will join us for the Q&A. And as Joe mentioned, this is our 69th quarterly index call, so over 17 years of doing this call. And we really provide a snapshot of the technology and sourcing trends in our marketplace. Today's call marks not only the end of the quarter, the end of the year, but as we all know, the end of a decade, and our reporting will weave in some longer-term trends, how far we've come as an industry and what's changed over the past few years. Overall, the managed services was flat, but as-a-service rose 14% mainly due to a robust Software-as-a-Service business. By region, the Americas combined market ACV slipped 3% on a combination of an 18% drop in ACV and weak activity among smaller transactions in the BPO space. Software-as-a-Service reached new heights, propelling the as-a-service ACV of 14% this quarter, though it did pull back sequentially from a strong third quarter. The EMEA combined market ACV accelerated 25% compared to 2018. Managed services posted a strong gain of 39% due to several large contract awards in the U.K. and DACH, and the as-a-service ACV held steady. In Asia Pacific, the combined market ACV rose marginally. Managed services fell by 40% as a result of weakening across most geographic areas, but the deficit was countered by vigor in the as-a-service segment, which now makes up nearly 80% of the combined market ACV in Asia Pacific. We'll begin -- let's -- looking at the broader market. After bubbling above the $14 billion market last quarter, the combined market ACV settled back to the $13 billion-plus level. The quarterly ACV is more than $3 billion higher than it was 2 years ago, though. Though managed services ACV edged down for the prior 2 quarters, activity is still brisk. For the first time in years, the as-a-service did not set a quarterly high. Infrastructure-as-a-Service ACV dipped below $5 billion for the first time this year, and Software-as-a-Service hit a new high. From a full year perspective, the combined market ACV registered a 10% gain over last year. The managed services growth of a modest 2% still set a record high. Both segments of as-a-service soared, with IT globally having its second best year ever. Infrastructure renewal activity compensated for slight declines in ADM, which fell against the difficult year-on-year compare. Applications remain very active as clients aggressively use DevOps and Agile-led skill to refuel their business transformations. Each of the 3 regions registered growth in network services. Legacy network deals continued to experience volume and pricing pressures, but we saw more deals in integrated SD-WAN and mobile edge computing. The BPO ACV was up 9% over last year, and award flow has been consistent over the past several years. In 2019, more clients started their transformation journeys with F&A and customer interaction services. Facilities management also remains strong with more clients seeking flexible office space solutions and contract for a larger bundle of services. Both the as-a-service segments once again showed double-digit growth. Infrastructure-as-a-Service has nearly doubled in the past 2 years. Clients are incorporating hybrid and multicloud strategies while maintaining some private infrastructure. We witnessed a series of product launches from larger players this quarter, such as AWS's Outpost, that manage customers' on-prem data centers and Azure and Google Cloud Compute introducing tools to move workloads freely between private and public cloud computing environments. The Software-as-a-Service ACV broke through the $7 billion mark, and we see plenty of upside. Many products that initially were U.S.-centric that could be growth levers are ported to different geographies and custom tailored to specific industries. Additionally, upselling complete solution sets inside of existing client spaces will continue to drive growth. The last quarter, we introduced a digital trend slide to explore how much of the current value awarded in the managed services has a digital component. We realize that everyone defines digital slightly differently, but in our presentation internally within ISG, we include those contracts that have some form of cloud computing, such as SaaS or IaaS and analytics and/or artificial intelligence. We measure the broad market by ACV rather than the number of awards. But instead of looking at the absolute value, we review the data on a relative basis; that is, what percent of the annual contract value awarded has a digital component. This helps normalize the data from quarter-to-quarter without the fluctuations by overall deal flow. In 4Q '19, 40% of the ACV coming to the market had a digital component. That was lower than either of the prior 2 quarters but still seen significant rise. The annual view removed some of this quarterly variance. In 2019, 43% of the ACV had a digital component, an increase of over 34% in 2018. Digital deals are fast becoming the new normal for the industry. However, this is an ongoing process with significant industry growth as clients move mission-critical workloads to the cloud. The average ACV of a digital-based deal has increased 15% from prior year. The growing deal size suggests market maturity, and we expect deals to become more multifaceted with data analytics and data management included across on-prem, private and public cloud environments. The lower 2 icons offer a glimpse of the raw numbers of deals awarded with a digital component. The total ACV of deals with a digital component rose 17% compared to 8% for nondigital deals. The digital segment of the market is moving faster than the overall broader market. And with the pace of disruption in global businesses and the pace at which industries are being disrupted, companies are increasing their investment in digital services. Now let's take a look at the global provider standouts based on awards made during the prior 12 months. You can find the regional leaderboards at the end of the slide deck, which can be downloaded from the ISG website. The traditionally stable Big 15 categories saw little turnover this quarter, with European firms BT and Atos returning. Each has been a steady performer on the EMEA leaderboard for many years. They are joined by public cloud infrastructure firms pushing deeper into the corporate enterprise space. In this quarter, Amazon Web Services won deals at BP, Cerner, SAP and Symantec, while Microsoft captured large Azure awards at Novartis and Coles. Google Cloud Platform continues its enterprise push with new clients Fiat Chrysler and John Lewis. The Building 15 group, which typically has 3 or 4 new names each quarter, had very little movement. The U.K.-based IT firm Compucenter (sic) [ Computacenter ] made the list this time. HR provider Alight Solutions and contact center provider Teleperformance also returned. HCM software provider Workday kept its place with key wins at Anheuser-Busch InBev, Magna, Royal Bank of Canada and South -- and Sutter Health. A full 20% of The Breakthrough 15 turned over this quarter, which we've come to expect. Atento, a contact center provider, returned; joined by health care software developer Aetna Health (sic) [ athenahealth ]; and by Mitie, a facilities management firm in the U.K. In the volatile Blooming 15 of high-growth companies, EXL reappeared. CSG Systems won a large renewal at Comcast. And new to the list are Persistent Systems, which develops outsource software products; and HubSpot, a cloud-based marketing and sales software platform. Now let's take an in-depth look at the region, beginning with the Americas from our U.S. expert Clay Calhoun.

Thanks, Steve. We've become accustomed to a quarterly combined market ACV in the Americas coming in somewhere between $6 billion and $7 billion each quarter. Then in the third quarter of 2019, the Americas posted its first $7 billion-plus quarter, but the region ended the year by falling back to within that $6 billion to $7 billion range. As-a-Service accounted for more than 55% of the combined market ACV, slightly more than the last quarter. Managed services slipped this period in ACV as did the number of deals. Both small and large deals declined. Only midsized deals did well but not well enough to support the market growth. As-a-service ACV dropped from last quarter but logged double-digit growth year-on-year. Software-as-a-Service edged up and reached a new high. Infrastructure-as-a-Service dropped 14% compared to the robust third quarter. Looking at 2019 as a whole, combined market ACV climbed 8% over last year, attributing its all-time high to the continued strength of as-a-service, which makes up 53% of the total ACV compared to only 41% of the combined market a year ago. Managed services finished down 5% compared to 2018 due to 2 light quarters that created some uneven deal flow. The number of contracts is still quite good, though down somewhat from a very difficult prior year comparison. By function in 2019, ITO showed a slight decline in ACV, while BPO fell precipitously. By a deal count, ITO had more activity than we've seen since we began our index call 17 years ago. Customers need to seamlessly upgrade their legacy enterprise architectures and environments to a mix of private and public cloud. At the same time, they need to scale applications to provide analytics and business insights. Cybersecurity remains top of mind. Network services had a good year as companies rely on network solutions to enable AI, big data, multicloud environments and IoT devices. The growth in these types of projects is going to drive a multiyear transformation of the network market, with areas such as SD-WAN, contact center-as-a-service and unified communications all doubling, tripling or even quadrupling in market size over the next 3 years. BPO tumbled compared to 2018. Facilities management stood out as the bright spot among weak performances by almost all of the functional areas. The business model of flex space is creating opportunities in this market as enterprises seek providers to improve efficiency by creating workspaces that energize and motivate employees. Both segments of the as-a-service market continue to do well. The more than $10 billion in ACV for Infrastructure-as-a-Service was 27% higher than in 2018 and nearly double the market size of 2017. Software-as-a-Service had another record-setting year with its 15% increase in ACV over 2018. Many SaaS firms are making a concerted effort to build out their partner-friendly ecosystems to offer clients more choice and to make integrations easy and accessible. Partnership channels create substantial co-selling opportunities and provide SaaS firms with another avenue of growth for large-scale projects, not to mention lending credibility in access and deployment capability. Moving on to Asia Pac. Combined market ACV edged up slightly this quarter against a difficult year-on-year compare. This quarter, the region sat in the midst of some very challenging geopolitical uncertainties, leading up to the U.S. trade agreement with China and the unrest in Hong Kong. Managed services, after posting several $700 million-plus quarters in the past 2 years, has slipped in the past 2 quarters. Most major markets dropped with the exception of China, which enjoyed a brief surge in the fourth quarter. The region's largest market, ANZ, suffered its third consecutive year-on-year quarterly decline. In the as-a-service space, a midyear slowdown in China affected large public cloud infrastructure players there. U.S.-China trade negotiations prompted the industry to delay technology purchases. However, in the fourth quarter, as-a-service ACV surged to a new high. Looking at the year in its entirety, the combined market combined -- continued its double-digit growth, and its ACV has more than doubled since 2016. As-a-service ACV hit a new high and accounts for 69% of the total market. The 10% annual growth in managed services can be credited in part to healthy large renewal activity in India and stellar results in the manufacturing and telco sectors. By function, ITO's 12% year-on-year increase in ACV came on the strength in applications and in network services. BPO has much -- a much smaller market in Asia Pac, was flat compared to last year. Facilities management and contract center (sic) [ contact center ] awards posted some gains. Both segments of the as-a-service market barreled along, growing by 20% over 2018. So Steve, now back to you for what's going on in EMEA.

Great. Thanks a lot, Clay. The combined market ACV in EMEA showed surprising strength, given the unpredictability in Europe and the U.K. Both enterprises still continue to build hybrid and public cloud environments and multicloud environments while aligning with their digital investments, IP solutions and managed services. After a substandard prior quarter, the managed services in the fourth quarter surged ahead with one of its strongest performance in the past few years, yet a quarter-by-quarter review showed some region's lumpiness. Slow first and third quarters were interspersed by strong second and fourth quarters. $1 billion quarter in BPO drove growth this period as did 5 mega relationship awards. The U.K. and DACH each posted $1 billion quarter, their first in more than a year, and most of the other markets also post gains. The stressed macro environment is offering some unique opportunities for cost takeout in managed services transactions. The as-a-service ACV had its slowest quarter of the year. Software-as-a-Service rose by a considerable margin, while Infrastructure-as-a-Service wallowed in one of its lowest quarterly results. In the full year picture, the combined market ACV rose 10%, fueled by new highs in as-a-service and the best performance in managed services since 2015, and the as-a-service continues to hold a little more than 1/3 of the combined market ACV. ITO dipped in EMEA compared to 2018, but ADM continued to show vigorous activity. The BPO market rose markedly against a very soft compare and on the strength of several large renewals in the facilities management and contact center segments. The contact center industry is fast transitioning to a full end-to-end [Audio Gap] privacy and compliance issues with different requirements mandated by the EU and country regulations. We expect to see fluctuations from quarter-to-quarter in Infrastructure-as-a-Service as it's hard to predict the pace of sales cycles associated with enterprise migrations. But the stakes have never been higher. AWS got out to a relative head start versus its main competition in the public cloud, but now the challengers are gaining ground. Microsoft Azure, while second in share in Europe, is quickly gaining ground with its sizable enterprise presence in the corporate market. And the 2 firms should be in a dead heat for market share through much of 2020 and 2021. So let's take a look at the global industries. As a refresher, our global industries, the top line under each industry lists the ACV awarded for the full year. Directly below that line are the growth rates across a variety of factors, first for the combined market, then the managed services and as-a-service and then 3 regions is broken out at the bottom. Many of the enterprise we work with are in different stages of their digital transformation, and each industry has a different speed of adoption. New-economy companies encroaching on turf traditionally held by long-time leaders adds another layer of complexity. As providers examine their client portfolios at the start of this new decade, the optimal mix will shift towards a combination of traditional blue chips and burgeoning new-economy players. We'll highlight a few of the largest industries. In manufacturing, trade wars and a softer automotive sector have impacted supply chains. With the as-a-service growing at a 20% clip, clients are leveraging new tech in digitization and smart manufacturing, IoT and mobile and digital platforms. The ACV in Asia Pacific rose significantly from a year ago, and the Americas dipped 5%, and Europe was flat. Telco and media rebounded substantially off of softer compares. 2018 was one of the weakest years in recent memory. New-media and digital-native entrants ate away at traditional telco firms, which responded by turning to digital technologies to take out cost. Telcos are making CapEx investments in SD-WAN, network modernization, wireless and pay TV convergence and cloud-based 5G networks. Each of the regions showed double-digit growth in ACV over the last year. In today's special topic, Owen Wheatley will give us an update on banking and financial services. Owen, over to you.

Thank you, Steve. I frequently talk with clients and stakeholders from the banking and financial services industry across multiple functions, from technology and operations to marketing, finance and the lines of business. Although each institution is on its own journey, they all describe the bewildering amount of transformation going on in the sector. Today, I'll talk about this transformation in the context of challenges and trends I see in the industry from retail banks and capital markets firms. The #1 priority for most, if not all, banks is to elevate customer experience to improve loyalty and wallet share. On the next slide, I'll talk in more detail about why that's so important. But in attempting to achieve this goal, established banks are facing strong headwinds from 4 significant macro factors. One such headwind is flatlining revenues. The post-2008 crash decade has witnessed a relatively stagnant period of revenue growth, particularly in retail banking. Key measures such as ROI and revenue per customer have struggled to achieve parity with prerecession levels. Nearly every financial institution has conducted multiple cost-cutting cycles, and the low-hanging fruit has been taken. The focus now turns to attracting new customers and increasing wallet share with existing ones. We see examples such as Mizuho Bank partnering with LINE to leverage their smartphone-based digital bank to appeal to a younger customer and Goldman Sachs launching a new mid-market personal lending platform called Marcus. Second, never has there been more competition in financial services. Banking organizationals -- banking organizations and financial institutions are no longer the only ones offering financial services. For example, in the payment space, 25% of all transactions now go through nonbank financial institutions. Think of Apple Pay or Amazon Pay. It's ever easier for customers to switch between financial providers. And in some geographies such as the U.K., new challenger banks such as Monzo, Starling and Revolut are rapidly taking market share, threatening to disintermediate the established banks. Third, regulatory pressures remain significant. Since the 2008 crash, we have seen unprecedented levels of regulation and an unprecedented degree of global coordination from regulators. The Great Recession that followed inspired regulators around the world to work together on a coordinated program to recapitalize banks and ensure sufficient liquidity in the global market. That degree of coordination and alignment is now receding, and we're seeing greater regulatory divergence driven by local market conditions and a pivot to supervision of existing rules as opposed to new ones. Such jurisdictional divergence is a particular challenge for global banks. Finally, whilst it's true to say that identifying, acquiring and leveraging skilled resources has always been critical for banks' success, a fierce battle for talent is now raging in areas we wouldn't have seen 5 or even 10 years ago, like data science, innovation and product development. These skills are now viewed as key differentiators, and banks like U.S. Bank are weaving talent strategies and robust organizational change management into their transformation programs. I previously mentioned customer expectations, which continue to rise sharply, reflecting the new world of personal technology. Traditional banks are faced with customers who demand convenience, immediacy and intimacy; for example, via personalized services that show the bank understands their needs without crossing privacy boundaries. To satisfy these customer centricity demands, increasing operating agility has become pivotal. Most financial institutions, if not all, are therefore on a major digital transformation journey. Many established banks have a patchwork of legacy systems which are impediments to that transformation, and provide friction in customers' journeys. Devising a strategy that recognizes the need to become more agile, but acknowledges the risks and costs of complete system replacement, is imperative. To remove some legacy constraints, banks are leveraging public cloud to provide additional capacity and agility as well as potentially more favorable commercials and on-premise solutions. I also see banks implementing end-to-end straight-through processing solutions with few manual touchpoints, such as Bank of America's Digital Mortgage Experience. Banks are also deploying AI to personalize messages and expose customers to new products on the front end as well as to combat fraud in areas such as antimoney laundering and know your customer in the middle and back offices. Finally, we see combinations of banks and tech firms working together to develop blockchain use cases and utility platforms in areas such as reference data. Crucially, all these technologies, old and new, must be woven together as seamlessly as possible like a digital mesh. The objective is to harness the power of myriad tools and platforms whilst ensuring the customer experience never feels disjointed. The key wrapper around this digital mesh is data. Few industries can boast as much customer data as banks, yet they remain relatively poor performers in extracting meaningful insight from that data. Chief Data Officer roles are now common with a remit to collect, understand and manage data, the ultimate goal being to monetize it through the mass personalization approach I mentioned earlier. It's no surprise that one of the fastest-growing roles being recruited by banks is data scientist. JPMorgan alone has a data science team with more than 2,500 to make sense of their 150 petabytes of data. The [ help in ] service providers and technology firms add most value in this environment. To achieve credibility, it's mandatory to completely understand the industry and its challenges. Bank executives will only trust your solution if you've demonstrated your knowledge of the industry's pressure points and could explain how your solution will help. Accordingly, attention to your proposed solution will rise in priority if it addresses one or more of the bank's imperatives. We talked about some of these pressures earlier, but there are many more. Take the time to research your prospect and find ways to link your proposal to one of the main challenges the bank faces. As far as possible, banks want plug-and-play solutions that are simple to integrate with their existing spaghetti of systems and platforms. So consider developing end-to-end platform solutions and streamline the process to reduce the friction on their customers' journey. Know the limitations of your proposed solution and proactively partner with other providers to fill gaps. Work together to co-design a comprehensive seamless solution. It's what banks expect you to do. View success from the point of view of the bank by tying your fees to that same success. It doesn't have to be an overt gainshare model. It could be price per outcome, such as a charge per successful loan per application, rather than a time and materials or milestone-based payment profile. Once your working relationship is effective, take it to the next level. Ensure your client can access and leverage your resource talents and R&D capabilities. This is one of the biggest pain points in relationships between banks and providers. You have the gold dust, so find a way to share it with your client. Finally, in response to the great battle for talent I mentioned earlier, a provider offering a build-operate-transfer model can be of immense value in building talent to the bank without compromising short-term services. We're seeing strong interest in this model. In summary, be creative. Banks want to hear new ideas. They're prepared to put money behind new solutions and even commit to longer-term contractual relationships if they include deep transformation capabilities and address the bank's most pressing business challenges. Now I'll turn the call over to Chip Wagner, who will tell us more about one of the major elements of the digital mesh I mentioned, and that's the RPA market.

Thank you, Owen. RPA and enterprise automation were last discussed in quarter 3 of 2018 on this call. This topic comes up a lot on this call and is a top priority for our clients, and rightly so as the automation of knowledge work is having and is going to have a very large impact on not just our market but the overall economy over the next couple of decades. But as we said in 2018, it's our view that most companies are still at the beginning of their automation journey. We've not yet seen a step-level improvement in automation capability inside the majority of large enterprises. Many have ventured into the automation waters but have yet to immerse themselves at scale. And the automation that is being sampled is the fundamental RPA capability, leaving many additional layers of intelligent automation yet to be explored or exploited. What we have seen, however, is a few billion dollars added to the valuation of the RPA software supplier market. If we take a look at the first -- at the 3 biggest RPA vendors by revenue, and these are also the ones we see the most often with our clients. UiPath has raised nearly $1 billion to date with a valuation that is tickling the $8 billion level. Automation Anywhere is right behind them, having raised $840-or-so million and with a valuation of nearly $7 billion. Blue Prism, as we may know, went public in 2016 and has raised -- has a market cap, rather, of $1.1 billion. All 3 of these are seeing explosive growth. We see our clients using one or more of them. In fact, some of our recent research just completed shows that many companies are now trending toward multiple RPA suppliers, and this tends to go up as the companies mature their automation capability, with nearly 40% of advanced automation companies using 4 or more automation vendors when we also include intelligent character recognition and optical character recognition as well as some cognitive tools. And this is why it's not just about the big 3, even though between them they have nearly half of the market. We're currently tracking over 25 companies with RPA solutions, and this number is going to grow. So if you look at our most current market estimate, we believe this is approximately $1.2 billion in 2020 and that it will grow somewhere between 35% and 42% this year, much faster than about any other segment of enterprise software. As you may imagine, this is spawning a very robust services market as well. Service revenues are 3 to 4x software spend. Today, most of the work is focused on consulting and systems integration. But we also think there's going to be a sea change in the next 3 years around services. We're going to see more vertical- and horizontal-specific managed automation services, which we think represents a terrific opportunity for BPO and ITO providers. Managed services revolving around the BOT, the infrastructure, maintaining them, et cetera, is a space that's actually growing even faster than the implementation and configuration business. We think this will continue as the automation implementations become more complex with ICR, OCR, machine learning and natural language processing elements being integrated with core RPA. So it's clear this is a very fast-growing market, but in our view, these massive valuations are bets on what's yet to come, basically using RPA as the entry point for more transformative front office-focused automation. However, since most companies are still in the early stages of deploying and scaling basic RPA, let's take a look at what they're seeing. In 2018, we talked about the RPA market. Way back then, the market was less than half the size it is today, a sign of how fast it's growing. But we spend most of the time focused on where enterprises are in their journey, and we focused on specifically a concept that we call the RPA wall. We're finding companies are stalling at roughly 20 processes. Organizational change management and lack of mature center of excellence are inhibiting growth. Basic RPA can only take them so far. It will indeed need to be coupled with cognitive tools to open the aperture and to tackle judgment-oriented processes. And based on that recent research that we concluded and published in a report, we don't think things have significantly changed. We're still seeing companies continuing to hit the RPA wall. Automation capability has improved. We saw a significant percentage of companies move from our lowest capability levels up to higher levels, but the highest level, what we call Bot 3.0, stayed flat year-over-year. This is the threshold at which companies pass through the RPA wall. While almost 70% have implemented RPA, 59% of those automated less than 20 processes, and only 12% have automated more than 50. And there are other indicators that progress may be stalling, such as bot utilization. Our study found that the average utilization of bots was 44% for companies at lower capability levels, versus nearly 60% for the small number of companies at the Bot 3.0 level. This is because it's hard to get past the 1 bot, 1 automation mindset without a strategic plan and governance about how to scale automation across the company. In our view, it's clear why companies are hitting this wall. They've not established an effective automation center of excellence. This COE defines the strategy and the operating model, lays the foundation for building and supporting bots and establishes metrics and reporting standards, which in turn drive reinvestment in automation as companies see results. We're confident this is the solution because we see it anecdotally with our clients and in our data. Bot 3.0 companies which have mature COEs are consistently meeting or exceeding their business goals around cost savings, reducing cycle times and improving data accuracy. We believe that the need for an automation COE is going to become even more important as companies start to move beyond back-office swivel chair processes to more front-office processes where judgment is required. And this will be the holy grail for the software suppliers because the number of processes in this area dwarfs those in the back office. In the back office, a lot of the focus is on executing the same process faster. But the middle and front offices are different, with processes like know your customer and trade-based money laundering inside banks, as Owen mentioned. These are complex, time-consuming processes that also require human judgment. So RPA suppliers are seeking to add judgment capability to their products through development, partnering and/or acquiring. So in conclusion, what does this mean for the RPA software suppliers and for the managed service providers? We could easily imagine that UiPath or Automation Anywhere are likely to explore a public offering either this year or in 2021. As is often the case when an IPO is forthcoming, we can see a good chance that one or both could be absorbed in a blockbuster straight-up acquisition by a company like an Oracle, Sales force, SAP or Microsoft. We also believe there will be new entrants. And it may actually be one of the really big independent software vendors deciding they want to be in the RPA market. This is actually already underway, but not really that highly publicized. For example, just last month, Microsoft rebranded its workflow automation solution that it called Flow as Microsoft Power Automation (sic) [ Microsoft Power Automate ], which adds RPA capabilities. So if Microsoft can add RPA capabilities into its already deeply integrated office productivity suite, where a lot of RPA activity happens today, it certainly could create some challenges for the Big 3. Similarly, SAP also recently announced an RPA capability called Intelligent Robotic Process Automation. The same thing applies here, of course, if they can introduce automation prepackaged inside of their already impressive 25% market share of the ERP market. That would represent yet another competitor in an already highly competitive independent software vendor market. RPA is also having a big impact on ITO and BPO managed service providers, more so BPO providers to date. As we've talked about in the past, BPO providers are feeling the impact from automation more than ITO because traditional BPO services tend to be highly manual and task-focused. And tasks, of course, are what RPA is great at automating. But this is also why we're seeing so much platform-based automation from the leading BPO providers as well. They know this is the case, and they're working to transition to nonlinear revenue models. They're doing the disruption to themselves rather than waiting for someone to do it to them. So what will 2020 hold for RPA? We think it will be really focused on proving out the multibillion-dollar valuation of the top players in a market that is getting more and more attention and more new entrants every day. With that, Steve, I think it's over to you to take us home.

Great. Thanks a lot, Chip. I know everybody really appreciates the insights from this section. I think you and Owen really nailed what's happening in the RPA space and the banking and financial sector. So thank you. So let me sum it up. The combined market continues its healthy growth trend throughout the year. The managed services ACV edged up slightly over the year, achieving a new high of $27.7 billion. We did see some inconsistent quarters temper the annual performance, with a near record-low quarter being followed by a near record-high quarter. The number and size of digital-based awards are driving growth in the managed services at a rapid pace, and it's up 17% by ACV over the year and outperforming the overall broader market. Most enterprises are still in the early stages of their digital transformation. Digital products -- projects are moving beyond the pilot phase, though, to implementation and are beginning to scale. The as-a-service sector posted a 21% increase. We're seeing some inconsistency in quarterly performance though, and the rate of growth for IaaS and SaaS is slowing, but the overall growth trend remains positive as the Big 3 continue to battle for market share. For our forecast, we're projecting a 23.5% year-on-year revenue growth for 2020 in the as-a-service market. Many of the Chinese-based Infrastructure-as-a-Service providers finished the year strong, which enhances confidence in our outlook. We're also closely following Google Cloud Compute to see if it can penetrate the enterprise space or make a major acquisition to accelerate their growth. And we're watching the best-in-class battle between AWS and Microsoft to see who gains the market share supremacy in Europe. We're taking a conservative stance in the managed services by starting our 2020 forecast at 3.2% growth. As the largest service providers rebalance their growth engines, will they emphasize digital-led transactions in an increasingly addressable market? Or will they review (sic) [ revert ] to pursuing legacy deal flow? I think it's a stay tuned on this one. A reminder that we will have our index call specifically geared towards the European region on January 29 of this year. You can register for that call at our website, www.isg-one.com. And at this point, I'd like to hand the call back over to the operator to start the Q&A session.

[Operator Instructions] Mr. Foresi, start with your questions of ISG.

Can you hear me okay? I just want to make sure. So I guess my...

Yes, I can hear you fine.

Sure, no problem. I just want to make sure. I didn't know if I -- I'm so used to * 1, it's uncomfortable just to get turned over the mic. So I guess my first question is just about the global demand in 2020. Maybe you could give us your top 2 or 3 highlights on how you see the demand environment this year versus last year. And really, I think people are interested in any change. Is it stronger, the same, less? Are there concerns around economic changes? Have certain trends gotten better or worse? I think we're just looking for a general outlook on 2020.

Yes, sounds good, Joe. I think there's sort of 2 main themes that I would highlight. First is, is there are some economic issues that I think are impacting us on a global basis. I know we've talked about these for the last several quarters, whether they're trade wars or some of the slowdown in the European markets that we're seeing. I think from an overall managed services market, what we're going to see is sort of a revised push, if you will, on cost optimization. And I think if you look at the market and the sort of the 3.2% growth that we're projecting there, I think cost optimization will be a big driver there. But the other big tailwind that I keep talking about is this digital transformation component and how critical that is. So when we look at the SaaS and IaaS providers as we talked through, there is clearly a lot of macro-level issues that are driving their growth. And clearly, it starts with the enterprise businesses and the need to connect closer to their customers and their customer experience. And we do not see that really slowing down into 2020. A matter of fact, I think it's going to accelerate as we go forward. We're seeing a lot of just major deals coming to market. Again, as we reported, 40% of the managed services market now has a digital component, so you're going to see more and more of those deals come to market over 2020 and 2021, which will bode well for the traditional service providers in that space.

Got it. And maybe within digital, could you give us some feel for how the different players are competing? And I'll give you the 3 categories I'm interested in. One is your pure-play provider. Do they have a discernible competitive advantage? Two are your traditional outsourcers. I think I'd throw Infosys and some of the larger Indian players in there. And then three, the domestic multinationals like Accenture and IBM. How are all those players adjusting and competing for these digital dollars?

It's interesting because I would say players in each of those markets have struck different strategies. We did some analysis over the last quarter through our M&A database, and I think one of the most striking things is the amount of M&A that's taking place. So essentially over the last 4 years, within the technology space, so the sector that we cover, we saw 4,100 acquisitions, over $1.4 trillion of capital spent on those acquisitions. And clearly, depending on how you categorize stuff, when we looked at it, over $700 billion of that was directly related to digital, whether that was digital marketing or some of the acquisitions, clearly, that Accenture has made in that space. But all of the traditional outsourcers, the pure-plays, the domestic MMCs have all made major acquisitions to really fill out their portfolio. So if we look at some of those acquisitions, there's this big move into engineering services. So clearly, the DXC-Luxoft has been talked about. The ongoing Cap and Altran deal that's still in the works has been talked about. What those acquisitions are really focused on is building out digital products and services, so moving away from sort of the traditional ADM, ADO space, if you will, into really building -- developing products that integrate hardware, software, IoT, et cetera. But the traditional outsourcers, so you talk about the TWITCH providers or even the Tier 1, Tier 2s in there, are all making big acquisitions, a big boost in that space as well. So again, I think customer centricity is probably the biggest thing there, how do you think more about the design, the interactions, the whole customer value stream and move through there. So it's -- I don't know that I would use the same categories as much anymore, just because we're all converging on this -- to help our individual clients on this whole digital transformation piece, and that's probably the driving perspective.

Got it. Just 2 others before we open up the floor. In financial services, we've had, I guess, a tale of 2 cities, one being the big banks who seem to be pushing back on costs at a very high level and kind of consolidating and continuing to optimize their spend. And then we've seen a, I guess, resurgence in their move into digital to stay competitive and then an uprising, I guess from some of the retail and other fintech areas. Maybe you could just talk about the hot and cold spots in financial services and what your expectations are for growth next year.

Excellent. Owen, you want to take that one?

Yes, sure. Thanks, Steve. Yes. So I think that's right. I think as I mentioned in the original briefing notes, we've seen most of the major banks undergo several rounds of cost cutting, cost optimization. And that's involved cost cutting with respect to new outsourcing arrangements. It's with respect to job losses, it's respect to trying to automate right across the spectrum. But the key focus is now -- for those banks is now turning towards revenue growth. When it comes to some of the other challenges in this space, whether they are fintechs, whether they are smaller banks, start-up banks, we see a lot of activity in the U.K., for example, in the retail banking space from challengers. Or whether it's nonfinancial institutions. I talked about payments being perhaps the most mature of those spaces, where 25% don't go through financial institutions today. So I think there's an element of competition driving the established banks to try and do something different. And that's -- they've done the cost base. What they're looking to do now is the customer experience piece. So how could you -- if you were one of the big established banks, how do you stop one of these new digitally native, born-in-the-cloud, app-only banks stealing your customer set, particularly the millennial generation and the next generations to follow? And so that's where -- linking back to what Steve has been talking about, that's where we see 2020, is a huge focus on more digital transformation. There's going to be more disruption. We're going to see more breakthrough use cases for artificial intelligence. Chip talked about a few of those, but particularly on the front end with regard to product pushing and understanding and predicting patterns of spending behavior and so on from customers. So I think if I can summarize, it would be more disruption, more competition. There will be more consolidation as well because scale brings benefits. But I think the era of simply looking at costs is over.

Got it. And then the last one just on RPA. And we've done a lot of work on it on our end. It sounds like you're talking about an RPA wall, which is kind of unusual when you see growth numbers and companies IPO-ing. Maybe you could just talk about why you think there's a wall here. And is the challenge here that the problems -- the solution is not fitting the problems? In other words, is the software too basic and duplicable? Or are there just not as many replicable daily tasks that can fit into the software? Maybe you could talk about what, I guess, RPA 3.0 looks like. And then operator, you can open up the call.

[Operator Instructions]

Steve, did you want me to take that?

Yes, why don't you go ahead and take the RPA one, Chip?

Thanks. Actually, it's a terrific question. There's quite a lot of oddity about the market in some ways. The Big 3 in particular, as we've talked about, Automation Anywhere, Blue Prism, UiPath have been proliferating aggressive software distribution, pushing to get thousands and thousands -- well, really tens of thousands of licenses into the market. And it's been received with open arms. Early innovators with RPA found that there are terrific processes to automate and to get good returns, no question about it. What's happened is the center of excellence model, in many cases, has not really taken root in these big enterprises. And so there's an awful lot of almost citizen development that's taking place across the organizations. And in some cases, they're enamored with the idea of automating a process to save 1 or 2 FTEs worth of work and return that to the business. What we're suggesting in those that are Bot 3.0 is that they have a clear strategy, they've undertaken an enterprise assessment, they've created a center of excellence that has control over the way the technology is being distributed, and the organizational change management aspect has been fully embraced. That's been something we have found is short, and as a result, we're finding people having great difficulty scaling without outside assistance. And so that's what this chapter really has turned into. It's turned into scaling with assistance from the outside because the promise has yet to be totally fulfilled and yet it's looming, with the opportunity to save literally tens of millions of dollars in larger enterprises. So we're actually excited. We think there'll be a second wave of enthusiasm. We hope we're a part of that. And certainly, as we see the second chapter of the book, if you will, we get into intelligent character recognition, optical character recognition, some of the additional cognitive technologies like machine learning, natural language processing, and we think we'll see a surge and a deepening in how far automation can reach.

Operator, you can open up the call.

[Operator Instructions] We do have a question from Jared Levine from Cowen.

I just have 2 questions related to automation. My first one, are there any service providers you believe who are doing a better job than others to help clients break through that RPA wall you've discussed?

Chip, why don't you take that one as well?

Yes, very, very good question. As we mentioned, the ITO side of the shop really has done a lot of automation long before RPA came into play, so we're seeing a little less in the ITO space. On the BPO side, I think all of the big multinational players that you can imagine in the BPO space, the Genpacts of the world, WNS and so forth, Capgemini, even IBM to an extent, are doing a really nice job of applying automation technology to their service delivery model. That enables them to provide a faster service and more -- a higher-quality service and a lower-cost service, and maybe they even take some of that for themselves in a sharing arrangement in terms of the lowering of cost. The RPA wall, though, is still present beyond just what the service providers are doing, because that really only affects the scope of work that a BPO provider might be delivering. Inside the enterprise is where the opportunity lies, beyond any outside provision of service from either an ITO or a BPO provider. So we think there's lots of runway for all enterprises. There's not really that many exceptional users of RPA and intelligent automation. It's really early days. If you think back to it, this market is really -- despite the software providers having been around for quite some time, the real embracing at an enterprise level has begun really less than 5 years ago. So lots and lots of room in front of us.

Got you. And then just one follow-up. What do you make of the acquisition by Appian of Jidoka RPA platform?

Yes, that's a great question. Obviously, as we said, there's tons of room in this market now for some consolidation, whether it be at the software level or frankly, at the implementation and configuration level. It's a very, very crowded market. There are over 150 providers that are doing configuration and implementation. And whether you want to look at the various different Magic Quadrants and Forrester Waves and so forth, there are dozens of software providers. Jidoka is an interesting player, relatively small. It's sort of a Tier 2, if you will, player, not to suggest they aren't a high-quality company. I think that Appian is showing us that this is a place where some players that don't have an RPA or an intelligent automation capability feel the need to have one. And if they're not in the SAP space or Oracle space, where they're kind of doing their own thing, or Microsoft space, well, they've got to think about maybe going out and grabbing one of these instead of making one. So I think it's encouraging. I think it suggests what we've said, which is consolidation and people feeling the need to be in the intelligent automation space.

And we have no additional questions in the queue at this time. [Operator Instructions] And we have no additional questions on the phone lines at this time.

Great. Well, thank you, operator, and thank you, everybody, for joining the call. Again, we will be having a European-specific call at the end of the month on January 29, so I encourage you to go out and register on our website, www.isg-one.com, and we'll take a really good perspective at a country-by-country level across the European markets. With that, I hope everybody has a great rest of the day, great rest of their week. And welcome to the next decade. So with that, thank you, and have a great day.

Thank you. And again, that does conclude today's call. Again, we thank you for your participation. You may now disconnect.