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

Good day, and welcome to the 1Q 2021 Global ISG Index. This call is being recorded. At this time, I'd like to turn the presentation over to the Index host this quarter, Rishi Jhunjhunwala, at IIFL Institutional Equities. Mr. Jhunjhunwala, please go ahead.

Thank you. Good morning, good afternoon and good evening to all the investors, service providers and corporates who have joined the call today. I, Rishi Jhunjhunwala, on behalf of IIFL Institutional Equities, welcome you all to the 1Q 2021 ISG Global Index call. As you are aware, ISG is one of the largest outsourcing consultants in the world, helping more than 500 corporates globally. ISG's role as a leading adviser and influencer in global services -- in global sourcing provides a unique view of the managed services and as-a-service markets. The company has been hosting these index calls for over 18 years. And for those who have listened to these calls in the past, you would be aware that ISG's position working with both enterprise buyers and service providers offers unique insight to key industry trends. ISG's comprehensive view is all the more critical as we take stock of the pandemic's impact on markets and work through the recovery. So in this call today, ISG will present an update on the state of Global IT services industry through both the traditional and as-a-service markets as well as the global sourcing playbook in the post-pandemic era. We will begin this call with a presentation from the partners at ISG, followed by Q&A. In case you do not have the presentation with you. It can be accessed through the website of ISG at www.isg-one.com. With that, I'd like to pass over the call to Kathy Rudy, Chief Data and Analytics Officer for ISG. Kathy, over to you.

Thank you, Rishi, and welcome, everyone, to the ISG Global Index conference call. I'm Kathy Rudy, and with me today is Steve Hall, Partner and Global Leader for the ISG Index; and Stanton Jones, Research Director and Principal Analyst. We are also joined by Dale Hearn and Robert Stapleton, ISG experts in the oil and gas and chemicals industries. This is our 74th quarterly index call, and 2021 is off to a hopeful start. Vaccines are slowly making their way around the world, and along with a sense of relief in anticipation for how we move forward. Despite the pandemic, in many areas, the markets have stayed strong, and we'll cover what we're seeing across the globe in the first quarter of 2021. Then Dale and Robert will sort out the volatility of the energy sector and share where they see opportunity. Stanton will share a deeper insight into the key themes for the first quarter, and will tell you how to sign up for his quarterly e-mail. And if you haven't already, it's pretty insightful, and I look forward to it every week. Now let's go to Steve, and he's going to give us the headline.

Great. Well, the economic picture has certainly improved over the last 3 quarters. The ISG deal pipeline is stronger, and we continue to see strength in the as-a-service economy. For Q1, the global combined market exceeded $17 billion. So that's up 11% year-over-year. The managed services was up 7% year-over-year and continued to recover due to a second consecutive strong quarter in Europe. And the as-a-service ACV was up 15%. The Americas Q1 combined market was up 6% year-over-year, really driven by the as-a-service market. Managed services was down slightly about 1%, but has returned to pre-pandemic levels of $7 billion of ACV per quarter. The EMEA combined market accelerated in Q1, up over 20% year-over-year with both managed services and as-a-service contributing. The EMEA market added an additional $1.5 billion of ACV each of the last 2 quarters, with most of the strength coming from the managed services sector. EMEA had its second consecutive robust quarter in managed services with strong results in both ITO and BPO, and in all 3 of the larger markets of U.K., [ Deutsch ] and France. The as-a-service business drove Asia Pacific's combined market ACV growth of 11%. As-a-service comprises a full 85% of the combined market in Asia Pac now, and routinely post 20% year-over-year gains in ACV. The larger deals in managed services have really disappeared over the past 6 quarters, and the sluggish performance in the managed services continues to pull down the combined market. Let's take a look at the global market trends. So the global market exceeded $17 billion per quarter for the first time. On a trailing 12 months perspective, the combined market was up 7.5% on the continued strength of the as-a-service market. Though down 2.8% on a trailing 12-month basis, the managed service market returned to pre pandemic norms with over $7 billion of ACV awarded for the second consecutive quarter. Q1 ACV of $7.2 billion was up 7% year-over-year and up 4% over 5 year historic averages. This level of activity and contract awards was up 12% on a year-over-year basis, and 9% against 5-year averages, over 500 contact -- contracts were awarded in Q1 2021. We've now seen 3 successive quarters of over 450 contracts per quarter, which is really the first time we've seen that since we began reporting the index in 2003. So it really indicates a strong, healthy environment, just tends to be at the lower end of the market right now. So 92% of the deal activity was below $30 million of ACV, but we did see a 30% increase in deals in the $20 million to $30 million range. And there were another 4 mega deals with an ACV greater than $100 million awarded this quarter, which is also in line with historic averages. The global as-a-service market ACV came close to the $10 billion of ACV this quarter and should break through the $10 billion per quarter in Q2. On a trailing 12 months basis, the as-a-service market was up 17.2%, adding over $1.8 billion of ACV per quarter from the pre-pandemic lows. For the trailing 12 months, the as-a-service market generated over $35 billion. Globally, for as-a-service market now represents 56% of the combined market, which is up over 400 basis points from 2020 and over 700 basis points from 2019. The global results by function really are interesting this quarter. So despite a record number of contracts awarded, the ITO ACV of $5.8 billion was flat on a quarter-over-quarter basis, and again, down about 1% on a year-over-year basis. The Q1 ACV was up 7% against historic averages though, and up almost 14% from the lows reported at the height of the pandemic. The market was driven by a $3.1 billion of ACV awarded in the application space, which is now over 53% of the market, which crushed the quarterly record, and up over 23% from historic averages. It's clear that enterprises are shifting internal spending effort to application refactoring and relying on public cloud providers for core infrastructure. Now let's talk about BPO. So the roller coaster ride with BPO continues. After being down significantly in 2020, primarily as a result of the weakness of contact centers and facilities management, the BPO ACV was up 43% on a year-over-year basis. The BPO growth was driven by a 24% year-over-year increase in industry-specific BPO, such as claims and mortgage processing. And the industry-specific BPO functions now account for over 30% of the market. Engineering and R&D ACV, which now accounts for 20% of the market, was double the pre pandemic highs, and we've now seen 2 sequential quarters of over $300 million of ACV. We continue to see larger multiyear deals with the convergence of information technology and operations technology or IT OT, and really an acceleration of Industry 4.0. Facilities management, which is really weak during the pandemic recorded its first $200 million ACV quarter since Q4 2019, but remains 1/3 of its pre pandemic side. The European markets are still in lockdown, and most global clients are still reconsidering their real estate needs. We expect to see downward pressure on the facilities management. Interesting though, WeWork did seem to rise from the ashes with an announcement to go public through a SPAC, but the valuation of the $8 billion is far short of the $47 billion target just 2 years ago. The contact center business also continued to struggle with the ACV, down 33% on a quarterly basis and down almost 4% on a year-over-year and down 50% from historic averages. So the $120 million of ACV awarded in Q1 was the lowest awarded amount since Q4 2013. The number of awards was up slightly, but most were renegotiations for smaller scope. The Infrastructure-as-a-Service segment generated over $7.2 billion of ACV this quarter, up 18% year-over-year and 11% quarter-over-quarter. After breaking through the $6 billion mark for the first time in the fourth quarter, the IaaS market added another $500 million of ACV, crossing through the $7 billion ceiling. The year-over-year growth rate of 18% did slow from a 36% year-over-year growth rate we observed in 4Q. And as we mentioned last quarter, longer-term deals are -- growing backlog are becoming more prevalent metric to assess the performance of the public cloud infrastructure. So I think we'll start looking at backlog as they continue to grow the backlog between the major hyperscalers. The SaaS segment generated over $2.5 billion level for the first time, with year-over-year growth up 200 basis points to 7% this quarter. And I did want to spend a little bit of time talking about the deceleration on the cloud. Though you can see, we still see great growth in the as-a-service market, it continues to add about $10 billion of ACV per quarter. But the growth is slowing. The enterprise clients continue to shift workloads to the cloud at a record pace, but Software-as-a-Service has slowed a bit. The 2020 annual growth rate for Infrastructure-as-a-Service, which includes the hyperscalers, was 24%. The 5-year CAGR was 25.4%. And we expect to see it settle in sort of the low to mid-20% range as enterprises accelerate public cloud adoption. Still healthy, but we don't expect to see the 40%, 45%, 50% growth rates that we've seen in some past years. Now let's turn to the global provider leaderboard, which is based on awards made during the trailing 12 months. The regional leaderboards are at the back of the deck and can be downloaded from the ISG website. We didn't see -- we did see some movement between categories this quarter as enterprise clients continue to consolidate and reduce the overall number of suppliers. Overall outsourcing spend remained flat, but we continue to see movement with suppliers that are winning a greater percentage of deals, coupled with aggressive digital transformation strategies. The Big 15. So these are the companies with revenues greater than $10 billion, typically has very little turnover. But the big news this quarter is the entrance of HCL into The Big 15. As most of you know, HCL has been a powerhouse in The Building 15 group for years, and with its 3 pronged go-to-market strategy of legacy optimization, digital transformation and its new software business, it eclipsed the $10 billion annual revenue target, and is now in The Big 15. China Telecom was also new to the list this quarter with an incredible growth of 58% year-over-year in the cloud business. So key signings in The Big 15 this quarter included TCS contract with Skanska to streamline the construction group's journey to the cloud. Accenture made an additional 13 acquisitions in Q1, which Stanton will talk about to really increase its regional presence and enhance its capabilities in SAP, Salesforce, ServiceNow and Workday as well as cybersecurity and data analytics. So if we look at The Building 15, more than 25% of the leaderboard turned over in The Building 15 group of the firms with revenue between $3 billion and $10 billion. Serco joined the list as did OptumInsight, a healthcare it firm that's been in the news recently for its nearly $8 billion acquisition of Change Healthcare. 2 firms debuted this quarter, Conduit, [ active ] in the transportation and the health care BPO space made the cut as the workplace as-a-service firm [indiscernible] systems. Among the familiar names, T-System Inc. large renewals with Shell and Deutsche Book Post. Tech Mahindra won a sizable deal with RSA Scandinavia and signed a large transaction with Telefónica Germany/O2. And among the as-a-service providers, Workday landed new HCM customers, including Spanish multinational bank, BBVA, Southwest Airlines and Wells Fargo Bank. The Breakthrough 15 is an equal mix of managed services and as-a-service firms with revenue between $1 billion and $3 billion. But this quarter, the customer care TTEC returned, TTEC applies digital innovation, what has been a traditional legacy BPO industry and has a potential for growth in the lucrative and underpenetrated customer experience sector. The HR tech provider, UKG rejoined the list this quarter. Shopify, the Canadian company, joined The Breakthrough 15 with a series of signings with Hallmark, Diageo, Yamaha Motorcycles, discount grocery chain Aldi and Nestlé's Purina dog food brand. The smallest group of companies with revenue under $1 billion experienced some turnover. Hosting firms, OVH and [indiscernible] made the list for the first time so did data warehousing, SaaS players, Snowflake computing, which won deals at Mastercard, genuine Parts and Northern Trust this quarter. Another newcomer was Softtek, an application software company based in Mexico, L&T Technology services, which debuted last quarter remained on the list. L&T was selected by Airbus to provide digital engineering for the Aerospace Corporation Skywise Partner Program. And likewise, Zoom remained on the list with wins at Equinix and Universal Music Group. So let's take a look at the regions. And Kathy, you want to start us off with the Americas?

Yes. Steve, thanks a bunch. The Americas $8.6 billion in combined market ACV represents a [ 6.6 year increase ] in an 18% jump compared to the prior quarter. All the gains came from as-a-service sector. Activity was up, logging the most awards for quarter to date. During the trailing 12 months, ACV rose 6% as well. But as we'll see elsewhere, the rise was not as high as the trailing 12 months increases a year ago due to the quarters where world economies were locked down. Managed services ACV of $3.4 billion reflects a 1% dip year-on-year and a 32% higher from prior quarter. This continues the Americas' Feast or Famine pattern of the past year. The number of awards over $40 million ticked up a bit this quarter with a flurry of contract signings. ACV in the trailing 12 months dropped 5% from the prior year and the one before that. As-a-service ACV this quarter surpassed $5 billion for the first time, an 11% year-on-year rise and a 10% increase from the prior quarter. Infrastructure-as-a-Service, Software-as-a-Service contributed equally. ACV in the trailing 12 months, which again included pandemic lockdowns, rose 16% as companies pivoted to functioning remotely. By function in the Americas, ITO ACV of $2.5 billion decreased 13% from the first quarter of '20, but soared 51% against a weak fourth quarter of '20. Activity was brisk. Among the most notable deals in ADM, Kaiser Permanente signed a multiyear cloud deal with Accenture to replatform digital assets on Azure. Infosys locked in a 5-year deal with Newmont mining to leverage AI. And on the infrastructure side, DXC won a sizable deal with Molson Coors across multi layers of the enterprise technology stack. BPO rose moderately year-on-year and declined slightly quarter-on-quarter. Industry-specific BPO and engineering and R&D services fueled the gains, as Steve noted. Infosys signed a $5 million deal with Google to provide customer experience and engineering support. Contact center, again, a distressed sector last year began to wake up slowly, illustrated by TTEC's winning a deal with Schwan's Home Delivery to quickly deliver a virtual customer engagement center. Infrastructure-as-a-Service generated $3.5 billion in ACV, a 14% gain year-on-year, and a 10% rise from the fourth quarter of 2020. Last quarter, we noted the battle developing in the media and entertainment industry among AWS, Azure and Google Cloud. This quarter, the competition extended to the automotive sector as Ford and Google signed a 6-year deal with hundreds of millions of dollars for GCP to handle in-vehicle connectivity. Microsoft invested in GM's driverless car startup, Cruise, which will use Azure cloud computing. Software-as-a-Service has rebounded from its midyear construction to produce $1.7 billion in ACV, a remarkable 5% year-on-year gain, given the first quarter was strong of 2020. ACV this quarter is 11% higher than the fourth quarter of 2020. And key deals include ServiceNow's multiyear and multi-product contracts with AT&T, along with other signings at BP, USAA and Booking.com. Adobe had some notable customer wins from its experience platform, including Abbott Labs, Coca-Cola, FedEx and Mondelez. Let's switch over to Europe -- I'm sorry, Asia Pacific, where we'll analyze the combined market in Asia Pacific. We're basically talking about the as-a-service sector. Managed services makes up only 15% of the total ACV in the region. The combined market ACV of $2.6 billion is 11% higher than a year ago, but 9% lower than last quarter. ACV in the trailing 12 months grew only 7%, somewhat less than a year ago. But that's no surprise, again, given that COVID impacted the entire 12-month period. Managed services ACV dipped below $400 million, as it did in the third quarter of 2020, again, due to pandemic conditions. The northern markets of China, Japan and South Korea advanced, but the main market of Australia and New Zealand fell 20%. Contract activity was the slowest it's been in 5 years, and large deals have disappeared in the past 18 months. And in the past 18 months, Asia Pacific has only had 7 deals over $40 million. Over the trailing 12 months, ACV plummeted 26%. As-a-service ACV of $2.18 billion this quarter came in on par with prior quarter and gained 22% compared to the first quarter of 2020. Over the trailing 12 months, ACV rose more than 20% from the same period a year ago. The robust growth makes sense given that as-a-service is such a large portion of the combined market, far and away, the highest ratio of all of the regions. By function, ITO was the only segment that declined, and its ACV fell significantly this quarter, down 36% year-on-year and 41% compared to the prior quarter. 2 ADM awards stand out in the market. Accenture will implement a cloud-based system for Shiseido, the Japanese-based beauty multinational, and Mitsubishi Motors extended its IT infrastructure contract with IBM Japan for another 5 years. BPO, though a tiny market, saw 29% year-on-year but dropped 35% sequentially. Infrastructure-as-a-Service, by far, the largest function in Asia Pacific, rose 24% compared to the prior period and edged down 2% from the previous quarter. The race for market share in financial services continues. This quarter, AMP announced it will migrate all of its on-premise workload to Amazon Web Services Cloud by 2022. Also, Kyobo Life Insurance in South Korea announced it will transfer its big data systems to AWS. And Microsoft signed an agreement with Bank of New Zealand to migrate 1,000 applications to Azure in a project dubbed, M1K. Software as-a-Service ACV grew by double digits year-on-year, important deals include Kawasaki Engines signing Salesforce and its manufacturing cloud, improvement engineering leveraging Salesforce's commerce cloud to improve online user experience. Kiwi marketers, Zespri International, will become one of the first SAP customers in the region to use SAP S/4HANA Private Cloud Edition. And BHP is using Microsoft Dynamics to keep rural Australia mining employees safe. Now it's time for EMEA. Steve, back to you.

Great. So the EMEA market set new highs with back-to-back quarters of $6 billion of ACV and adding over $1.4 billion of ACV for the pandemic lows. The combined market was up 20% year-over-year, even though it edged down 5% from last quarter. And the trailing 12 months increase was 10% over the prior like period despite the mid-2020 weakness brought about by the pandemic. Managed services ACV grew 23% year-over-year, even though we saw a drop of 15% from the prior quarter. 3 of the 4 mega deals awarded in the industry this quarter were in Europe. That brings the 2 quarter total to 8 mega deals, and you have to go really back to 2017, the funded 2 quarter period in EMEA that had more mega deals awarded. By region, France had its best quarter for ACV since 2014, the U.K. posted its fourth consecutive quarter over $800 million in ACV, and the [ DoD ] market now accounts for almost 30% of the total managed services ACV, broke the $1 billion ACV per quarter for 2 consecutive quarters and is 33% above historic ACV levels. As-a-service ACV rebounded, up 16% year-over-year and 12% quarter-over-quarter. And from a trailing 12 months perspective, the growth was even stronger, a full 18% rise. As in the Americas, both Infrastructure-as-a-Service and Software-as-a-Service reached new quarterly heights. And as-a-service in EMEA now accounts for 41% of the region's combined market. This is lower ratio than what we saw in Americas or Asia Pac, but it does show sort of the growth of what's happening in Europe now with public cloud and SaaS adoption. If we look at it by quarter and by function, the EMEA ITO market reached nearly $3 billion in ACV, a 17% year-over-year increase. But again, a 19% drop from a historic quarter. ADM and infrastructure made strong gains. And among the significant IT awards, Mphasis contract with Ardonagh Group, the U.K. independent insurance group, on a digital transformation and on the infrastructure side, Atos won a large digital workplace contract with WINDTRE in Italy, and HCL inked a 5-year digital workplace service agreement with Airbus. The EMEA BPO ACV was also up significantly year-over-year. Industry-specific ACV rose 40%, and F&A and engineering and research also posted sizable gains. KPIT signed 2 significant deals in the auto engineering space, 1 with Veoneer and BMW centered on autonomous driving and intelligent mobility. Facilities management and contact centers also posted year-over-year gains in Europe. [ IIAS Group ] secured an 8-year extension with Barclays in the U.K. to provide integrated facilities and workplace services across the banks of state in over 30 nations. Infrastructure-as-a-Service generated $1.8 billion in ACV, which was a 19% increase year-over-year, and a 14% rise from the prior quarter. As Kathy noted in her -- in the Americas section, the automotive sector is really shaping up into the battle ground among major cloud providers. In Europe, BMW Group announced it will migrate workloads to AWS from its business units. Renault and Volkswagen are also migrating workloads to AWS. And ISG advise one of the biggest landmark cloud deals in the region this quarter with a signed agreement between Amadeus and Microsoft Azure. Software-as-a-Service rebounded for the pandemic by producing back-to-back quarters that surpassed $600 million in ACV. Microsoft signed deals with Daimler, GSK and IKEA, and Oracle secured contracts with NatWest Group to standardize its various banks on Oracle fusion in the cloud. So let's take a look at the key industry trends. So during the next few years, we expect demand to strengthen across most industries, even industries most impacted by COVID are beginning to revitalize. Strategic priorities are consistent across industries, cost savings, workplace modernization and digital transformation. So really, technology is at the core of all the changes taking place. Since we covered the trends in BFSI last quarter, the sector has remained in positive territory in both managed services and as-a-service. BFSI's combined market ACV in the trailing 12 months grew 9%, really an indicator of solid growth. And as-a-service comprises 43% of the combined market ACV showing that digital is becoming more integral to BFSI every year. Retail and CPG have registered excellent growth in both managed services and as-a-service. And obviously, those were 2 industries that were hit very hard during the pandemic. A full 66% of the combined market ACV in retail and CPG now comes from the as-a-service. And really only tech-heavy business services has a higher digital profile. Now Dale and Robert will dig into the energy vertical, particularly oil and gas and chemicals.

Thanks, Steve. Good day or good evening, wherever you may be. My name is Dale Hearn. I currently lead our oil and gas and chemicals practice, which is part of the energy vertical. With me today is Robert Stapleton, who is also part of ISG's energy practice. The 2 of us will give you our perspective on the opportunities and pitfalls in this sector. During the past 12 months, the energy vertical has generated over $4 billion in ACV, a 5-year high. Both managed services and as-a-service, registered double-digit growth and contributed to the combined market ACV growth of 16% over the prior year. This market has plenty of room to grow from a digital perspective. Currently, as-a-service accounts for 34% of the combined market ACV, the lowest digital ratio among all industries. It's no secret that 2020 was a bit of a rough year for oil and gas, we had COVID, of course. And in March, Russia and Saudi Arabia engaged in a price war that disrupted the industry. At the same time, demand dried up, and for the first time ever, the price of a barrel of oil went negative. Producers nervous about maxing out on storage capacity were paying buyers to take oil off their hands. Oil and gas exploration and production companies also combined $1 trillion for the year. And more than 100,000 jobs were lost, and that may continue into 2021 now that the permit to continue construction on the Keystone Pipeline has been canceled. More than 20 oil and gas companies in the U.S. have filed for bankruptcy, and that has spurred some merger and acquisition activity. We expect new combined companies to look for synergies and ways to reduce IT spend, which should lead to renegotiating IT contracts or a modification to existing agreements, especially in the IPO and BPO areas. But we're now beginning to see some movement in the market. Oil demand is rising. And while supply is low, prices have started to creep up. One reason for the increase is that oil wells that were capped in the second quarter of 2020 have been difficult and expensive to bring back online. New wells take time to build and will take capital investment, which oil and gas companies are looking to curb. Within ISG, the energy vertical includes the chemical industry. As hard as oil and gas has been hit during the pandemic, the chemical industry has remained stable. Many chemical companies shifted their production capacity toward products that were needed to combat COVID. For example, Dow went from making 1 chemical to making PPE devices for hospitals. Other chemical companies made similar moves that generated capital. Pandemic and post-pandemic strategic play books are emerging. We also saw several chemical companies move workloads to the cloud. This shift may not have been on their horizon and in their budget before 2020. But moving their business processes to the cloud enabled chemical companies to become nimbler and responded to fluid market demands. Even though this was not in their budget for 2020, they're recognizing this as a new priority and focus for 2021. So how will energy companies survive in 2021? Oil and gas is still in a survive and recovery mode. We're seeing higher gas prices at the pump, and we expect those to continue to increase. As prices at the pump rise, energy companies have more flexibility with OpEx and CapEx spend. The effect of COVID will be uneven across the chemical industry. Petrochemical companies that have large oilfield chemical business will fill the pain from the standstill in drilling activity. Other chemical firms are proving to be more insulated to the effects of the pandemic. In terms of industrial gases, the high demand in this area is going to ensure that companies supplying material to the health care and pharmaceutical industry, like DuPont that manufactures products that go into PPE devices, will be able to survive and thrive during this time. Now I'd like to turn the call over to Robert Stapleton, who will share some of the mega trends we're seeing in both the oil and gas and chemical industries.

Thanks, Dale. After such a challenging year, we are beginning to turn the corner. As we continue to march towards widespread vaccination, state and local economies will continue to reopen and establish a new normal, and demand for oil will continue to rise. With that, oil and gas companies are revisiting positive investments in business analytics and AI technologies projects as well as renewed focus on asset management technologies. These technologies can help solve a problem that quickly emerged during the pandemic, supply chain resiliency. This is an emerging potential megatrend, but 1 megatrend that is currently underway is a focus on green energy. The Biden administration has made green energy a priority. A number of oil and gas companies are investing in carbon-negative bioenergy carbon capture technologies and investing in wind and solar to power rigs in the oil fields. ExxonMobil recently announced that it was investing in carbon capture technology, while Chevron announced an investment in bio energy. Many oil and gas companies are looking to further diversify in a number of green technologies to establish a material presence in the green energy space. The second mega trend we've noticed is an uptick in attention to BPO services. My conversations with service providers and clients as well as our ISG research have confirmed that BPO is one of the areas oil and gas companies are looking to invest in 2021. From 2016, all the way through the first half of 2020, industry-specific BPO services dominated a lot of the deals in the BPO space. A majority of the deals were signed across many different industries and functions, such as energy efficiency, management, billing and in F&A. Nearly 30% of the deals signed between 2016 and the first half of 2020 had a digital component and scope. Moving on to the chemical side of our industry. We're continuing to see a number of SAP upgrades to S/4. Most chemical companies have some component of SAP in their IT environment. And with SAP announcing last year that it is ending maintenance for SAP ECC by 2027, companies have felt compelled to upgrade to the S/4HANA platform. A lot of companies, petrochemicals, agrochemicals, industrial gases, household chemicals, are taking this opportunity now to take the plunge and upgrade because they know it may take several years to implement and switch over, and even longer if they want a greenfield implementation. Another chemical mega trend we're seeing is the number of companies accelerating digitization to improve safety, cost efficiency and sustainability. Chemical companies like businesses and other industries are very concerned about cybersecurity. Historically, chemical companies have been somewhat lacking in the security space, yet we can't ignore the number of breaches and exposures occurring in the industry. And chemical companies are reacting by investing more resources and cybersecurity to protect themselves. We're also seeing a growth in artificial intelligence. AI and machine learning can optimize business operations and more importantly, help with the asset management. Chemical companies like oil and gas companies tend to be very asset heavy. AI can help firms become more proactive in improving and extending the life of their assets and reduce downtime, all of which is very important to their bottom lines. Lastly, we've noticed an uptick in cloud adoption across all industries, and the chemical industry is no exception. The pandemic has required rapid scalability of systems such as work-from-home technologies. Many chemical companies produce chemicals that are part of supply chain for products used to fight COVID and have had to ramp up production quickly to meet sharp increases in demand as the pandemic began unfolding. Moving core systems to the cloud allow chemical companies to scale faster and establish resiliency. The migration to the cloud is continuing. Even as the number of virus outbreaks trend down, we still expect to see investments in cloud services continue throughout 2021. Now I'll turn it up back over to Dale for a few closing comments.

Thanks, Robert. While 2020 was a very challenging time for the oil and gas industry, several IT service providers were very successful in this industry and have great momentum entering 2021 and for the foreseeable future. One focus area that companies will embrace include IT support for SAP S/4HANA. As more companies move toward their new S/4HANA systems, clients will want a smooth transition and will place a huge emphasis on organizational change management. We are seeing this trend with several of our clients today. The portfolio for the future for successful server providers in the energy industry will be weighted toward automation, service reliability, cybersecurity, compliance and safety. We're seeing clients in this industry continue to embrace cloud and move away from legacy services. And finally, oil and gas companies are continuing to put an emphasis on harnessing data they generate from oil wells and land. Clients are looking to consolidate their provider list down to a few service provider partners who do this well and are expanding to take advantage of new technologies in this field. Thank you for your time today. Stanton is up next to expand on the key themes from the first quarter.

Thanks, Dale. So for those of you that have attended the call over the past several years, you know that we typically focus the Index Insider on an important technology or trend that's changing our industry. But today, we're going to do something a little different, and we're going to focus on the top 5 most important themes from the first quarter. So let's jump in. Theme #5 focuses on the significant M&A activity in the first quarter, starting off with Atos courting DXC in late December and into January. The deal was reported to be in the $10 billion range. But as we all know, that did not come to fruition. Given how short the courtship was, we actually don't -- really didn't see a big impact on bookings for either one, which can sometimes happen when big firms announce M&A activity. IBM made 2 significant acquisitions in January at Nord Cloud and Taos. Both of those are focused on bolstering its hybrid cloud-managed services, which are, of course, core to IBM strategy, given their $34 billion acquisition of Red Hat in 2019. As Steve mentioned, Accenture continued their torrid acquisition pace, making 13 in the quarter. They actually just announced another one, focused on cloud analytics, this morning. What's worth noting here is about 1/4 of these deals from the first quarter will fold into their talent and organization practice. And this is consistent with what we're seeing with our clients, really strong demand for advice and consulting on the cultural changes required to become a digital company. Wipro made a really big bet in March with a $1.4 billion acquisition of financial services consulting firm Capco. And just last week, Hitachi announced a $9.6 billion acquisition of GlobalLogic, continuing a trend of both OEMs and IT services firms acquiring product engineering firms. So for example, like the Altran acquisition by Capgemini, and Luxoft by DXC in 2019. In Q1, we started to see some consolidation in the automation space. And given the growth and valuations of the RPA firms, big tech is now starting to take notice. ServiceNow acquired a RPA company called Intellibot, which will enable them to move up the technology stack from low-code workflow-based automation to screen-based automation. In that same week, UiPath announced the acquisition of Cloud Elements, an API management platform, which will enable them to move down the technology stack, which will enable them to have bots to talk to application APIs. And both of these companies are fighting to be the de facto automation platform for enterprises. So it's really clear why they're making these bets. As I said, big tech is taking notice of RPA, and both Microsoft and Google made automation moves this quarter. Microsoft acquired their own RPA platform in Softomotive last year. And this quarter, they made Microsoft Power Automate free. We think that Power Automate is going to be the way that Microsoft will deploy a lot of their automation capability in the future. So an enterprise-class RPA platform integrated into Microsoft's core productivity suite could be hugely disruptive to the automation market. Google also announced a multiyear partnership with Automation Anywhere, making AA's Automation 360 platform available via Google Cloud, and promising a set of industry-specific automation by embedding Automation Anywhere into Google products. So our #3 theme for the quarter focuses on people and talent. Most of the big IT services firms are announcing significant hiring plan this year in anticipation of a vaccine-fueled recovery. Capgemini announced they're hiring 30,000 people this year, a 25% increase over 2020, and Cognizant plans on hiring 23,000, a 35% increase over last year. A number of providers are also focused on local hiring. Infosys has had a big localization focus for a number of years and has hired over 13,000 folks in the U.S. since 2017. So following this localization strategy, in Q1, a number of providers announced new digital hubs in the U.S. and Canada. So for example, NTT Data is opening a new hub in Nashville, Tennessee. And HCL is opening a new delivery center in Mississauga in Canada. And it's not just the increased hiring that's important here. It's also important to understand the dramatic changes in skills profiles that -- around these hires. The focus has shifted from being specialized in a specific technology, for example, like Windows server to being both deep and broad. So hires need to have or be able to learn deep technology skills, but at the same time, have strong analysis and testing skills. The hyperscalers were very active in Q1, no surprise. Former Oracle executive, Thomas Kurian's industry strategy at Google, backed by his years of experience, selling software into the enterprise, has enabled Google to win some significant new workloads at places like Tapestry, which is the parent company of Coach, Nokia and Investment Bank, BNY Mellon. Microsoft also had some big wins this quarter, especially in the connected car space, as we talked about earlier, with wins at General Motors and Volkswagen. And as Steve mentioned, a big win on an ISG deal -- ISG-advised deal in Amadeus. And finally, AWS had a really busy quarter. In addition to getting a new CEO, and former Tableau Head, Adam Selipsky, they won commitments from BMW and Ford. And as Kathy mentioned, got a commitment from Australian Bank AMP to 100% of its workloads to AWS by 2022. And our #1 and most important theme for the quarter is the really unprecedented scope and scale of cybersecurity breaches we saw in Q1. In the SolarWinds breach, the software build process of a major enterprise software company was compromised, impacting over 18,000 organizations worldwide. And in the Microsoft Exchange breach, a decade-old flaw was exposed leading to over 30,000 compromised systems, including the European Banking Authority and even Norway's parliament. And as we discussed a couple of quarters ago, we believe these exponentially increasing attacks are going to create huge demand for managed cybersecurity services, given the volume and sophistication of these hacks. But we also have to remember here that providers themselves have been victims and will continue to be. There's been a number of ransomware attacks against IT service providers over the past several quarters. So providers are not immune, and all it takes is one highly public breach to seriously damage a firm's reputation. So those are the top 5 most important themes in IT and business services from the first quarter. As a reminder, you can get access to these insights each Friday now from our new weekly research briefing, the Index Insider. And before I turn the call back over to Steve, I'd love to get your feedback on this new format that we're trying out this quarter. So please take a minute to let us know what you think in the post-call survey. Steve, with that, I'll turn it back over to you.

Great, Stanton. And I for one, really love the new format. There was so much new information to share this quarter given the changes in the market and really the first look after the pandemic. So really great insights. Thank you. So if we summarize the combined market, ACV in the first quarter this year finished 11% higher than the same period in 2020. And again, the managed services outpaced expectations by growing 7% year-over-year, really led by the strength in Europe. In the Americas, managed services declined 1% against a strong year-over-year compare. And BPO saw heightened activity across the globe, really driven by industry-specific and engineering and R&D categories, and its ACV was -- it rose, but against significantly weaker comps. The as-a-service ACV reached new heights and posted a 15% year-over-year rise. So let's talk about the forecast. So in making our managed services forecast this quarter, we really took a look at the pipeline of large deals and the overall impact of the market. When we look at the ISG pipeline, we're seeing really strong pipelining activity. But it's still weighted towards those midsized deals. Mega deals are really a prerequisite for a solid industry growth, and we expect to see 4 to 7 mega deals over the next several quarters, which would impact our annual forecast. We're currently forecasting an increase of 5% for the managed services on an ACV basis. But should these mega deals sign as planned, I think we could see an additional 200 basis points, pushing our forecast to almost 7% growth ACV on a year-over-year basis. Our as-a-service forecast remains in line with our previous forecast of 18% growth. The hyperscalers are really focused on growth and should continue to see more than 20% year-over-year growth. The SaaS firms are growing at a slower pace, though. And I think we'll continue to see investments in industry-specific solutions and international expansion. So at this point, I'd like to hand the call back over to the operator, and we'll start the Q&A session.

[Operator Instructions] And well, I'll turn it over to Mr. Jhunjhunwala, and we'll start with your questions of ISG.

Can you guys hear me?

Yes.

Rishi, we've got you, yes.

Yes. Okay. Yes. I'm so sorry. There were some problems with the audio. If we -- maybe we can probably start with looking at the rearview mirror, right? So it's been more than a year since pandemic hit us. But if we look at the overall sourcing as well as IT services industry, clearly, there has been a recovery which has been stronger than earlier expected. Can you comment a little bit about what had really changed that has accelerated this IT adoption, which has been better than expected in the past year or so?

Yes. So I think there's a couple of things, Rishi. First of all, it's a bit of tails across the globe as we talked through. So Europe and Americas are a little bit different story right now. But in general, what we saw was big cost take-out initiatives being implemented through 2020, especially, sort of starting in late Q3, magnifying and really accelerating in Q4 and continuing into Q1. And a lot of it was really focused on cost optimization and cost takeout at the enterprise level. So we saw some big deals, some mega deals, quite frankly, in Q4. We saw more mega deals in Q1, which is very good for the market. And most of those, if you look, were really focused on the traditional we've got to eliminate costs. So whether it was data center costs, driving things to the cloud to reduce their -- drive more variable spend there or really applications, we saw a lot of growth as well on driving that piece. Kathy, anything you want to add from an Americas perspective on it?

No. What you were talking earlier about the R&D and engineering, and the IoT becoming very important now, especially in manufacturing. And what struck me is that we're not talking about if you're going to last is the data part of it, right? That's also going to become a very big opportunity as you collect all of this data, how is that then going to be analyzed and then leveraged and renewed. That's really the point of all of this. So I think we should see some activity there as well.

Yes, I agree.

Fantastic. Sorry. Steve, do you have something to close?

No. No, go ahead, Rishi.

Yes. Sure. The other thing which we found really interesting in this time's presentation is some of the things you talked about on the mega deals, right? So first of all, can you call out the 4 mega deals that probably closed in 1Q? And secondly, you've talked about 4 to 7 more mega deals that would come through in the next half, which could drive managed services growth by almost 500 to 700 basis points higher. I don't remember when managed services actually managed to grow at double-digit in the recent past. So if you can give some color on that as well, it will be really helpful.

Yes. Absolutely. So 2 of the mega deals that closed in Q1 are confidential, so we can't disclose those. The 2 that we can disclose were in Europe one was with Shell, and the other was with Deutsche Post. So those were 2 big ones. And also we're seeing a lot of -- an awful lot of renewals in there. And again, they were both focused on big cost optimization plays as they go forward. The activity, though, for -- looking at Q2 through Q3, so call it probably the next 6 months, depending on the size of the deals that could even go out into a little bit further into Q3 is there's quite a bit of pent-up demand. And there's just -- there's a lot of activity out there. So we think some of those are going to come through, which are going to propel it. That's sort of why on the forecast, I was hedging a little bit between the 5% to 7% growth because of the mega deals hit, which we've got some confidence that they will, I think we'll be at the higher end of that forecast.

Interesting. And when we talk about large deals and the amount of deals that have been signed in the past 2 quarters, can you comment a little bit about the pricing competition? Is it higher than usual? And on the flip side, [ life side pressure ] getting reflected in the bid pricing, given that you've talked about robust hiring plans already?

Yes. Absolutely. Stan, why don't I turn that over to you? Because I know you did a pricing analysis on the Index Insider in February.

Yes. Rishi, so let me talk about the supply side first. So I think the hiring angle is interesting because I think it does signal what we are believing is happening. And Steve talked about this as managed services is recovering to pre-pandemic norms. But I think the challenge is going to be is securing the right talent and then also having the technology and infrastructure and operating model in place to be able to train freshers as they come out of school. So there's going to be a huge amount of competition this year to be able to tap into that talent. Because as I talked about earlier, it's not just about the old model of taking somebody and then applying and then they learn a specific technology and then they can do that for 20 years, right? We need very fungible resources that are deep on technology, but also good in testing and analysis. And so I think there's going to be a lot of competition for that. Whether those providers that have announced those plans are going to be able to secure those resources, we don't know. We're going to watch that closely. Because I think there is going to be a lot of competition for that, and a lot of stress on the ability to staff some of these projects for these more specialized resources. On the pricing side, Rishi, so we actually just did some -- we actually talked about this in a recent -- in fact, we actually just did some interesting stuff around storage. And how storage prices, we've probably just assumed that storage prices will always come down. We actually saw over the past year, storage prices started to flatten out a bit. And of course, as we know, I mean, the storage component to infrastructure and even application deal is going to be a huge component and a huge part of that overall deal. So ultimately, and this kind of ties back to what Cathy was talking about, is companies are collecting more and more data. We kind of assume that storage is cheap. But as -- if you don't have that model in place to manage the collection of that data -- and are we actually going to use that data, then that can drive those prices up because of the demand for that storage is outstripping the supply. So I think at least on the storage side, we're actually starting to see those prices flatten out a bit. We're also doing something analysis actually right now in sort of the pandemic impact on pricing that's still in the works. But I think the main message here is, especially on the supply side with the resources being able to tap into those resources, I think it's going to be a key component, whether a lot of providers can meet these pretty aggressive targets that they're hitting or that they're planning on for this year.

Can I just add one more thing to that? When we look at pricing, 1 of the things that we do find is that it's not always the lowest provider that wins. And I'm sure you all know this, it's really if the client feels that there's the cultural fit and then going back to what Stanton is saying, if they truly have the confidence that you can bring to the table, the talent and skills that they need to accelerate their transformation of their digital journey. So it's not always the lowest price. It's price combined with, with, with. But I would say it's bringing the best team to the table, bringing the confidence that you can deliver what the client is really looking to achieve. And I think that's really super important in deal wins.

Yes. Well said, [ everybody ]. I think, Rishi, the last piece I would add, just on the pricing piece is we're not seeing a big increase in the price on rates or anything. Even for the digital transformation work for engineering work or even for the app space, which from a service provider space means that there's probably going to continue to be some downward pressure on margins as they go forward. It's -- I think as we come more out of the pandemic, and there's more demand out there, I think we'll see the prices increase a little bit. But right now, I think we're still very much in the mode of cost takeout, which isn't giving a lot of room for rates to be increased across the board.

Fair enough. The other question is on M&A, right? So we've seen 2 kinds of M&A playing out in this quarter. On 1 hand, we had Atos DXC, which eventually did not fruitify and Wipro Capco , which are more additional [indiscernible] that we see happening in the industry. On the other hand, we saw Hitachi acquiring GlobalLogic at fairly high valuation. Given that it's a product engineering asset probably. Just wanted to understand, given that IT spending in itself is recovering and you're seeing it's like a rising tide, why would companies look for some of these acquisitions? What's the rationale behind looking for these acquisitions and paying such kind of valuations?

Yes. I think it's the shifting nature of spend, Rishi, that we're seeing across the market. And I'll let Stanton go into this in a bit more detail. But essentially, if you think about the Capco acquisition. That really moves Wipro more into BFSI, industry-specific solutions and very much a consulting play. If you look at the other big ones, especially the Hitachi one with GlobalLogic, it's really the spend is shifting so dramatically to engineering. And we've talked about in the past, but with software clearly leading the world, we're seeing such a massive spend on engineering. One of the reports I read earlier, I think it was late last week is, Volkswagen in Germany is likely to be the second largest software employer in the -- across the continent or certainly in Germany as they continue to expand on just software engineering. So I think we're seeing this shift not away from IT but other business units really increasing their spend on engineering services, and that's putting a much higher valuation. We've seen it with Luxoft. We've seen it with Cap, Luxoft and DXC. We saw it with Cap and Altran. Now we've seen it with Hitachi and GlobalLogic. I think we're going to continue to see that because it's just such a lucrative market. But Stan, do you want to provide some more insights on that?

Sure. Rishi, so yes, I would say probably, if you look at the -- some of the ones we called out on my section, the Wipro and Atos, you could probably kind of put those into the scale bucket, increasing scale for Wipro. BFSI is already their largest industry, but they want to obviously compete more and better in that industry. So that adds scale, but it also adds capabilities. So more of a consultative capability rather than just a technology capability. Like, for example, in banking, I mean there's huge demand around sort of the core banking transformation. And that could either be replacing a core banking system or more often than not it's really big banks. It's the -- how do we fully leverage the mainframe and build a digital core around the mainframe, but that also requires a new way to think about how the technology model works and how the operating model works, and that's going to require like banking specific knowledge and consulting capability in order to make that transformation. So that's, for example, why Wipro would go after a Capco on the Atos DXC. And my feeling is that, again, though that was in the valuation of $10 billion that were one of the largest IT services acquisitions in the history of our market. I mean, last year, 90% of IT services deals were under $200 million. So that would have been a really, really big one. But at end of the day, I think that's about scale, increasing Atos' capability and scale in United States to be able to extend their one cloud investments, have complementary workplace services capabilities that it could scale across Europe and the U.S. On the -- as Steve said, on the Hitachi One. Hitachi is somewhere in the range about 50% of their business is outside of Japan. So clearly, they want to continue to expand into the U.S. and Europe. And the ability for manufacturers and OEM providers to be able to add software to their products, and those products could be anything industrial, automotive, utilities. I mean we're talking about heavy equipment here that now needs to have software added to it but it also enables a business model change because now when you add software on top of it, you're collecting data from it, then you can monitor and manage it remotely. You can turn that into a service. And that means recurring revenue. And that's happening across everybody that makes products is wanting to move in that direction. And that's why you see so many of these product, engineering-type acquisitions happening. And that the valuations are happening at -- because this is combining engineering with really serious software engineering capability. And when you combine those 2 things together, that's going to create those really impressive valuations.

Fair enough. And maybe just last question, and then we can open the floor for the rest of the audience. If you really look at the nature of the deals that have come through, and Steve, you touched upon that point in the initial question as well. A large part of these are related to cloud transformation and operational efficiency-driven deals, but what we are missing out probably is some of the deals around front-end digital transformation, which could be considered as investments into group capital, right? So it looks like there is a clear bias towards the kind of deals that are coming through. How do we read that in context of whether the overall IT spending budgets have actually gone up and whether they will sustain the momentum in 2022 as well.

Yes. Rishi, it's interesting because you're absolutely correct. There is still a lot of spend on customer experience, the B2B and the B2C space. I think the challenge is some of that spend is dispersed throughout the organization. So it doesn't necessarily always hit the IT budget. But we clearly see contracts and a lot of the lower end contracts are in that space. I don't think we're in the proof-of-concept phase or pilot phase anymore. It's clearly gone production, and it's at scale. But those deals just tend to be on the smaller size. So they're not as impactful as the mega deals that we talk about, quite frankly. And the cost takeout and the really application refactoring, as you saw with the numbers on how ADM is growing, are really the key drivers. I suspect, especially with all the service providers that have acquired design agencies and have really moved into that space, you're going to continue to see that grow. It's a little bit harder to get the perspective from an ACV perspective on that growth. So I think we're going to have to make sure that as an industry, we're able to carve that out and get a better perspective on that spend because it's just dispersed too far -- too much throughout the organizations.

Rishi, this is Stanton. I think something -- it's important to keep in mind here that, as Steve said, sometimes that spend can be very distributed. But I think it is also important to keep in mind, and we're starting to see this. And I think we're going to see an acceleration of this as we come out of the pandemic, obviously, choppy across the world, how fast we come out of it. But I think it's important that we start to think about this -- we have, in the past, thought a lot about sort of productivity and efficiency and costs, separate from sort of the customer experience. And more and more those are going to start to come together. So if you think about like a system of record like an ERP system or a mainframe and then be -- maybe the e-commerce page where you're ordering from the provider, those are starting to come together. And the pandemic in many industries has accelerated that. So if you think about in fast-moving consumer goods, let's say, for a grocery store, what was a very analog experience of walking into a store to go buy a product. And the checking out process was kind of digital, but that's kind of it. Now the pandemic means that I can now -- in my store, and it happened pretty quickly, pretty seamlessly, schedule my pickup, and I tell them what I want. And if they have it in inventory, and I can go pick it up, and it's there and there's somebody there waiting for me, that entire process, especially, for example, a grocery train, which is probably running a mainframe for their inventory system has been completely rethought in a matter of less than a year and that's across applications and infrastructure and customer experience and operating model and technology model. I mean there's a huge amount of change happening. And I think we're starting to see that reflect itself in some of these deals where these are what would be considered like multi tower deals that sometimes go outside of even traditional powers in order to help a company and that's happening, the same thing's been happening in durable goods as well. That's going to be an important metal model for us to be thinking about, it's not just about cost or customer experience. It's the transformation of the company to be able to become more of a digital firm. So not there yet, but I think we're going to see more and more of those kinds of deals.

Let's open up the floor for the audience.

[Operator Instructions] And we'll go ahead and take our first question from Moshe Katri from Wedbush.

I have 2 follow-up questions. First, the presentation points to a deceleration in growth in digital for this year. Can we get some more color on that? What's kind of driving this? And then the other thing that I thought was interesting was a strong recovery in BPO for the quarter. I don't know if it's a catch-up from prior quarters or if this is a sustainable trend. Maybe you can focus on that as well.

Yes. Absolutely. So the deceleration is interesting because when you look at the big hyperscalers. So if you separate out Google, Microsoft, AWS, that's a really big chunk of the market. And they're still growing at great rates. When you get below that, we're seeing a big shift away from some of the other cloud providers. We're seeing really a downshift a little bit on the SaaS providers. So it's the overall that we're seeing. But I think we're still going to see growth rates. We're saying 18%, but I think they're still going to be in the mid-20s -- low to mid-20s as we go forward. I think we're just hitting the law of large numbers a little bit and sustaining the growth. But the other aspect of it is, if you look at the workplace or the clouds -- the -- let me call it -- let me think of the cloud spend, if you will, at the enterprise level and what's really accelerating there, you still have an awful lot of that spend in traditional data centers. But we're also seeing that move out quite dramatically to the cloud as we talk through. So that shift is happening. But I think the combination, we're just not going to see the 30% or the 40% that we've seen in past years on cloud adoption. I think it's going to sort of settle in that 20% range, which is fantastic, right? So when we say deceleration, it's decelerating off a large number, and there's multiple factors that are impacting that. BPO is interesting. And really, as I said, 50% or almost 55% of the BPO market now is really industry-specific BPO. And R&D space, which is really reinforcing what we're seeing on the engineering and R&D side of the business. The traditional F&A, HR, that continues to shift to SaaS. The spend continues to be a lot lower there, especially against historic averages. And even though we saw a little bump in facilities management this quarter, it's still 50% below what it should be, and contact centers are completely being reenvisioned as far as what we think about the call center. The [ ship ] left is still occurring and automation is really impacting a large percentage of that business. So I think BPO, it is up off historic lows, clearly from the pandemic, but I think you're going to see this big shift to industry specific. And R&D is where the spend is going to be.

And if I may, just to add another one. Financial services had very strong showings in digital. And then it also seems that travel may be recovering. Maybe some color on both.

Yes. Kathy, you want to take the update on financial services and travel and transportation, if you like, as well? Or I can also do travel and transportation.

Sure, Steve. I think I was focused a little bit on the financial services aspect in Asia Pacific [ in mine ]. And we just see the activity there in Asia Pacific, mainly in the financial services industry. I think we know from last index when we had on the financial services is really looking at how to reinvent themselves in not just the post-pandemic world, but just in the digital world altogether. I think that's what's seen a lot of the acceleration there, and the amount of deals that as the banking and financial sector realizes that sluggish in -- if you're looking at insurance, not as sluggish in banking, but definitely not the next-generation of where we want banking to go. Travel and transportation is a little bit puzzling to me. But we have seen it take off. I think they're figuring out how to get their footing back. I think with the pandemic and the vaccinations rolling out, someone told me people are planning their vaccinations. So it's their vaccination vacations. I think Steve, there's a lot of pent-up demand there. Steve, I don't know if you have more color for that.

Yes. The only thing I would say, and I think it's going to be -- the compares are going to be really interesting for the next couple of quarters, and we're just starting to see Q1. If you guys recall, the -- we really shut everything down about the first week of March. So last year, when I did the index, I talked about how being -- we are off to a really great start. I thought we were going to see significant growth. And then the -- we just land on the brakes. Travel and transportation was definitely hit by that, probably as much as anybody. That sector is up 38% year-over-year. But when we look at the 5-year averages and sort of what's going on, it's really only up about 1% from its sort of traditional ACV. So I don't think we're out of the woods yet, but the numbers were so poor last year when everything stopped, at the -- it's just -- it's very favorable compares, if you will. Financial services, I think, Kathy, you're right, we're continuing to see the move towards core banking, much more connected, mobile banking across the board. I think the fintechs aren't raising as much hell as they were prior, but we're still seeing some of that growth there, which means you're still going to see some of the investment on the financial services side on digital transformation. But their numbers are right in line as well with sort of the historic spend that we see. They just sort of -- they're up against fairly weak compares if you look back. And I think that will -- quite frankly, I think that will be a similar story for Q2 on just the compares. Though, I think when we do, Q2 will give us a really good indication of when the industries have truly recovered and which ones are really struggling still.

And we'll go ahead and move on to our next question from Bryan Bergin from Cowen.

This is Zack Ajzenman on for Bryan. We had 2. First one on large deals. There were some large deals, obviously, to support the market in Europe. If you were to exclude those, how would that region have looked? Another way of asking that, does the quantity of deals coming through support the recovery, too? Or is it all largely carried by some of these larger deals?

So the first part of the question is we're seeing, overall activity is up. So when I just look at the number of awards, the number of awards was up almost 16% year-over-year, 15% across 5 year compares. So really good numbers across. And if I exclude the -- from an ACV perspective, if I exclude the ACV for the large deals, it would still be up. So I'll tell you what, though, on the insider, I know you guys get the insider. We'll do a bit of compare for you. And Stan, let's just take that as a takeaway to take a look at the -- on the next one, what it would be like without the large deals in Europe. But overall, TCV would be down a little bit, a few percentage points or 0.5 percentage point, probably from what we're seeing overall, but the activity is really strong, which is what I like about the market right now. And again, if -- overall, the ACV for Europe was almost $3.5 billion. We haven't seen that level for a long time, and it was $4 billion in Q4, and not all of that is large deals. So a lot of good activity.

Got it. And one follow up is on the energy BPO. Are there any managed service providers that you see most frequently in that market? Are some better positioned than others to benefit from the rising work that was cited there?

Yes. Robert or Dale, you guys want to take that one?

Sure. I'd be happy to, Steve. So who we've come across and seen in this area has been LTI, [indiscernible], HCL, Infosys, Accenture and then a few others. But those are what I would call the top players that we've seen in this area for the BPO space right now.

And we'll go ahead and move on to our next question from Sudheer Guntupalli with ICIC Securities.

In the earlier commentary, on mega deals, you kind of alluded that it is driven by renewals. But if I were to ask, how are the trends looking like if we strictly go by the new deals or new spends without accounting for the renewal activity.

Yes. So the contract database on the renewals looks really healthy. It's starting to hit some highs, especially if you think about the 5-year deals that are coming up for renewal, and there was quite a bit of just extensions last year in the market because of the pandemic, and most of those were 1 year extension. So we're seeing that activity as well. So again, when I talk about sort of the upper end of the mega deals and even the renewals, there's an awful lot of activity there. I would say the restructuring is probably still the biggest part of the market where we're seeing the growth. So it's less new scope coming through and restructurings and renegotiations as we go forward. But clearly, one of the things that we talked about in the past is that if a deal goes competitive for restructuring, the existing service provider is likely to lose 50% of the scope, if you will. So it gets really competitive when deals go out for renegotiation. And there's lots of reasons from pricing, capabilities, relationships, et cetera, that really drive that renegotiation market. But I would say over the next 6 months, certainly, the next 2 quarters, the renegotiation market looks really good.

Sure. And a follow-up to one of the earlier questions. I completely agree with a lot of large numbers you highlighted earlier, possibly in a steady-state kind of a scenario. But given the widely held perception that COVID is kind of accelerating public cloud migrations, and given that public cloud also provides a much-needed optionality of variabilizing fixed costs, which is especially relevant in times like these, we would have expected the lava of large numbers to be kind of offset to an extent. But the sharp growth deceleration in cloud ACV, especially in Infrastructure-as-a-Service by almost half is indeed surprising. Even on your outlook, despite the relatively low base, we started off the calendar year 3 months ago, with as-a-service growth outlook of 20%. And after just 3 months, it's kind of moderated a bit, so I'm just wondering, how do we reconcile this disconnect?

On the as-a-service or the Infrastructure-as-a-Service. Combined-as-a-Service or just infra? On the Combined-as-a-Service...

Both [indiscernible].

Yes. I think it's on the -- so if it's on the combined, you're correct. Again, when I look at the large hyperscalers, their growth is going to continue. I think AWS is going to be in the 24% to 25% range. GCP will continue to expand as well Azure. I think it's -- when we look at the whole basket, though, I think we will see a bit of a deceleration. Now again, you're absolutely right. And we debated this quite a bit as well over the last couple of weeks as we started seeing the trends. You still have a lot of workloads moving to the public cloud at the enterprise level. The pandemic has certainly accelerated the move to it, to the public cloud as well, which is helping fuel. And I think that's the offsetting, as you said, on the sort of the rule of large numbers, if you will. But if you look at just the overall IT spend going forward and the additional spend, I think being in that 20% range is still phenomenal for the industry to still grow at that level. We just don't see -- if you go back a few years, again, on some of those charts that we showed, it was [ 45 ], [ 49], [ 56 ], you saw significant growth as workloads were just beginning to move forward. Now I think we're really at 3 to 5 years at 20% plus that you're going to see sort of again in that low to mid-20 range. So I don't think it's a major concern from an industry standpoint. I think it's more of an interesting observation on you've got these competing things taking place. Now SaaS is absolutely slowing down a little bit. I think we're seeing more cloud transformation and whether it's just moving workloads directly to the cloud or refactoring containerization, some other strategies, that seems to be the preferred method right now. Again, I think some of that is because of the pandemic versus going wholesale moving to SaaS. And I think even as you look at what Microsoft and AWS are doing with SAP and others riding in their cloud, you're just seeing some downward pressure on the SaaS providers, which is also holding it back a little bit.

Sure. And just one observation or one question rather. If the top hyperscalers like AWS and Microsoft, Google, their growth rates are going to continue at the same level, then what -- how is the industry growth rate decelerating? Or what exactly is happening at the bottom of the pyramid on these hyperscaler ends?

Yes. A fairly large decrease in the market share. Stan, I know you've done some analysis on this. Do you want to jump in on this one?

Sure. Sudheer, so if we're talking about the -- there's definitely -- I mean there's no surprise here. There's a Microsoft, AWS and Google dominate the hyperscaler market. You have others providing those kinds of services like Oracle, IBM, but the market share is much smaller, the growth is smaller. I think it's important to keep in mind here, when we talk about this Infrastructure-as-a-Service basket, that's not just the hyperscalers. It's colocation providers. There's carrier cloud providers in there. So that's important to keep in mind. Occasionally, we will split out just the hyperscalers to show that differentiated growth because that's where most of the market share is, but that's important to keep in mind. On the SaaS side, as Steve mentioned, I think it's also important to keep in mind that a lot of that market share is held with the big guys like Workday and Salesforce and ServiceNow. They've already done that landing. They did the landing years ago, right? What they're trying to do now is expand. And when you expand beyond, for example -- and we've talked about this on a couple of calls in the past, Workday expanding into financials, ServiceNow expanding into enterprise service management. That's a much harder expansion because you're expanding outside of your core. Workday is known for HR, but I mean they're doing quite well as they expand that financial services product, but that's outside their core. ServiceNow is traditionally and was born as an ITSM solution, well-known within the IT organization, but when you're talking to the CFO about using ServiceNow to automate workflows, right, that's a different conversation. So I think we're going to continue to see strong growth in the SaaS market, but it's just going to slow because they're expanding outside of their core, and that's going to be not only a harder sell. But also just a more complicated one, and it takes more time and effort to get those bigger kind of transformational projects done.

And that will be our last question. Ms. Rudy has some final remarks.

I do. Thank -- a special thanks to Rishi and your team at IIFL for hosting today's call. And to everyone in the audience for making time to join us and for your really insightful questions. Our ISG Index call to analyze the second quarter of 2021 will be on July 7. We'll be in touch with you soon about registering for it. In the meantime, if you have an opportunity for a vaccine, take your shot. I got mine on Thursday. And I am so looking forward to hugging my parents in a few weeks. We'll see you in July.

And with that, that does conclude today's call. Thank you for your participation. You may now disconnect.