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

Good morning. I wanted to welcome everyone to the Quarterly ISG Index Investor Call. My name is Moshe Katri. I'm a Managing Director at Wedbush Securities, equity research with primary coverage of payments and IT services. I will be co-moderating this morning's call with the folks from ISG. In general, given its unique role, essentially intermediating between enterprise IT buyers and IT services and product vendors, during the past 15-plus years, ISG has been able to provide us with a unique perspective of ongoing trends in the IT services space. The last time we hosted a call with ISG was July 7 last year at the peak of the pandemic. Obviously, with the uncertainties created by the pandemic last year and the opportunities we're seeing as, hopefully, we're in the process of overcoming the pandemic, the company's perspective here becomes more and more critical and relevant for the investor community. Now similar to prior calls, we will start maybe with some questions to the ISG management team. And obviously, we'll proceed with a presentation. With that, I wanted to pass the call over to the ISG team. Maybe we'll start by focusing on a couple of relevant topics here. One, I would say that some will argue that the pandemic essentially created a new multiyear spending cycle for the sector, with most vendors pointing to a robust deal pipeline. And I would say, one, based on the visibility that you guys have, can you talk a bit about whether this is sustainable? And then on top of that, any preliminary indications looking at next year's IT budgets for now? Thanks.

Thank you, Moshe, 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; and Stanton Jones, Research Director and Principal Analyst. We're also joined by Gaurav Gupta, ISG Partner and Global Head of Digital Engineering. This is our 76th Index call. And after reviewing the results, we definitely have more positive news than negative to share with you. Overall, discretionary spend and IT budgets are improving. With the economy open in many parts of the world, markets and industries are inching toward normal levels. Pipelines continue to expand, and activity is bustling as clients push transforming their businesses forward to compete in a world transformed by COVID. Our focus area for today is engineering services. It's a market standout in terms of growth in recent years, and we're going to discuss how it's changed, how much it's changed and some major trends in market moves. As you can see, we're live again this quarter. We received solid feedback on the format. So here we go again. A reminder for our Q&A today. [Operator Instructions] All right. Let's get started. Steve, what are the main takeaways for the quarter?

Well, let's jump right into it with the global combined market, which just has absolutely accelerated. It's $21.8 billion in ACV this quarter, marks a 40% year-over-year growth rate. To put that in context globally, we've added $6.2 billion of ACV to the market since the dark phase of the pandemic last fall. Even more encouraging, though, we saw growth in both managed services and as-a-service, which reached new quarterly highs, indicating a really strong return of tech spending. One of the key concerns, though, in the industry this quarter is the race for talent. We've all hyped it as a great resignation, but in many ways, it's so much more. We have a real talent shortage to support the digital agenda of so many firms. Attrition is high. Quite frankly, it's probably at near all-time highs as providers report attrition rates 500 to 1,000 basis points higher than normal. In India, we're seeing attrition rates for the young digital talent as high as 50%. Organizations are using all of their tools that they're disposed to lower attrition, but this often means more spend, which is impacting margins. Providers are pulling all the levers to add talent as quickly as possible, increasing campus hires, doing more lateral hiring, using more subcontractors. It takes time to ramp up resources though with training program, training costs and the added pressure of more expensive resources. The sheer number of resources required to support the demand is also amazing. Over the last 12 months, the industry has added $4.5 billion of ACV in engineering and applications, requiring over 100,000 new software engineers. This doesn't include the digital transformation projects added by enterprises or the massive hiring currently taking place with hyperscalers and SaaS providers. Though everyone in the industry understands the challenges, most of the managed services deals in the market have agreed rates and inflation clauses that make it very difficult for service providers to adjust their price. Unfortunately, we don't have a silver bullet, and we think it's likely to continue for 2022. Shifting to automation, implementing process improvements and shifting to less labor-intensive or nonlinear revenue strategies will help, but again, we're likely to continue to see the margin pressure. So if we take a look at the Americas, the Americas combined market ACV has increased every quarter throughout 2021. The $11.6 billion this quarter reflects a 37% year-over-year increase. Managed services with more than $4 billion in ACV was particularly strong. Kathy, I know you're going to touch on this in the Americas, but the Americas managed services ACV reached all new highs, delivering almost $4.8 billion of ACV in the quarter with 5 mega deals, which is just fantastic. EMEA's combined market ACV grew 36% this quarter year-over-year to $6.5 billion. EMEA combined market has now delivered 4 consecutive quarters above $6 billion ACV after the first ever $6 billion quarter in Q4 2020. Managed services, $3 billion of ACV, experienced its third successive sequential decline as both the U.K. and the DACH market pulled back. The decline was led by a drop-off in traditional infrastructure spend. Asia Pacific repeated its 60% year-over-year gain this quarter in combined market ACV, and the managed services business grew by more than 50% year-over-year as many of its markets posted double-digit gains. Stanton, these numbers are robust. Can you give a deeper dive into the key trends and deals that shape the market?

Sure. Thanks, Steve. So after so many quarters of strong growth, we're kind of running out of ways to say record high, but here we go again. Combined market ACV was $21.8 billion this quarter, a 40% year-over-year increase and almost $2 billion more than the second quarter. And on a year-to-date basis, the combined market gained 26% against the COVID-impacted quarters of 2020. Managed services ACV of $8.4 billion was up 22% year-over-year, another record increase. Contracting activity is also up significantly. We had 564 awards this quarter, another record. And of those 564, 6 of them were mega deals, the biggest one being the network deal between AT&T and Dish TV. And on a year-to-date basis, managed services ACV of $24.2 billion was up 17% over the prior year. And Steve, as you've talked a lot about over the past few quarters, things appear to be falling into place for us to see the first ever $30 billion year in managed services. As-a-service generated a record $13.4 billion in ACV this quarter, that was up 55% year-over-year as post-pandemic cloud demand continues to surge. And year-to-date as-a-service ACV of $35 billion is up 33% over the prior year. And as-a-service now makes up almost 60% of the combined market. So let's take a look at the results by function now. And as usual, we'll look at these results on a year-to-date basis. ITO ACV was up 12% year-over-year, primarily driven by really strong growth in ADM, which is up 29% year-over-year. As we've discussed, we see a strong linkage between cloud growth and applications growth as companies really get serious about refactoring their application portfolio as they move more workloads to the hyperscalers. BPO was up 40% year-over-year and up 11% over 2019, primarily driven by triple-digit gains in engineering services, and we'll hear more from Gaurav on the red hot engineering space here in just a minute. We've also talked a lot about the growth of industry-specific BPO over the past few quarters. It did slip a bit. It's down 4% year-over-year, but it's still up 19% above prepandemic levels. And we think much of the growth in BPO is headed towards using data and technology to solve domain-specific problems. So it will be less about using people to run a process cheaper and more about using technology to optimize the process itself. Infrastructure as a Service generated almost $26 billion in ACV, a 36% increase year-over-year, and that's actually the best growth rate since 2018. The post-pandemic cloud wave is upon us in a big way, and we're moving into the heavy lifting phase of cloud where companies are really starting to rethink the way they work, given the massive scale and speed of the hyperscale platforms. Software as a Service ACV of $9.7 billion is up 26% year-over-year. You may recall that we saw a slight slowdown in SaaS ACV in 2020 as enterprises paused technology spending, a lot of these big transformational implementations. We think that's actually starting to recede. And if you look at this from the sell-side perspective, one of the trends we're noticing is the heightened discussion of contract backlogs or remaining performance obligations. So many of the leading SaaS vendors are highlighting these RPO metrics as a leading indicator that they're seeing longer contract durations. So let's take a look at the global leaderboard. And remember that placement on the leaderboard is based on awards made during the trailing 12 months. So the Big 15 had very little turnover as usual, but there were a number of interesting deals signed this quarter. Cognizant signed a deal with John Hopkins (sic) [ Johns Hopkins ] to transition its Medicaid business to a Business Process as a Service solution. HCL had a number of deals this quarter. One was with Rogers Communications in Canada, focused on cloud transformation. And Atos signed a 7-year workplace services contract with EY to improve the IT experience for more than 300,000 employees. In the Building 15, Genpact had an active quarter and signed a deal with Coca-Cola Beverages Africa to establish a new shared services organization, and Wipro closed a 5-year contract with U.K. National Grid for colocation and managed services. And in our breakthrough and booming categories, WNS signed an award with Pacific Life to support its pension risk transfer business and product engineering firm. Globant is helping South African telecom launch an e-commerce platform. So let's head over to the regions. Kathy, back over to you.

Thanks, Stanton. I promised more positive than negatives, and Americas doesn't disappoint. With a lot of strength this quarter, the combined market ACV rocketed to $11.6 billion. ACV has never gone above the $9.5 billion it reached last quarter but has steadily increased every quarter since the slump at the end of 2020. Year-to-date, combined market ACV is up 20% over the same period. While that's certainly impressive, the growth rate in the Americas lags the other 2 regions. Managed services, which has been choppy, up and down quarterly trajectory for the past 4 years, has now accelerated to record-setting territory at $4.7 billion in ACV. A new high of 282 contracts were awarded this quarter, including 5 mega deals that totaled $1.4 billion, making it the most mega deal ACV in the past 14 years. The $12.1 billion in managed services ACV year-to-date amounts to a 13% growth rate over 2020. As-a-service ACV for the quarter nearly hit $7 billion. That's quite an achievement, considering that only 2 quarters ago, ACV broke the $5 billion mark for the first time. That's a 51% year-on-year growth rate, and it's the best we've seen since we started tracking the metric in 2014. Year-to-date as-a-service ACV of $18.2 billion is up 26% compared to the same period in 2020. As-a-service in the Americas now accounts for 60% of the combined market ACV. Now I'll break out the year-to-date performance by function for the Americas specifically. ITO ACV is up 8% versus 2020 and 12% versus 2019. ADM market was active with a 20% increase. Given that 2020 was a robust year for contracting, the positive comparison is all the more meaningful. The number of global contracts awarded so far this year is 3% higher than at the same point last year. Similar to what Steve told us about the global market, the ACV awarded in the ADM space is an all-time high, up 28% over last year. Infrastructure, on the other hand, dropped 8.6% from 2020. Notable deals during the quarter included HCL winning an ISG-advised 5-year, $100 million transaction with an integrated producer of materials. And in another ISG-advised network services award, a diversified multinational health care enterprise selected AT&T, Lumen and Verizon for a 3-year, $55 million deal. While BPO ACV climbed 20% -- 27% over the 9-month mark for the prior year, momentum has come in fits and starts. ER&D is 90 -- $900 million in ACV, mirrored the global market's performance and was up triple digits compared to 2020 and 2019. Industry-specific BPO edged up 4% over 2020, but F&A fell 15% from last year. Contract center ACV of $700 million is up 37% over 2020, but still not to -- not back to prepandemic levels. Facilities management dipped 5% during the same period. One example of an F&A deal this quarter was an ISG-advised contract for an organic products company won by Infosys. Another large award was a renewal by CGI and Quebec-based Desjardins in a 10-year, $500 million agreement that covers management of payroll service center. Infrastructure as a Service generated nearly $12 billion year-to-date, a 26% increase over 2020. Even so, Infrastructure as a Service growth has slowed a bit in the Americas. A few notable deals in the quarter include CIBC in Canada signing a multiyear deal to use Microsoft Azure as its primary cloud platform. Oracle Cloud Infrastructure also won a large deal with Telefonica Brasil to move its development and testing data workload to OCI. And AWS inked a notable deal with Sun Life, which will use AWS' portfolio of cloud technologies. The $6.2 billion in ACV that Software as a Service generated so far this year marks a 25% increase in 2020. That's the strongest SaaS growth in 5 years, with each of the past 3 quarters higher than the one before. Among the key deals signed this quarter were Google expanding its use of Workday applications and Adobe signing Experience Cloud deals with Capital One, CVS, Ford, Fidelity Brokerage and The Gap. Oracle signed a large deal with Humana for Oracle Fusion Cloud ERP and EPM. Now I want to switch gears and talk a little bit about Asia Pacific. During the third quarter, Asia Pac's combined market ACV soared 60% against the pandemic-fraught third quarter of 2020. Year-to-date, combined market ACV increased 45% compared to the same period in 2020, which encompass some of the worst months of the pandemic. Recall that Asia Pacific finished 2020 with a really strong quarter. And for the region to match that performance, it would have to exceed $3 billion in ACV, which is a really challenging benchmark to me. Managed services posted a 50% year-on-year gain in ACV this quarter but dropped 40% quarter-on-quarter with a large number -- with a number of large awards pulling back. This quarter only saw 7 awards greater than $20 million, and that's compared to last quarter with 17. Many countries in the region posted double-digit year-on-year gains in ACV with the exception of China. Year-to-date managed services of ACV of $1.9 billion translates to a growth rate of 26% compared to the light period in 2020, which again felt that brunt of COVID. As-a-service ACV held steady during the most of 2020. The past 4 quarters have each generated more than $2 billion in ACV, and this quarter broke through the $3 billion mark. Year-to-date, Asia Pacific's as-a-service ACV increased 50% compared to the first 9 months of last year. And as-a-service ACV amounts for 81% of the combined market. That's the highest ratio of all 3 regions. Now we'll look at the year-to-date performance by function just for Asia Pacific. ITO registered a 15% gain in ACV compared to 2020. Much like the other regions, the ADM market rose 15% year-on-year. When in contrast to the other regions, infrastructure ACV stayed positive, exhibiting a 17% growth. However, that's still 40% below the prepandemic 2019. Accenture had a busy quarter signing deals with Chubu Electric Group Power Company to transform its operations in collection -- in collaboration with Tsunagu Community Analytics, a new analytics company that Chubu created. Accenture will accelerate legacy systems and the migration of Microsoft Azure to cloud. Infosys also signed a multiyear cloud modernization deal with Ausgrid that leverages Microsoft Azure. BPO, a much smaller market in Asia Pacific, is subject to sizable swings. The $400 million in ACV year-to-date indicates an impressive 87% rise over 2020 and a 5% gain compared to the prepandemic 2019. ER&D reached a record high $200 million so far this year, and industry-specific BPO grew 25% compared to both 2020 and 2019. ISG advised on a $90 million deal with an engineering services company that supports energy, chemical and resource sector. The client sources legal IT and assurance services to NTT Data and TCS. Infrastructure as a Service came in at $7.5 billion in ACV, a 52% increase over last year. While Chinese-based providers like Alibaba, Tencent and Huawei are growing rapidly, AWS is winning the deals across the region. During this quarter, AWS signed with Axis Bank, the third largest private sector bank in India, is migrating most of its on-premise data center infrastructure. And RBL Bank, also India, selected AWS to power its AI banking solutions. Software as a Service produced more than $1 billion in ACV year-to-date. The 37% increase over 2020 is the highest growth rate in the sector since we began analyzing this market in 2014. Oracle won a couple of notable deals. One was Bharti Airtel and another with Acer. Also ServiceNow inked a deal with Asahi, selecting the Now platform to provide service catalogs. Let's switch it over to Europe. Steve, take us away.

Great. Well, thank you, Kathy. Well, fall is certainly in the air over here. We've got European football. We've got Premier League, and we got American football. So everything is good. But more importantly, the combined market ACV has now seen 4 consecutive quarters above $6.2 billion. You look at that, we've added over $1.5 billion of ACV just over the last year. The combined market ACV of $6.5 billion this quarter is 30% higher year-over-year and edged up another 4% on a quarter-over-quarter basis. The managed service ACV of $3.2 billion this quarter reflects a 19% increase year-over-year, but we have seen a decline for 3 consecutive quarters after the strong results posted in 4Q '20. The 2 largest markets in Europe, DACH and the U.K., really delivered weaker results than we expected. The U.K. market plunged to 81% year-over-year this quarter, and DACH dipped 8%. The deal flow was active, though. I think what we saw was multiple deals shifted to the right in financial services, and we continued to see weakness in the manufacturing sector. Activity in France though was crazy. It remained very robust, with 3 of the last 4 quarters delivering almost $0.5 billion of ACV per quarter. This is almost double the historic average for the market. And the French market now accounts for almost 25% of the total managed services ACV in EMEA. The as-a-service ACV in EMEA also passed the $3 billion mark for the first time, rising 34% compared to 2020 and now comprises 46% of the combined market. The EMEA ITO sector ACV rose 15% year-to-date, with almost 675 contracts awarded year-to-date. The number of awards at this point in the year far surpasses anything we've seen in the index. Several significant ITI -- IT awards were signed, including an ISG-advised 5-year, $200 million apps deal with an international food and beverage company that was awarded to HCL, TCS, IBM and Accenture. HCL also signed a contract with Munich Re to modernize and standardize workplace services for more than 16,000 employees in 40 countries. BPO accelerated by 58% against a weak 2020. Engineering, research and development generated more than $300 million of ACV year-to-date in Europe, which is a triple-digit increase versus just a year ago. The facilities management sector, which you'll likely recall, was impacted significantly during COVID, has really rebounded. Deal flow was still below average, but the market is up 500% with almost $600 million of ACV awarded in Europe year-to-date. Examples of deal in this space include ISS Facility Services wins a Denmark-based DSB and a large 5-year facility management contract with Equinor. Infrastructure as a Service produced nearly $6.5 billion in ACV, a 37% jump versus 2020. Among the deals that fueled the growth was GCP teaming up with Accenture to transform the B2C activities of French mass market retail brand, Casino Group. Microsoft Azure inked several notable deals, among them being a partnership with Wipro to migrate E.ON's IT applications to Azure. And a deal to move workloads of Standard Bank in South Africa to Microsoft Azure cloud. And then ending up, Software as a Service ACV of $2.4 billion reflects a 26% gain over 2020, continuing an acceleration that began in 4Q '20. In this quarter, from a SaaS perspective, ServiceNow closed a deal to support the digital transformation of Walgreens Boots Alliance. SAP won a sizable contract with French cosmetic company, Clarins, to use its HXM Suite to transform Clarins HR functions. And SaaS PLM provider Dassault Systèmes inked a contract to deploy the 3DEXPERIENCE platform to help Alstom reach its transformational goals and to speed up its integration of its recent acquisition of Bombardier Transportation. All right. So everybody knows this is my favorite slide in the key industry trends. As you look at this, it kind of gives a really good perspective of where the market is going. And I think this quarter, I'm actually going to frame it because of all the blue and all the up arrows. Only health care and pharma was down year-to-date primarily driven by tougher compares and the pullback in spending in health care outsourcing deals. We've seen a bit of pullback in financial services, but the sector is still the largest consumer of managed services and is also being dramatically transformed, which means we're confident it will return to double-digit growth. The other positive is providers are no longer tasked with just cost savings. Digital transformation allows providers to help clients enhance the customer experience, which really grows the top line. And as we've discussed earlier, the pace of apps modernization and engineering is really causing rapid access and rapid growth, quite frankly, across all of these industries. So thinking of engineering, today in our special industry topic, we're going to take a focus on the fastest-growing industry, which is engineering. Stanton, do you want to introduce our guest and talk about our industry expertise?

Sure. Thanks, Steve. So Steve, you just talked about one of the hottest areas in our industry right now, is engineering services. Industrial companies are really getting serious about not only digitizing their products but also the processes to create them in order to create connected experiences for their customers. So as you can see here on the next slide, transaction counts for engineering deals are up significantly over the past year as is ACV. We've seen over $300 million in ACV in this sector for 4 consecutive quarters. And in the third quarter, ACV is up 40% sequentially and almost 300% year-over-year. We're also seeing some significant consolidation in the space. 6 of the top 26 engineering firms have been acquired since 2019, and industrial companies have spent over $20 billion on software- and engineering-related acquisitions over the past 18 months. And as you'll hear from Gaurav next, we think this is going to start to blur the line between client and provider, which we think has the potential to fundamentally change the market over the next several years. Gaurav, over to you.

Thanks, Stanton. You're right. Amazing numbers and last few quarters demonstrating the strong growth in digital engineering globally. This has been building up and not by chance because engineering has been going through a transformation of its own over the last several years and in the way that products are conceived, delivered, consumed, and that's changed. And now engineering drives the central stage of a digital transformation converged state for the future. Four key factors are changing the way the business is turned around as today, [ if you look like. ] Products are not just designed to be products, but we are designing experiences through connected services and data. For instance, a manufacturer of a landing gear system or a braking system in aerospace doesn't just sell the braking system. It sells a number of landings, a number of brakings. John Deere, a tractor company that we all know of, now has invested into a software business. Schindler, known for elevators, is now selling mobility solutions. Bosch, not just selling drills and hard equipment, is selling IoT and monetizing analytics and tools. So this is changing the way that a product is conceived or delivered through an experience platform. The other change that we're seeing is the cycle of delivery that used to end at the point of sale is starting a cycle of functionality at the point of sale. And by that, I mean is when you hand over the product to the consumer, the enterprises are forced to keep it relevant and current through the life cycle by small continuous releases that are aligned to the customer behavior. Now this allows them to be closer to the customer and the whole concept of a sunset and capitalization of a product process has changed, example being Tesla. Once you buy a Tesla, Tesla makes sure that the automotive is kept relevant and upgraded functionality through over-the-year updates. Now that the products are being connected longer, the enterprises are closer to the customer for longer. This also changes the way that businesses can capture profits. The point of sale provided not only the realization for profits, but now additional profit streams can come into play through software and data insights that allow enterprises to get closer to the customer for longer. And going back to the example I gave about elevators, you might be selling service hours for an elevator, but insights of use from maintenance and operations data give you further revenue streams. Not only that, it helps you a predictive organization, which can help you cut costs, thereby maximizing profits. Now while we talk about the products, the most talked about transformation is the critical change in the way manufacturing and supply chain environments have undergone, leveraging industry for technology. And this transformation driving force about the connected enterprise and a highly converged state of manufacturing is going to drive transformation in the years ahead. Now this was all on, but then COVID arrived. And organizations did not know how to react. They were already grappling with typical changes in an industry that was transforming. And when COVID sneaked in, supply chains were off-line, shop floors were not sufficiently stocked in this [ area. ] Remote operations were not set up. The data management was not harmonized. And customer behavior has changed rapidly. Simply said, operations technology was not up to the mark. While IT, on the other hand, was standardized, mature and remote and worked fine. So organizations with a converged agenda used this time of COVID for magical thinking to scale. And those who did not have that converged agenda put strategies in place for the same, and that is what we are seeing reflecting in the numbers. The other thing that happened was the product environment is typically centralized based on competency pools. If you go to Germany, if you go to U.S., there are pools of people who have been doing this traditionally. Now that pool has been globally distributed -- or triggered to be globally distributed through the COVID environment. And that was leveraging the power of virtualization, cloud, tech to set up remote operations and successfully so. And extending the engineering work went beyond the traditional, and this is going to stay here. And these will drive significant trends that we are seeing in the market for next 3 to 5 years. And I'll take you through some of these that we believe will shape the way engineering is being delivered through a digital transformation agenda. The first trend that we're seeing is about value realization that CXOs carry. But that value realization was always done in traditional siloed startups of: IT; OT, operations technology; ET, engineering technology; and CT as we define, which is customer tech or aftermarket. Everyone was trying to accomplish transformation on their own access. And if they do not get the converged view, the millions that are being spent will not have the ROI that are expected out of it. There are many levers that will define that being realigned data. It should not be an IT or OT or an ET data. Unless you have a converged state, you wouldn't be able to do it more. The moment you do that, imagine -- reimagine the organizations will take shape because the split of IT/OT is going away. Working models will change. New skills will have to be defined. Roles of an organizational [ KRAs ] will change. I mean people who have the budget may not use it, people may have the rights, but they may not license it. So the CTO, CDO, CIO roles will get blurred. Now the moment you start converging IT/OT, you require a full stack OT security layer and not just an enterprise security layer because OT is full of legacy. So you'll have to deploy digital tech that aligns with the operation tech to prevent cyber attacks and make that future-proof. While you're doing all this, the boundaries that are getting blurred through a distributed setup that you're trying to set up with your ecosystem comes into play. You will have to involve suppliers early and redefine the split of hardware and software, which will mean that our contracts will be more modular, more flexible to provide for these services. The second mega trend that we are calling out is the Industry 4 but maturing of Industry 4 through a digital thread and digital twin ecosystem. The data threat strategy leading to applications like digital twin is combining networking, software, data, analytics in unprecedented ways to optimize complex machines and systems on the shop floor. This ability to connect across the phases of a product life cycle will define how a system is managed and more importantly monetized. PLM, or product life cycle management, on the cloud and digital will be key factors driving the systems life cycle, IoT data insights or edge through a cloud continuum. And hence, security, connectivity and cloud will be underpinning table stakes to extract data and make the secure environment work towards providing a single data threat. This will be extremely critical for us to monetize the IT/OT. If there is no single data threat, you wouldn't be able to build cases on it. You wouldn't be able to reference architecture, wouldn't be able to build on it. Your supply chains won't be connected to your demand generation. So having that Industry 4 maturity is extremely critical, and we see that driving a lot of spend and a lot of agenda going forward. The third trend that we want to call out is about enterprises reimagining their products and services based on how the customer behavior has been mapped to. And which means they'll have to come up with a new software operating model, leading to unbundling of hardware and software, which again is changing the very core of the enterprises itself. Enterprises and OEMs is traditionally buy hardware kits from their Tier 1s and suppliers and then basically put them together. But now OEMs are redefining the software operating model, looking at virtualization and decoupling hardware and software, which means what they buy and make is very different what they did. Enterprises can now virtualize and standardize tool chains using methodologies like Agile, which puts them in a much better position to have a globally distributed setup as I was talking before, and hence, the ability to tap into global talent. Now that's an extremely important piece, which I think my colleagues mentioned earlier in the session as well, where talent extremely critical because everyone is fishing from the same pond. Software is becoming all pervasive. And whether it's your provider, whether it's your technology stack provider or it's yourself, everyone wants software skills. Talent acquisition and retention is the biggest obstacle you can imagine for a digital engineering transformation today. It's not technology. And to alleviate pressures, companies are looking at emerging markets such as India to build their COEs, capital strategies. But still, even in those markets like India, which produces 1 million engineers a year, the pool is limited, and you will need a strategy to retain and attract talent. When you make changes to your core like this, you not only have different ways to engage your employees but also your partners. So your ecosystem will be different because your make/buy decisions have been very different. So the way you source contract and manage supply relationships will change and evolve and create a new marketplace concept. Now while these 3 trends manifest, what does it actually mean for us? We at ISG, sitting outside, believe that this fundamentally changes 2 things. One is the IT, OT, ET and the customer tech coming together makes deal structuring that much more complex and large. It will require skills and domain beyond just IT and engineering to put them together but also execute them together. The second thing that's happening, which is extremely interesting, is, again, the blurring of boundaries of the ecosystem that I talked about. Because of the redefinition of core, the sell to and sell with opportunities are coming in and the people who are providing new technology may also provide new services and the service providers are as well. So your competitive boundaries, your partnership boundaries will live on. Hence, the way you design, deliver, consume, partner and source will never be the same again. Engineering is here to stay and will lead the transformation for years to go. Stanton, that's me. Thank you so much, and back to you.

Thanks, Gaurav. Some fantastic insights on red hot market. So before I hand it back over to Steve for the forecast, I want to remind you that each Friday, I publish a briefing on what's important in IT and business services for that week. I keep it really short by design so that you consume it in 5 minutes or less. So if you're not already subscribed, I encourage you to do so, and you can use the link you see here at the bottom of the screen. Steve, back over to you for the forecast.

Well, great. Thanks, Stanton. There are just a number of positive factors influencing the combined markets this quarter. We're seeing more deals. The Q3 deal flow was up 17% year-over-year and 20% over 5-year averages. And I think we'll likely see over 2,000 deals awarded in 2021, the most really in the history of the industry. We're seeing larger awards, a return of the mega deals, as we discussed, and we're seeing a really healthy mid-deal size market that's actively competed. The combined market ACV finished the quarter up 26% against the COVID-impacted 3Q '20 market, and the managed services and as-a-service both hit new highs. Year-to-date, the managed services ACV performed even better than anticipated. The Americas set the pace with nearly 17% growth in this segment. ADM, engineering and industry-specific BPO grew rapidly and offset the decline in legacy infrastructure awards. And as you just heard from Gaurav, I think we're expected to see engineering even grow faster over the next coming quarters. The as-a-service ACV growth to date exceeded 25% in each of the 3 regions. Its growth trajectory is broad-based. Nearly $9 billion in ACV awards have been added so far this year. And the as-a-service accounts for nearly 60% now of the combined market. There are a few headwinds, though, that could slow growth over the year and especially with the year-over-year comparisons. First, the supply chain issues in manufacturing and CPG. These challenges will ship dollars to correct the supply chain issues. And as we see more of the carbon issues come to bear, we're going to see a move to accelerate electric vehicles and more spend going in that direction. Second is the supply and demand issues with talent. Wage inflation and significant surges, the need for talent will continue to pressure the markets for at least another year. And finally, the year-over-year comparisons are buoyed by the softness in 2020 as a result of COVID and several mega deals and networks that aren't likely to be replicated. While we fully expect the apps, engineering and as-a-service market to expand, there will be pressure on traditional data center and ITO work, and ITO work that could impact the 2022 comparisons. However, back to the good side. Pipelines are really robust. The market doesn't seem to be driven solely by large deals anymore. The smaller awards are infused with digital transformation and are really growing into larger engagements. I think this will really make sure that the ACV growth remains strong. So with all that, our full year forecast for the managed services market is being raised 100 basis points to 10.1%. So I think we'll see really big growth numbers when we look at the end of 2021. In the as-a-service forecast, cloud adoption continues to expand across the globe, including in markets that have traditionally been slow adopters. With the overall increase in tech spend, we see even more tailwinds for the Infrastructure as a Service and SaaS space and are also raising our full year forecast 300 basis points for the as-a-service market to 25% for the full year. So with that, I'd like to open the audience up for questions. [Operator Instructions]

We certainly have a lot of questions in the queue. Moshe, I know you have a few of your own, and we'd like to start with you. So if you want to go ahead and fire away.

So just let's start with overall demand, and some will argue that the pandemic essentially created a multiyear spending cycle for the sector. Obviously, most vendors are pointing to a very robust deal pipeline. So in your view, is the recent acceleration and growth sustainable beyond calendar '21? And then maybe in this context, do you have any preliminary indications related to calendar '22's IT services budgets?

Do you want to go ahead and start with that one, Stanton?

Sure. Moshe, I can address the budgets, and I'll pass it back to Steve on the demand. So Moshe, on the budgets, I'd say qualitatively, things are looking very strong as we look out across our clientele and also across our advisers. I think the only potential headwind here, we actually talked about this kind of in the preshow, is potentially some concern about global growth. IMF just reduced global GDP by, I think, about 1 percentage point or so. So there's a little bit of concern, I think, maybe about overall just company growth and how that potentially could impact spending. I think one thing that we are sure about though is sort of the shift of spending away from hardware and into areas like services, and especially in the high demand areas that we talked about on the call, cloud, cybersecurity, data analytics. We absolutely see that shift happening. Steve, do you want to talk about the demand side?

Yes. Yes. I think, Moshe, you're absolutely right on the cloud sort of accelerating this and the pandemic really accelerating this. I think more than anything, what we really saw is everything associated with getting closer to consumers and opening up B2B-type capabilities is what's really driving it. And that's driving apps, that's driving engineering, that's really driving the whole transformation within enterprises. We think that's continuing. But if you look at the Infrastructure as a Service growth that Stanton just mentioned, that is leading more and more to apps modernization. That work is finally starting to flow through all the service providers. So I think we're just going to continue to see positive growth. So I think these numbers will continue into 2022. I think overall tech spend will increase in 2022. Because of this, I think everybody sort of sees what's going on there. I think the only caution, and Stanton mentioned it, is we are seeing a big shift. The traditional ITO business, data center infrastructure business is certainly shifting. So apps will be up, engineering will be up, industry-specific BPO will be up. We are going to see a flattening out of sort of that traditional data center piece as more workloads get moved to the public. There's still a hybrid cloud strategy. There's a multi-cloud strategy. But it's not going to drive the market the same levels that it has in the past.

A lot of exciting changes coming along. Moshe, I know you have a lot of questions. Why don't you fire another one at us?

Okay. Last one on my side, I guess, is going to be related to the cost equation here, rising wage inflation. Maybe you can talk a bit about the impact on new contract terms. Are we able to pass through some of these pricing pressure to enterprise customers? And then maybe some of the -- what's your forecast there?

Sure. I'll start with that one. I think that we will see some ability to pass the wage pressure along to customers and clients in new contracting. And what I've experienced is that current rate cards and pricing are staying pretty steady and there's been pressure then on margin. But we will see increases, I believe, in new contracting. We've looked at compares between 2020 and -- I'm sorry, 2019 and 2021 and seeing already a 4% increase between those 2 years. I think you'll see a lot of higher level or more experienced resources with higher amounts of effort on projects to make sure that we're delivering on commitments because you'll see a lot of junior resources on these projects as they flow out of universities and on to our providers' roles. I don't know, Steve, if you wanted to comment on that at all?

Yes. I would just say it's interesting, as we commented at the beginning of the show, Moshe, that clearly, there's a lot of pressure, and it's all being driven by the demand side of the house, if you will. And that's driving it up for the reasons that I just talked about. The -- with all the hiring that we're doing, I think everybody is bringing it up as much as I can, but we're seeing more growth with the hyperscalers. We're seeing growth in enterprises. I mean Volkswagen is, I think, the highest company now for the number of software engineers in Europe, the Volks engineers. So you're seeing great demand across, which obviously trickles into our business as we go forward. That's going to continue for the next several quarters as we go through. So high-pressure training, everything else. And as Kathy mentioned, so many of these deals are 3- to 5-year deals. So it's going to be hard to get the revenue for the price increase in current deals, but with projects and other things, we are seeing that come through.

That's right. Okay. There's quite a few questions from the audience. So I'd like to take a couple of those. The first one is why industry-specific decline of 4%? Steve, can you comment on that?

Yes. Yes. I think it's a great question, Kathy, that I think is just a bit of an anomaly because Q3 2020 was so strong. When we look at industry-specific BPO, it's really generating about $0.5 billion of ACV per quarter, really great growth, and that's really changed over the last 8 to 10 quarters that we've seen that. The number of deals are up. So I think it was against a really big compare with her. And there was -- the deal flow was the same, ACV down a little bit. So probably in the edges, there was probably a fewer larger deals in that space, but it's clearly still a space where we see really good investment and just changing what's -- that whole market. So I wouldn't be concerned with it. It was just a blip against the compare.

Yes. Steve, if you look at the data, it was actually -- if you kind of normalize for the quarter that you talked about, third quarter of 2020, it was actually -- you can take that out, it was actually up 20% on the half year. It was just that third quarter that was almost $800 million in ACV, in that third quarter of 2020. And so I think it's definitely more of a compare thing than anything systemic in the system. We are going to continue to see a really strong movement in BPO from more labor arbitrage to more data analytics and IP and technology to solve domain-specific problems. So I think it's just more of a compare issue.

Yes. That's right. That's a great input right there, Stanton, is it's really the whole transformation between labor detect is what we're seeing, which is opening up that whole space.

Okay. We've got quite a few questions related to Gaurav's section. So I'll just start with a really basic one. Is the growth driven by any particular part of engineering?

Kathy, good question. Yes. I mean if you look at the engineering landscape itself, if you categorize into verticals and markets, if you let me answer the verticals part first. So broadly, manufacturing, high tech and health care. These 3 drove the transitions quicker than the rest of these sectors. And how did they manifest in terms of regions? I mean America is definitely taking the lead, being the larger market itself in terms of how they adapt to the software changes in automotive or health care or high tech being the -- especially the West Coast. And followed by Europe closely, but with sectors like health care and telco leading the way rather than industrial. But automotive, again, a stronghold in Western Europe. Asia Pacific, slightly behind Europe but equally fast in terms of software adoption and technologies around telco and health care as well. So telemedicine and telecoms, et cetera, are catching up and creating a lot of speed and momentum into the software spend that we're seeing. So software, clearly driving the agenda, Industry 4, broad brush into manufacturing, high tech and health care.

Definitely driven by some network growth to support all of the activity in the space. Steve, there's been some interest in the regions and the difference between EMEA lagging behind Americas. Do you see this? Do you see that as a significant portion of the economy perspective? Or what's your take on that?

I don't know. I don't think my European friends would like us lagging behind the Americas now that I live over here. So I would say in general, as we've seen for many quarters, that the adoption rate is sometimes slower in Europe. Data sovereignty, data privacy, GDPR, lots of reasons for that. But we've clearly seen an acceleration of that. So when you actually look at the acceleration parameters, the growth of Infrastructure as a Service and the growth of cloud adoption is actually higher in EMEA as it catches up with sort of Americas right now. We had a little bit of a blip, I think, on the managed services side this past quarter, which slowed down a little bit. We talked about the U.K. being down and DACH being down. Some of that was, again, we had some really high compares last -- Q4 of last year, Q3 of last year. But we've also seen a little bit of pullback just because of Brexit and the COVID just a little bit. I don't think that's systemic in any way. I think we're still seeing a really robust pipeline across the region. And I think just as Gaurav said for engineering and the apps, we're seeing very similar growth region -- growth levels between all the regions.

Great. There are so many questions. It's hard for me to pick one, but I'm going to throw you one, Stanton. It says, what is putting pressure on IMS deals? Why is that down? Is it a trend or one-off?

Yes. So it's really infrastructure, Kathy. So if you look at infrastructure, I'm just, again, looking at our data here. So infrastructure is down 13%. On the 5-year average, it's down 17% sequentially. There's a lot more down numbers we could continue to say. So it's going to -- it's -- I think we generated $1.1 billion in infrastructure ACV this quarter. So it's been bouncing around the $1.5 billion to $1.0 billion. I know Steve and I broadly agree on this, but we're a little bit in disagreement on the timing of this as when this is going to happen. So -- but ultimately, it's the shift to cloud, and much of that infrastructure work, right, is moving towards the hyperscale providers. So we think that, that infrastructure ACV will probably continue to kind of bounce around the $1 billion to $1.5 billion for a while. The discussion is more about how quickly it's going to decline. You could argue that it's going to be a slower decline because there's so much legacy infrastructure inside of our clients' environments. So if you think about mainframes and insurance and banking and retail, those are, on the whole, not being turned off. They're being progressively modernized. But at the same time, the infrastructure business is going to continue to decline. The question is more about how fast it's going to decline. I think that's really what's putting pressure on those deals.

Okay. All right. We have a ton of questions as I have mentioned, and what we'll do with these questions is many of them will be answered through Stanton's Index Insider. So we will post responses to quite a few of those there, especially where we see the themes. And with that, I would really like to thank everyone for joining us today as well as to Moshe and the team at Wedbush Securities for hosting us. We really appreciate their support over the years. Our next Quarterly Index Call will be in mid-January. We look forward to seeing you all there, and we'll be sending out some information on how you can sign up for the call. We see the Delta variant waning in many countries across the world as well as a lot of vaccinations being delivered in places that we really need them. So we are really hopeful that in 2021, we'll have some other things to talk about besides COVID and its impact on the market. And we really look forward to speaking with you all then. Have a great fourth quarter, and we'll talk to you soon. Thank you very much.