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

Good morning, good afternoon and good evening to everyone on the call. I'm Apur Prasad. I would like to thank the team at ISG for their valued work on the industry and for asking us at HDFC Securities to introduce this call today. ISG has been hosting these Index calls on the managed services and as-a-services markets for over 18 years. The ISG advisers work with both enterprise buyers and service providers, so they offer unique insights to key industry trends. Critical as we navigate a new normal. With that, I would like to introduce Kathy Rudy, Chief Data and Analytics Officer for ISG. Over to you, Kathy. [Audio Gap]

And welcome, everyone, to the ISG global index conference call. I'm Kathy Rudy. With me today is Steve Hall, Partner and Global Leader for the ISG Index; Stanton Jones, Research Director and Principal Analyst. And we're also joined by Johanna von Geyr, ISG Partner and EMEA lead in BFSI. This is our 75th quarterly index call, and the economy has received a shot in the arm, literally, as more people get vaccinated and economies reopen. The pandemic is not over yet, and with variant strains, we'll need to be cautious for a while. But we're learning to move forward, and that shows in the strength of our many markets. As you can see, we're live streaming today rather than doing a voiceover to slides. We're going to have a discussion of what we've seen in the market so far this year. We're also changing our Q&A format. [Operator Instructions] Please let us know what you think of our new format. Steve, let's get started. What are the main takeaways for this quarter?

Great. Kathy. Well, I'm excited about the new format as well. But first, I do want to congratulate the entire ISG team for 75 consecutive quarters of the index. Job well done. But the numbers this quarter are just eye-popping, but this is one of the weakest quarters in recent history as the pandemic strengthened in Q2 2020 and brought the managed services market down almost 17%. But even with a softer compare, it was encouraging to see us bounce back to prepandemic levels, and I'll share that in a few minutes. So the global market ACV accelerated for the third consecutive quarter, breaking through the $19 billion mark. Managed services and as-a-service reached new highs this quarter. And the managed services rose 24% year-over-year due to an abundance of midsized deals and increase in the workflow in both EMEA and Asia Pacific. The Americas ACV was up double digits year-over-year and quarter-over-quarter for the second quarter in a row. The 14% year-over-year rise in managed services was off a particularly soft compare, and the as-a-service ACV nearly reached $6 billion this quarter. EMEA's combined market ACV was up 31% year-over-year against the COVID impact of 2Q '20. Most geographies generated sizable gains to give managed services a year-over-year boost. However, after closing out 2020 with a $4 billion quarter off the back of megadeals, the managed services slid slightly but remain 9% above the historic averages. The as-a-service ACV, though, is approaching $3 billion per quarter and now accounts for over 46% of the total market. Given the growth, it should surpass the managed services market by the end of the year. The Asia Pacific market's ACV shot up 59% year-over-year. The as-a-service market was up 50% year-over-year and continue to be over 70% of the total market. The managed services market, though, was up 87%, primarily driven by several large deals in the ANZ energy sector. The global market seems to be shaking up the worse of the pandemic. The combined market ACV of $19 billion for the quarter is up 32% year-over-year and 11% greater than the prior quarter. When you compare the first half of 2021 with the same period in 2019 prepandemic, the growth rates are a very healthy 27%. Managed services ACV is nearly $8 billion this quarter after a string of quarters at barely top $7 billion. More contracts than ever were signed this quarter, many of the $20 million to $40 million range. And the first half ACV was 14.6% higher than last year's COVID constricted first half and a solid 8% more than first half 2019. The new high as-a-service ACV of $11 billion this quarter was up 38% over last year's pandemic impact at the quarter and up 13% from the prior quarter. The first half of 2021 posted year-over-year growth of 25%, and as-a-service now accounts for 58% of the combined global market. We're going to now focus on the first half performance, so everything that you see here is really Q1 and Q2 combined. The $12 billion ACV of ITO was an 8% increase year-over-year with vigorous contracting activity and a 10% gain over 2019. ADM showed a rise in ACV of more than 30%, whereas infrastructure declined 11%. The ACV for app services continues to expand in response to the rapid growth in cloud computing, data modernization and the digital workplace. This chart really shows the recovery and potential forecasting that we'll talk through. The recovery looks strong and sustainable based upon 3 key factors. First, backup demand from last year, as you saw the 2Q 2020, had a 17% drop in ACV, but we've really seen a V-shaped recovery. This led to a strong backlog of deals that were renegotiated to decrease rates in multiple industries that are now being recompetitively bid or rates are returning to normal. We're also seeing this across retail, travel and transportation and hospitality. Transformation deals require deeper investments to achieve ROI goals in many organizations, and these are accelerating in manufacturing and life sciences, which is requiring organizations to make deeper cuts in traditional ITO. And finally, almost 60% of the ITO market is now app services. This is the convergence between traditional and digital that we've been seeing for the past 8 quarters, and this area continues to expand and we believe will drive top line growth across the market. BPO during the first half grew a full 48% year-over-year but dipped a percentage point from first half '19. Industry specific, F&A, engineering and R&D, all contributed to the strong performance. The change in BPO services is quite profound, though. As we've discussed, CRM and facilities management were significantly impacted during the pandemic. CRM is up 55% year-over-year and starting to recover, but it appears to be renegotiations on previous pent-up demand versus new scope. Facilities management is also recovering but remains less than half of its previous value, and long-term work-from-home trends will continue to suppress the sector. Industry BPO fared well, though. The big trend is that over the last 3 quarters is the rise of engineering services. We've seen this in the acquisition space and are clearly seeing in the deal flow. We think the growth of engineering will continue to reshape the BPM space given the rapid transition of cloud, and we're considering to breaking out engineering to better report the rapid growth across industries and geographies. The Infrastructure-as-a-Service ACV of $15 billion for the first half, reflects a 28% year-over-year increase supported by an unusually strong second quarter. Software-as-a-Service grew 15% year-over-year during this period. So COVID was absolutely an accelerant for the as-a-service market. Looking back at the last 10 quarters, you can clearly see the impact. You can see a slight dip in Q2 and early Q3, which was primarily driven by the intense focus on establishing the work-from-home environments in the first several months of the pandemic, and Stanton will talk about this later in the index. We now see the movement that cloud and the broad adoption of SaaS solutions across all industries and are truly is accelerating the growth of the broader market. Now let's take a look at the global provider standouts. So all the companies you'll see earn their spots based on awards made during the trailing 12 months. The most successful providers really bring innovative ideas and future-proof offerings relative to the clients. This quarter, though, we're going to take a closer look at the success of several of these companies. Let's first take a look at TCS. TCS is a regular in the big 15 and ended 2020 with 2 very large acquisitions in Europe, Primerica and Postbank Systems, that many in the industry predicted it would take some time to digest, and it would be a long while before TCS added to its position. But they were wrong. TCS chased those winnings with blue-chip clients across Europe to include Ericsson, Vodafone, [indiscernible], Nationwide Building, [indiscernible] and Alcatel-Lucent, among several others. So since 2013, TCS' Europe revenue as a percent of sales has grown from 26.7% to almost 33%, and all of it -- most of it is outside the U.K. Its Europe business recently topped $7 billion and has more than doubled in the past 7 years. That's all the more impressive given that a pandemic closed down economies in one of those years, and its EMEA's based revenue should accelerate as TCS ramps up from its recent acquisitions. Accenture has been particularly busy with M&A activity in the double digits in the past month. Accenture was honed in on the hot market of engineering, picking up the German firm, umlaut, and its 4,200 engineers and consultants and then [indiscernible] of engineering capabilities from [ DI Square ]. And of course, Microsoft, Amazon and Google all saw phenomenal growth this quarter, and we will continue to highlight major wins in their various markets. CGI is also expanding their European presence by signing a 5-year extension at Shell were $20 million to modernize Shell's mobility management and fuel payments platform that currently processes more than 250 million transactions. Kathy, can I flip over to you to talk to the Americas broader market?

Sure. Be happy to. We've gotten used to the 1 quarter out, next quarter down rhythm in the Americas. But this quarter was a breakout. Combined market ACV surpassed $9 billion for the first time and pushed year-on-year growth 25% and quarter-on-quarter growth to 10%. Combined market ACV in the first half was up 14% year-on-year, similar to growth rates in prior years. Unlike the global market, which showed some atypical acceleration emergence from the pandemic, first half growth in the Americas has maintained consistency. Managed service ACV this quarter was up year-on-year and quarter-on-quarter. The momentum of midsized deal activity that we noted in the Index last quarter was still persistent. This quarter, a record of 115 deals between $10 million and $40 million were inked. In the first half, managed services ACV rose 5% year-on-year and 13% compared to the first half of 2019. Seemingly, the Americas didn't suffer much from a COVID pullback as the other regions did. As-a-service ACV continues to rise, reaching nearly $6 billion this quarter. That's a year-on-year growth rate of 33%. Enduring the first half, the growth rate was 20% year-on-year, which is notable, but the half year growth rate in the Americas has dwindled since 2016 when growth rates prior to that were in the 40% range. As a service now accounts for 61% of the combined market. Because of its small size, the Asia Pacific market can change with just a few deals. In this quarter, its combined market ACV topped $3 billion for the first time, up 59% year-on-year jump and a 35% quarter-on-quarter gain. Its first half ACV of $5.8 billion is $1 billion more than any first half on record for the region. After a series of some weak quarters in the region's history, managed services exploded this period with an ACV of over $900 million. It was a busy quarter with 62 contracts awarded, a dozen of them were over $30 million. Only 8 deals that size were awarded in all of the last year. From a country perspective, only Korea lagged. The first half ACV was up 28% year-on-year but down against the first half of 2018 and 2019. As-a-service has taken off the past 3 quarters after maintaining an even [ kill ] the first quarter of 2020. This quarter was the highest yet in ACV, $250 million more than any prior quarter. Asia Pacific's first half ACV rose 30% year-on-year and was ahead of the 28% growth rate of the first half of 2019. As-a-service now makes up 77% of the combined market ACV. Steve, you've got a front row seat to EMEA. Can you tell us what's going on in that region?

Awesome, Kathy. Great to see the growth in Asia Pac come back. So this quarter in EMEA marks the third consecutive quarter that the combined market ACV stayed above $6 billion. Overall, combined market ACV was up 31% year-over-year and up 4% quarter-over-quarter, all driven by the as-a-service market. The half year growth of 25% year-over-year far exceeds the growth rate from a year ago, and the overall ACV in first half '20 declined by less than a percentage point. The EMEA managed services market was down 4% quarter-over-quarter but up 17% year-over-year. Some of the decline was of record numbers over the past 2 quarters where the sector -- then the sector really registered a flurry of mid-range deals in the $20 million to $40 million range this quarter, similar to what I think we saw in Americas and Asia Pacific. North Europe, which includes U.K., [ IEN ] and the Nordics, delivered almost $1.7 billion of managed services ACV this quarter, one of the highest since Brexit was passed in late 2016. Financial services and manufacturing are the 2 largest markets in EMEA, accounting for over 45% of the total ACV. Both sectors were up significantly year-over-year, though flat quarter-over-quarter, which led to stronger results in Q2. As-a-service ACV this quarter nearly reached the $3 billion mark. First half ACV rose 27% year-over-year, and the as-a-service market now comprises 44% of the combined market, lower than the other regions but certainly growing in EMEA. Now let's take a look at the global industry trends. Rather than do an in-depth look at only one industry, we're going to present a short overview of the industries. And then Johanna von Geyr will share her insights into the insurance industry. We've also got the ISG Index report where we'll provide more details. So just a couple of call-outs this quarter. First, energy was up 26% on the half year mark. They're also up 11% over the 5-year average. So we're starting to see some good trends in the energy space. Retail also seems to be recovering from pandemic lows. The sector is up 33% at the half and 41% against the 5-year average. Financial services, which accounts for 21% of the total ACV for the first half of 2021, was up 24%. This is going to be the highlight of the quarter, so we'll really take a look at BFSI and specifically insurance. So with that, I'd like to turn the call back over to you, Kathy and Johanna von Geyr.

Thanks, Steve. Welcome, Johanna.

Thank you very much. Amazing to see the market picking up so well across all the industries. But now, as Steve already announced it, let's have a look at what the insurance industry is doing in a bit more detail. As others, they are recovering from the COVID pandemic situation, and they are on that journey pushing the digital transformation at a speed we've probably not seen beforehand. If I talk nowadays with C levels, many of them have certain milestones in the works for their digital transformation, not only since yesterday. But now they really wanted to work at absolute high speed. The challenge for all industries is to become more efficient and get more customers on board and interact with them. That connection and interaction is a bit trickier in the insurance industry, say, than, for example, in the manufacturing automotive industry. Buying a car is certainly much more fun for customers than buying an insurance policy or filing a claim, but simplifying the insurance product and the digital experience can make the interaction much more positive. If you look in the insurance organization nowadays, a lot of them are carrying a large portion of mainframe. And simplifying that complex legacy environment is really one of the biggest levers to gain cost efficiency in our days.

Johanna, I want to interrupt with you with a question here about the mainframe. I think there's got to be more simplification, not just the mainframe. Can you talk a little bit about that?

Think of it this way. If you have a fire insurance tariff that includes yellow and green fires in Belgium, but red and purple fires in the U.K., why not simplify all to a standard tariff covering just fire? That sounds simple, but it incorporates new functionalities, hard-to-design applications, process efficiencies, APIs and much more.

On offer simplification, although that did sound a little complicated with all the fires. But there's got to be some more trends that are important. Can you talk about those?

Yes. Sure. Historically, insurers grow organically and through M&A activities. Many companies are still using 30-year-old mainframes and applications, but not Ping An, one of the most valuable insurance firms in the world. It has grown the majority of its business from a standing start, which significantly reduce complexity. The only way to get new cost efficiencies in place after IT is modernized is to look to those activities and radically simplify the product and transition from product to client services. We see that happening in the market now quite a lot. In the U.S., especially, we are seeing a lot of private equity investing in M&A. Private equity firms can leverage the insurance pools in consumers insurance premiums and other contract fees as a steady stream of reliable assets. Having that, permanent capital at their disposal reduces their pressure on them to raise money in the market. As private equities buy up companies, the cost pressures on providers increase. This changes the playing field for service providers, and it's not making it easier. However, none of the private equity investors is an operator. So they typically look to third parties to manage operations such as third-party administrators and outsourcing IT systems. Insurers, being very risk-averse, have made cybersecurity a priority. They are developing cyberinsurance products and constantly improving their own organizations. Cyberattacks are hitting businesses with greater frequency and severity. More companies are opting for cyberinsurance, and its cost has risen markedly.

Johanna, there's so much there to contend with. How do you see technology making a difference or helping support some of these challenges you're seeing in the market?

Let me take again the example of Ping An. Their early in place of cutting-edge technology has helped to increase efficiency, reduce costs, improve customer experience, strengthen risk management and sharpen the group's competitive edge. It's an example of what the industry is looking for when you specifically ask where technology has made a difference. Many insurers have their framework contracts with hyperscalers nowadays. They are constantly taking over a bigger portion of data, including personal and sensitive data in some instances. We expect this market to significantly grow and scale in order to be more flexible in today's markets. Not everyone can manage hyperscalers on their own. Insurers may need the service integration layer on edge. This presents a big opportunity, especially in the next 2 or 3 years, to get IT service providers engaged here and help insurers go through that journey.

What are the other trends that you think we should know about or should be thinking about?

Certainly, AI. If we look to the heart of an insurer to the contact center where increased customer satisfaction tends to generate more revenue per customer, for example, and also in the back office where machine learning helps price risk more effectively as another example, these are really good opportunities to improve. But AI is not at scale yet. For big and small insurers, that journey is still in front of us. It's more a proof-of-concept status, I would call it. Looking into the startup world, and you call it -- you can call it a stunt, but Lemonade has demonstrated what automation and data transparency can achieve. The claim paid in just 3 seconds without paperwork. Imagine this would be at scale with other insurers as well. It's a tip of the iceberg of what is yet to come.

It really is fascinating. I know that my daughter uses Lemonade for her renters insurance, and I just think wouldn't it be easy to do all of your insurance that way? I know you talked about cyber a little earlier, and it's really on everyone's mind. There's cybertechs going on every day. What should we be thinking about here?

Look, the increasing use of new technologies, self-learning machines, cloud computing, digital ecosystems, 5G and our dependence on intelligent devices are all part of the global digital transformation of businesses and the society. If we look back into 2017, 27 billion devices around the world were online, and it's set to increase fivefold to 125 billion by the year of 2030 according to latest research. Cybersecurity products are beginning to be aligned with new technologies. Cyberinsurance could become more mainstream with its results through technology providers. Look at the models adopted by Google Cloud, Allianz and Munich Re. The requirements for comprehensive protection are complex, and safeguarding against financial losses is only one component. Munich Re has developed its own cyber ecosystem, involving multiple companies, technology companies, IT security providers, startups and that to develop solutions for cyber risk of the future. Increasingly, tech is meeting the challenge of personalizing the customer experience, which is at the heart of the insurance business. This is nothing new, but the technology has matured greatly. Learning what customers are doing, what they want to do, where they see their risks, it all comes together with technology.

Well, how do you see successful service providers adjusting their businesses to these new trends and the new challenges put in front of them?

It depends, I would say, where do they operate, what is the size of their business, what kind of scope do they cover, et cetera. If we look in the EU nowadays, we see some in-sourcing activities for insurance firms. But in the U.S., there's no repatriation happening. More and more hyperscalers are partnering also with consulting firms. This gives additional competition for the provider world. They will need to keep alert to how they can build up their transformational consulting skills in order to support the client at the same level. A multinational 360-degree provider with a key application focus has the advantage of combining domain knowledge and consulting with technical knowledge and the ability to scale across the globe. It can go end-to-end and across all towers, which is a significant competitive advantage nowadays for global insurers. A provider focused mainly on infrastructure will still find a market because digital transformation won't happen overnight, but that market is certainly declining. Niche providers can stay competitive with multinationals given the growth in micro verticals, insurance tech and analytics. They can succeed by taking on small chunks of the business and over-delivering. Indian heritage firms are growing into this field. Although in Europe, especially, for more midsized providers, finding enough local language capabilities can be a challenge. The sense of urgency to develop a comprehensive long-term cloud strategy is huge. COVID showed us this one multiple times. If I'm a business that's not in a position to be flexible and respond to different market requirements, I'm putting my entire business at risk. With the cloud strategy, I gain flexibility and modernizing applications, this to get to the next level of maturity. Stanton, I believe you are up next to recap some of the hot topics in this past quarter.

Thanks, Johanna. So yes, you're right. This quarter, we're going to focus on 3 key themes from the last quarter. So we're going to kick off with some interesting changes in how enterprises are buying IT services. And then as you just talked about, Johanna, we'll talk about cybersecurity and really the massive impact that recent breaches are having. And then we'll wrap up with some interesting data on the resiliency of the Indian IT services sector. So let's jump into our first theme. So you may recall, a couple of years ago, we talked about the time line of the outsourcing industry. So in the 2000s, outsourcing was really focused on cost reduction. That's obviously changed dramatically. We've talked a lot about that over the past few years, and I want to kind of show you some data to back that up. So we recently looked at a basket of ISG advised deals where multiple providers bid on the same scope. So this is multiple deals with multiple providers, but they're bidding on the same scope in order to get an apples-to-apples comparison. And the TCV for this basket was around $2.3 billion. So as you can see, the lowest bid only won 40% of the time, and the high bid actually won 30% of the time. And that's because enterprises just aren't buying based only on cost anymore. They're buying based on a business need. So for example, Johanna talked about moving faster by simplifying. That said, as Steve talked about, managed services is also often used as a way to take cost out, but it's usually a lever to fund a lot of these digital investments that we've been talking about, but it's really not usually the primary business need. The challenge is that many providers today are still making that cost reduction the primary focus and submit low bids. And sometimes that works, but sometimes it doesn't. And one of the challenges is that low bids can actually do the opposite of what they were intended to do. So they can actually create doubt if the provider actually understands the complexity of the environment or if they can actually continue to deliver at a high level when margin pressure starts to kick in, in the out-years of the relationship. But there's another really big change coming on top of what we just talked about, and that is enterprises are increasingly prioritizing environmental, social and governance, or ESG, criteria and their evaluations of IT service providers. So for example, enterprises are looking at things like diversity of the sales team and of the delivery team, the provider's commitment to the environment, their corporate governance practices, for example, in order to measure and reduce their third-party risk. So really, the net here is that providers that have pursuit teams that understand and can really kind of tease out the real business need, obviously, backed up by proven delivery credentials and a really strong commitment to ESG, we think, are going to be in a position to win, even if they're not the lower bidder.

Stanton, we hear so much about ESG recently, and I don't know if it's just selective perception on my part. But every time I turn around, I hear about investors looking at ESG, enterprises looking at the ESG commitments of their service providers. I'm thinking that this might be something that's a topic we talk more about as we move forward.

Absolutely. It's been a really important criteria for enterprises as they evaluate these solutions. So yes, we're going to talk about it more in the coming quarters.

Yes. I know I'm trying to figure out how you really do an evaluation and understand the real positioning. But I know you also want to talk to us about cyber. So why don't you give us your view on where things are going in that area?

Sure. So as most of us are probably painfully aware at this point, ransomware attacks are absolutely skyrocketing. They're up by more than 300% in the past year alone. Lots of recent examples, unfortunately, to pull from here. So Colonial Pipeline, for example, shut down over 5,000 miles of pipeline in the U.S. in the first quarter. Just a few days before that, this actually didn't get a lot of publicity, but a few days before that, a Norwegian water infrastructure company was hit. And literally, right now, as we speak, we actually may be in the midst of the largest ever ransomware attack. So over 1,000 companies have been impacted by the [ Casella ] supply chain attack. So just for some kind of quick background to level set here. So ransomware attacks usually start through an e-mail-based phishing attack. So they gain access to your data, and then they encrypt it, and they hold it for a ransom. And that ransom is often demanded in the form of cryptocurrency. So the problem is when you combine a really easy infiltration vector like e-mail with companies that are willing to pay to get their data back or to not have it exposed publicly, with a really hard-to-trace payment method like crypto, attacks are absolutely skyrocketing. But that's also why demand for security services is skyrocketing as well. So as you can see here, ISG benchmark data shows that enterprise security spending per user increased by more than 40% over the past year, and we think this is going to increase even more so in 2021 because the data I'm showing you here is before a lot of the things that happened in the first quarter, for example, the SolarWind supply chain attack and the exchange vulnerability. So because of that, we're starting to see the shape of managed security services deals change as well. So managed SoC and SIM security services are in super high demand. So these engagements are typically a little smaller, sort of in the $2 million to $3 million range. But we are seeing ACV grow up to $5 million in scope, which means we can start to track that as part of our quarterly index research. That's usually happening as companies sort of broaden into areas like cloud integration and identity governance. And finally, I do want to talk also about cyberinsurance, what Johanna mentioned. So demand for cyberinsurance is, of course, increasing as is the cost. But it's also important to note that the coverage itself is actually changing as well. So AXA announced it will no longer reimburse for cyber ransom payments in France. So insurance companies are increasingly requiring security attestations for new policies and even to renew existing policies. So expect to see a really significant increase in security assessment type work over the next few quarters as companies look to beef up their security posture and, at the same time, reduce the back-end financial risk of catastrophic breach.

Stan, do you think some of those assessments will include the users', I guess, cyber knowledge or cyber awareness because you mentioned that most of those phishing attacks come from somebody clicking on wrong e-mail. So is that part of the assessment work that will be done as well?

Absolutely. So user awareness really is the #1 way to reduce the risk of an attack because, as we talked about, it's primarily happening through e-mail-based phishing attacks. So absolutely, user awareness is a huge part of it.

Interesting. I know we have awareness training here at ISG all the time.

Yes, we do. Yes, we do.

[indiscernible] clicking on anything. So I know for the last topic, we want to talk about what the impact has been on India for COVID and the resiliency, really, of the teams there. And this impact us -- hit many of us personally as well as professionally. And I think that it's great that you're going to talk about today because they've really had such an up and down over the pandemic. So give us your thoughts there.

Sure. So I think it's important to kind of step back and remember what happened to our industry 1.5 years ago. So literally hundreds of thousands of service provider resources pivoted to a virtual model pretty much overnight. And then if you recall, in the early days of the pandemic, we talked about in the Q2 and Q3 calls how we viewed provider productivity falling by upwards of 20% in some places. And then enterprises in the hardest hit industries, if you recall, requested discounts and asked to extend payment terms and delay negotiations. And so when you add all of that up, obviously, that had a huge impact on bookings in Q2 and Q3 of last year. But then in Q2 of this year, the second big COVID wave hit India. And at one point, India was seeing over 300,000 new cases every single day. And many of you on this call and lots of folks at ISG had family and friends and colleagues impacted by that massive surge. But the great news is that Indian IT really did continue to deliver. So as you can see here in May, we pulled a number of ISG project leaders who were advising large enterprises with outsourced delivery in India just to kind of get a pulse on the situation. And as you can see, we really saw pretty limited instances where a provider missed what we would call a critical service level or a key milestone. Now of course, some providers did fall behind on project work. But frankly, that was to be expected. So the main message here is that we really didn't see any significant instances of large-scale repatriation of work in order to continue operations. And I think it's also important to note that providers themselves really stepped up during the second wave. They were providing vaccines to their employees, expanding benefits to their employees. So they really stepped up. So kind of the net here is that Indian IT services sector has really, in my view, proven to be remarkably resilient in the face of COVID-19, and we think that's absolutely going to continue to be the case. Okay. So before I hand the call back over to Steve, I do want to quickly just remind you about the weekly insider research briefing. Gotten great feedback from so many of you that you really are getting a lot of value out of the insiders. So thank you very much, and please keep that feedback coming. So Steve, I'll turn the call back over to you for the forecast.

Well, great, Stanton, Johanna, Kathy, that was a great session and really good to hear the challenges about how well the market has really responded. So in summary, as we look at things, the demand environment and technology spend is really robust. I think in general, we fully recovered for the pandemic across all markets in industry. The market growth is more than the pent-up demand, and it's actually the early stages of the cycle that should continue over the coming decade. We're just really at the tipping point of digital transformation with engineering services, smart technology and solutions, 5G, cloud, edge computing, data and analytics, quantum computing, all pose to further disrupt the industry. The half year data shows really larger transformation-led deals as clients invest in data analytics and capabilities. As we discussed, the combined market finished the first half up 21% year-over-year, really propelled by a record-setting ACV in both managed services and as-a-service. The many services continues to outperform expectations, growing nearly 15% year-to-date. And given the trajectory, we could see a $30 billion ACV for the first time in the history of the market. The as-a-service ACV set records across regions and posted a 25% growth rate year-over-year. Growth continues in all regions and accelerated across Europe. For the managed services forecast, we're encouraged by the high number of mid-level ACV transactions, sort of in that $20 million plus range. Healthy growth is possible even without the megadeals. So we expect to see some megadeals in Q3. We expect a strong second half would begin -- could push us up over the $30 billion ACV mark in 2021. This growth will be driven by apps, refactoring and engineering services. So we're raising our full year guidance to 9% growth in the managed services for the year. This implies again that the total annual management services ACV for the full year will approach $30 billion and represent a 5.7% gain over 2019's prepandemic managed services full year ACV. The as-a-service market continues to expand at similar rates. Overall, the last 5 years, the market has seen a 20% compounded annual growth rate, largely driven by cloud adoption. We expect to continue that acceleration of our forecasting a growth rate of 21% for the full year. We're now going to start the Q&A section. [Operator Instructions] And Kathy, over to you to kick us off on Q&A.

Thanks, Steve. Great session, everybody. We're going to start out with the questions from our host. So Apurva, please go ahead and give us your thoughts and questions on the Index we just covered.

Thank you. Excellent presentation, guys. Thanks, Steve, Kathy, Johanna and Stanton. Just kicking off the Q&A. The first one from my side. This is more on the deal pipeline and more so the nature of the pipeline. So we've heard from large service providers on strong momentum in midsized deals. You've also alluded to that. I think in the presentation, you did mention about a 78% awards in the $20 million to $40 million ACV. So in that context, how should we think about the nature of pipeline from a more volume and a deal size perspective?

Yes. Apurva, I'll take that initially. So the pipeline has been strong, as we talked about. So we did have 4 megadeals this quarter, 2 in the U.S., 2 in the U.K. That's sort of held but not really that strength. All the strength is sort of coming from that $20 million to $50 million ACV range. And with that, we're sort of seeing strong pipeline, not only in ours, but the type of work is quite interesting. Again, as we said, apps are really sort of leading the way. So apps are almost 60% of the ITO spend now. Product engineering, industry-specific BPO. So the areas where we're seeing it are really areas that are going to continue to grow. So when we look at the forecast and we kind of see the rest of the year, strong pipe, see an easy path to really $30 billion ACV for the managed services bid. And I think we see continued growth going into the next several quarters.

And next one is more on enterprise decision-making. So I mean as we gradually come out of the pandemic and some of the more exposed segments seem to be rebounding, do you think -- do you see further acceleration in digitization even as compared to, let's say, early part this year? And let me layer that with a related piece. Do you think that there is pent-up demand probably that was held back due to the pandemic that can get released as we gradually head back to those numbers?

Yes. I think there's 3 key points here, and we talked a little bit about on the COVID slide. And when we really went through and looked at the market over the last 8 quarters, it was so compelling. So first, there was some pent-up demand. And if you think about that slide where we really showed the drop, some of that demand is being eaten up. Now we know that for Q2 and Q3 of last year, there was a really big focus just on work-from-home. BPO segment had really dropped. Even IPO dropped significantly. So some of that demand is just being pulled back up. Second is, though, the whole transformation of digital is having a huge impact on all industries. Some of them that really don't have the capital right now to fully move forward with their digital transformation continue to use outsourcing and other means to kind of fund those activities. So we're seeing more of that pull in, and that's really driven on the app side. The third piece is infrastructure is clearly going to the cloud, but all of the refactoring work that has to take place, all of the API and micro services integrating apps into that environment, is just really beginning. So really at the tipping point, I think as we go forward with this, and it sort of holds on what we're seeing the data. And those 3 trends, I think, are going to continue to drive the momentum as we go forward.

All right. And on pricing, if we get to that, so there's a very interesting stat in the presentation, I think, in Stanton's piece. And I think it did feature in one of the earlier ISG insider editions, highest bid winning 30% of times. So I mean talking about pricing environment, do you think the current supply side resource crunch is supporting some form of a pricing uptick? And maybe another connected question to that is whether are you seeing any change in price discounting for some of the larger or megadeals.

A lot to unpack on that one. So let me take it a couple of ways. We're not seeing a tremendous amount of price fluctuation because of the challenges on the supply side. Clearly, and, Kathy, you may want to talk about this a little bit as well. There is this big talent crunch right now, but that talent crunch isn't necessarily driving higher rates in the market. And in many ways, I think the market is disconnected a little bit from the cost of labor or the price because of all the automation that's coming in and how we think differently about how the work is done. So there's really becoming sort of the separation now between the cost of labor, the T&M piece and how work is done because of automation, because of some other things. Stanton, why don't you take the question on what do we think about the deals between the 40% and the impact on price? And then, Kathy, maybe you follow up a little bit on the race to talent and what that means for organizations to retain that talent.

Sure. So yes, we got a lot of interest when we published that research about the lowest bid, not always winning. We actually got a really interesting question in that I'm going to take away and do some research on, and that was kind of the relationship between that and incumbency. So I think it's an interesting question to kind of go research is to understand how does incumbency impact that winning bid. I think that the main message here is we've gotten so used to over the years talking about outsourcing as a cost reduction play, right? And we talk about that a lot. Clearly, it still is, and there are substantial savings to be had in many cases. The key message here is that, that savings is more often being used to drive investments into new digital offerings. It's not just a pure cost takeout play. And I think that's really the main message here is that, that is sort of a means to an end, and teams and providers that can really kind of tease out what that ultimate business need really is and why they want to take that cost out in order to go fund those new initiatives, I think, are set to perform quite well over the next couple of years. And then back on the talent side, I'm just kind of looking at some of our data here real quick, and we were talking about this in the precall. If you look at spending across digital initiatives, so some data that we have shows that 37% of spending on digital initiatives is on people, 24% of that is on services. So the lion's share of those digital initiatives are getting taken up by people and services. But on the people side, 2/3 of that spending is contractors. So what we see happening is companies are really grabbing and reaching for that talent that they can't find internally. But I think what's going to happen when we look at this data this year is I think over time, that shift is going to start to happen of contractor resources sort of moving more into that services bucket as providers start scaling up their digital initiatives. So we've seen lots of announcements in Q1 about hiring. So just looking here at some of my data. Capgemini was planning on hiring 30,000 this year. That's a 25% increase over last year. Cognizant, 23,000 this year. That's a 35% jump over last year. And Infosys plans to hire 24,000 university graduates compared to 15,000 last year. So there's a lot of investment in talent happening, and that's really where we're seeing so much of that crunch happening on the enterprise side is getting access to that talent. I think over time, it's going to shift from a contractor profile to more of a services profile.

Stanton, just to add to that. When I see pricing come in, what I'm seeing more now than I have ever in the past is a tiered set of pricing based on skill and the actual activity being performed for the initiative or the transformation. So I'm starting to see what I would call transformational pricing where you have the digital experts, you have the transformational and the OCM or the change management, the management consultant, the technology pure play part, all being priced separately in the market as I think providers are really looking to hone the talent they use on the deals in the right spot, and this allows them to remain competitive by having more of a structured rate card than a blended rate card. We're not seeing pricing changes in terms of reductions in rates. We're really seeing things fairly flat but just more tiered, like I've said. So they're being more specific about the talent they use and the prices and actually across locations as well. In terms of retaining talent, I think this is something that's going to be really a key focus going forward. We're going to see a lot of like what we see lately what they're calling the great resignation where people are really looking to think about who they work for, why they work there, what is going to be the most important thing for them. And there's just a lot of opportunity right now. So I think Steve talks about talent. We all talk about talent, but I think it's also about how you retain, train and treat your employees and give them the most optimal place to work.

Yes. Well said, Kathy.

We have a lot of audience questions. I don't know if we want to switch to a couple of those. I've been keeping track of the ones that we've had. A lot of them are around the topics we've already been talking about. There was a question about what portion of the deals are substantial renewals compared to supplier switching brand-new deals, and that was talking about the nearly 60% of ITOs and app services and how is this impacting our growth trends. Steve, do you want to talk a little bit about that? I think you touched on it a bit.

Yes. Absolutely. So we did see a really big change this quarter and a big change from what we've seen previously. So when we were in the middle of the pandemic, almost 40% of the deals were really renegotiations, and most of those were renegotiations: I need to get money out quickly. Some of those didn't even hit our numbers. I would say another 10% didn't hit our numbers because they were just renegotiating part of that deal immediately. What we saw this quarter, though, was just the opposite. We saw 70% of the deals really being new scope and competitive renegotiations. So again, it kind of goes back to that pent-up demand. But I think, again, we've got a much bigger pie now. The pie is growing versus just sort of slicing it up the way the last sort of 18 months have been. So I think that's going to continue. On the ADM side, I think 60% of the market on the IPO side is ADM. Now I'm an engineer. I'm an apps guy, most people know. I think that's an incredibly good thing because what we clearly see is the infrastructure is moving to the cloud. Consumption is going to be based in the cloud, and that's going to be new operating models as we go forward. And we're seeing that already shape. I think, Stanton, you talked about this a couple of Index calls ago, and the trend is just perfectly clear. What the outside, though, means, though, again, is really that continued changing of the organization and that ability to drive more and more out. So that's positive for the overall market.

Great. Thanks. Johanna, I have a question for you. It's how do you see low-code no-code affecting the ongoing development situation, if at all, especially in the insurance sector?

What we see with our insurance client, that's mostly embedded in the platform solutions now. And the organizations are training business users on the IT skills to help analytics, et cetera, et cetera, but I wouldn't think that is in any case insurance specific. That's something we see at other client on the same level.

We have -- thanks. We have a question around engineering services, and they're looking for a little more color, the types of deals, ACV, are they advised? So just a little bit more around what we're seeing in engineering.

Yes. So engineering, I'm very bullish on, and I think the numbers are really calling it out. Just to put a bit of perspective, ISG has invested in this pretty significantly over the last quarter as well. So we've hired some senior people to come in and really take us to the next level on how we even think about it. The overall market, as I said, is up significantly. It's the highest number of volume of deals that we've seen, and that's tracked over the last several quarters. It's the highest ACV that we've seen. It's being really managed and advised now. The average ACV on the deals is now around $15 million. So they finally have some bulk and everything as we go forward. I think -- and I've been around this space for a lot of years. We've seen some fits and starts. But I think it was a bit like digital transformation. We knew it was coming. We knew things were going. We knew we were going to transition to the cloud. We knew IoT and analytics were taking over, and everybody was just ready. We already know those are accelerated. Engineering is just on that same cusp, and I think we're going to see that acceleration. We've seen it again over the last couple of years. It's clearly arrived right now. The good thing is we're starting to see clients really actively engage, and they're very different. Again, as I mentioned earlier, that IT, OT integration is really big. Thinking about the SaaS solutions that are big. And because it's software, you're going to see software essentially eat the world again as we keep saying, but really drive through all business functions.

Yes. And Steve, I think it's also important to remember in the ER&D space. It's a highly fragmented space with lots and lots of providers, and those providers tend to be very industry-specific or region-specific. But I think what you -- what we're seeing happening now, as you talked about sort of the average ACV, around $15 million, it's almost like a consolidation is starting to happen. I'm just looking at our M&A database here, and I'm already looking at over 60 M&A transactions just in the ER&D space. So there is absolutely consolidation happening. We think that that's going to really start to shape up, and that's one of the reasons, as Steve talked about, we're kind of thinking about how we're going to trace that and track that on an ongoing basis as that market starts to consolidate.

Yes. You're absolutely right. I mean the M&A, whether it's a leading or lagging indicator, is -- clearly supports out what we're seeing as well. I think it's the trend for 2022, I think, for sure.

There's a question around diversity and vendor teams playing a role in vendor evaluation. So I can take this real quick, and then maybe, Stanton or Steve, you want to jump in. But we're absolutely seeing this become something that's more and more important to our clients as they look at the make up of the teams that they'll be potentially working with as well as how that fits into their environment and what they're looking to do in terms of diversity in their own organization. So yes, I think for sure that this will continue to be a factor as well as other ES&G attributes. They'll be asking more and more for it, and we're really thinking about how we can help our clients understand the ES&G relationship with the vendors that they're working with. Steve or Stanton, do you want to follow up on that?

Yes. I mean I think it's absolutely -- it's here, like this is getting incorporated into provider evaluations now. But also, remember, it's not just about, as we talked about, the diversity side or your firm's commitment to becoming carbon neutral. It's also a lot more scrutiny on governance and service providers, governance, corporate governance practices, and that's because of this increased focus on third-party risk. So in that cyber risk, it's reputational risk, that's becoming exceptionally important in many, many evaluations and is really taking off, and I think it's going to be really important for providers, too.

If I may, Stanton. If you look into the insurance industry, this is a top priority on each and every CEO who acts on a global scale in the moment, and that's certainly echoing what you see on the provider side. And we really expect here even in BFSI -- well, especially in BFSI, a strong push towards the end of the year into next year.

Right. I see a lot of the providers actually being ahead of this as well. I mean they're really focused on it, looking at some of the reporting that we see. It's pretty encouraging.

Yes. I think from our industry guys, it's going to be so critical for us to focus on the E. All 3 are really important, but the IP industry as a whole generates, call it, roughly 2.5% to 3% or 2.5% to 4%, depending on the country, of all CO2 emissions. So given that, we can really start thinking about what it means, how do we accelerate cloud, how do we think about DLT, how do we think about analytics and compute, all things that will lower it. And we've heard some amazing stories from multiple service providers on what they're already doing on the E, and I think it's really going to change as we go forward. And sustainability is top of mind across so many organizations now. So it is great to finally see. Good. So Kathy, I think we're just at the top of the hour. This was an outstanding session, everybody. Please give us some feedback. We'll leave it up, so you can give us feedback on the -- in the chat room on what you think about the new format. We also have the new Index that Stanton sends out. I think what we'll do is we will even take a lot of the questions that we didn't get to and maybe answer those in the Index, so we have an ongoing dialogue as we go forward. So Kathy, over to you.

Thanks, Steve. We did get a lot of questions, so we'll absolutely make sure that we put those into the Index. So thank you for everyone's participation and attention. I'd also like to give a special thanks to Apurva and his team for hosting today's call and to everyone in the audience, again, for taking the time to join us and your really good questions. Our ISG next call to analyze the third quarter of 2021 will be on October 13, so mark your calendars. We'll be in touch with you soon about registering for it. In the meantime, if you get the opportunity for a vaccine, take your shot. Do it for yourself, your family, your community and the economy. And we'll see you all in October. Thanks a bunch.