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

Good morning, good afternoon and good evening to all the investors, service providers and corporates, who have joined the call today. I, Rishi Jhunjhunwala, on behalf of IIFL Institutional Equities, welcome you all to the 1Q 2022 ISG Global Index Call. As you are aware, ISG is one of the largest outsourcing consultants in the world, helping more than 500 corporates globally. Its role as a leading adviser and influencer in global sourcing provides a unique view of the managed services and as-a-services market. The company has been hosting these calls for nearly 20 years. And for those who have listened to these calls in the past, you would be aware that ISG's position, working with both enterprise buyers and service providers, offers unique insight to key industry trends. In this call today, ISG will present an update on the state of the global IT services industry, both -- through both the traditional and as-a-service market as well as the global sourcing playbook in the post-pandemic era. With that, I'd like to pass it over to Stanton Jones, who is the Principal Analyst and Research Director at ISG. Stanton, over to you.

Thanks, Rishi, and hi, everyone. With me today is Steve Hall, Partner and President of ISG EMEA; Kathy Rudy, Chief Data and Analytics Officer; and Namratha Dharshan, Research Director and Principal Analyst; and ISG Partner, Doug Saylors, has joined us to talk about some really important trends in cybersecurity. This is our 78th Quarterly Index call, and we're closing in on 20 years of IT services market analysis. But before we jump in, we do want to briefly mention Ukraine. As many of you know, we've been monitoring the situation closely. There's around 50,000 people employed in the IT services sector in Ukraine, with another 200,000 to 250,000 freelancers and contractors. And the country exports almost $7 billion in IT services, and that's almost 5% of Ukraine's GDP. The great news is that the sector is proving to be incredibly resilient. There's still a significant amount of IT delivery taking place from the Western parts of the country, and employers continue to show exceptionally strong support for their employees in the region. Okay. So let's go ahead and jump into the Q1 results. Steve, let's kick off with our big 3 thoughts from the quarter.

Great, Stan, and great job following the Ukraine situation. You and the team have really been doing a great job on this for the last couple of months. So the managed services, ACV and contracting levels, remain really high. There are over 600 contracts in the first quarter, the highest number ever in the Index. We've also seen 4 consecutive quarters now with over $8.5 billion of ACV, which is really healthy. So three things. The overall ACV is down slightly quarter-over-quarter. Even though demand remains robust, the IT market remains below $6 billion of ACV per quarter for really the first time in a year. Two, demand for talent is outstripping supply, creating pricing and delivery challenges for both enterprises and providers. We're going to talk about that a little later in the Index, but we've seen record high attrition from several service providers. And as an industry, we are well above the 20% annualized attrition. Finally, enterprise costs are rising due to inflation, energy costs and shortage of IT talent. This is going to drive reprioritization of IT technology budgets and major programs over the next several quarters. Energy prices are already hitting consumer sectors, and we expect IT budgets to be further impacted as data center power has surged. So on the broader market basis, the combined market is up 31% year-over-year, with over $24 billion of ACV awarded in the first quarter of 2022. Managed Services was up 13% year-over-year to over $8.6 billion of ACV, though it was flat on a quarter-over-quarter basis. Contracting activity was amazingly robust. Over 600 deals awarded in the quarter, and nearly 60% of the deals in this quarter were in the $5 million to $10 million band. There were 6 mega deals inked in the quarter, but 5 of the 6 were restructuring of the existing deals. The as-a-service market added $15.6 billion in ACV this quarter, up 43% year-over-year and 9% quarter-over-quarter. And this was the third consecutive quarter with a growth rate higher than 40%, which really haven't -- which we haven't seen happen since 2018. The as-a-service ACV now accounts for almost 65% of the combined market ACV.

Thanks, Steve. So Kathy, as Steve mentioned, we're seeing some significant pressure on pricing given that demand is outstripping the supply of talent. So let's talk about what kind of impact you're seeing.

Sure, Stan. Thanks. As you said, there's been a really strong interest in where pricing is going in the market. What we did was two things. We looked at our data, and the first data that we looked at was for rate card or project-based data. Looking at that for the last few quarters, we have, in fact, seen increases in pricing, across the board between 4% and 7% and for really in-demand skills, it's high as 15%. We think of in-demand skills, we're talking about digital transformation, engineering and cybersecurity. We then looked at managed service or fixed price deals. And again, we're seeing an increase in those types of deals as well, much lower though, 2% to 3% increases. Typically, we see those deals on a unit price basis go down. What we're seeing is that overall deals are going up, but unit prices are continuing to decrease, but at a lower rate. So normally, we would see unit prices decreasing between 3% and 5%, now it's just between 2% and 3%. And if you think of it, the decrease is driven by hardening of those commodity-based services, continued automation in those types of services. But clients are definitely looking for some price relief. On the provider side, though, they're finding that having the conversation around pricing is a lot easier. Everyone is aware of inflation. COLA conversations are happening and a lot of suppliers are finding that the COLA is tied to the Index, which is making those conversations easier with their clients. They're using subcontractors to help fill in the gap from some of the pricing. They're doubling down on hiring freshers, and getting them out to the market is sometimes as soon as 4 months after training. They're also changing their pyramid, and having conversations with clients about more offshore resourcing has also become easier in the tight market.

Thanks, Kathy. So in our view, it's really the access to talent is the #1 issue in our market today. So Namratha, you're right in the thick of it as you interact with hundreds of providers and you yourself lead a team in India. And really, India is where the attrition challenge is most acute right now. So update us on what you're seeing.

Absolutely, Stanton. I think attrition is definitely one of the biggest topics in the industry as of today. And as Steve mentioned, we are seeing record high attrition today. So it's a combination of strong demand and elevated attrition that is causing the churn in our industry. And given the current situation in the industry, both enterprises and service providers are facing significant challenges. So to better understand the situation and the industry-wide challenge, we surveyed over 60 of our project leaders working with enterprises. And we uncovered some concerning trends there. So let me begin with provider service -- provider side, right? So on the provider side, almost half of them indicated that providers are struggling with staffing, and in turn, they're not being able to ensure smooth transition and run services. Almost another half noticed performance issues due to lack of resources. And on the enterprise side, 1/3 of them indicated that enterprises are now evaluating other providers, experiencing delays in both across transitions and projects. And as Kathy discussed, many of the companies are also agreeing to increase in prices or rates.

Okay. Thanks, Namratha. So clearly, the industry is facing some really significant challenges right now. Let's talk about what we think is coming over the next several quarters, and what do you think providers should be focusing on to tackle this challenge?

Right. So I think the demand for services is growing. So which means that the companies will continue to ramp up hiring to address the growing demand. In third quarter 2021, Indian Heritage providers added more net headcount than they did in the 7 -- past 7 quarters, but net headcount additions slowed down in the fourth quarter 2021. Now this slowdown can be attributed to the hiring challenges that prevail in the industry. Conflict in Ukraine will create more pressure on hiring as the demand for digital engineering talent is increasing. Let me give you a quick perspective on the demand. Monthly average openings in first quarter 2022 were more than 300,000 in India, and IT services needs the growth there. Also providers will have to now compete with start-ups. So India has a large start-up ecosystem. 14,000 start-ups who have been recognized very recently. So this will only increase the pressure and the intensity of the competition. And it's not just about hiring. It's also about retaining the talent, grooming the talent, which has become equally challenging. So our employees are now concerned about work-life balance and wellness. They're seeking work from home over higher salaries, and they're even willing to quit if that option is taken out. So companies will have to factor this into hiring. And most importantly, we will have to also adopt hybrid working culture too. And of late, there's a lot of emphasis laid on upskilling and reskilling, and that has become a critical and an important factor to meet the industry requirements. And not just that, it will also provide continuous learning and development for employees. And finally, Stanton, I think as challenges mount, in my opinion, firms driving innovation at the level of hiring as well as retaining are well positioned to sustain these challenges.

Awesome. Thanks, Namratha. So Steve, let's circle back to our contracting intelligence and dive a little bit deeper into the managed services results.

Yes, I agree, Stanton. I think Kathy and Namratha, I think you both did a great job, kind of highlighting what are the challenges. But when we look at the broader market, I think the ITO market was also really pressured by the hyperscalers. The overall ITO market ACV dipped below $6 billion. This was a year-over-year decline of 6% and a quarter-over-quarter drop of 17%. So the ADM market was down slightly, about 1.5%, but it's still delivered over $3 billion of ACV for the fifth consecutive quarter. App-supported development out counts for over 55% of the total ITO ACV, so a significant movement on the [ outside ]. The data center market, though, did show some strength this quarter with almost $1.6 billion of ACV. That's its biggest quarter in 2 years, but it was still down against its historical averages, still being impacted by the hyperscalers. And most of the gains in the data center business were really offset by a significant decline in network deals this quarter. Now for the big news. The BPO market saw over 200 deals this quarter, a record number. It delivered almost $3 billion of ACV and 86% year-over-year rise, the best in more than a decade. The market was led by industry-specific BPO deals in both the Americas and EMEA. You've heard Stan and I talk about the rise of industry-specific BPO for some time, and we really saw it in the numbers. Those numbers soared above $1 billion of ACV for the first time on just absolutely record volume. Engineering services space continue to expand as we've been discussing. Fourth consecutive quarter of ACV above $400 million, reflecting a 35% year-over-year increase. And the volume of engineering deals also remain robust with almost 50 deals, the second most in the history of the Index. Contact centers interesting are making a comeback. The contact center space ACV rocketed 116% year-over-year and 75% quarter-over-quarter. We really saw a significant increase in the restructuring deals in the contact center space, with more than half of the ACV restructuring related compared to a historical average of 30%.

Thanks, Steve. So I'll take us through the as-a-service results. So Infrastructure-as-a-Service generated almost $12 billion in ACV for the quarter. That was up over 50% year-over-year. And most of that growth came from the Americas and from EMEA. That said, the big 3 hyperscalers, so AWS, Azure and GCP, did outperform the broader IaaS market. They grew by almost 60% year-over-year. Another interesting area we're watching here is related to longer-term commitments in Infrastructure-as-a-Service. And you can actually see this reflected in the hyperscalers backlogs. So for example, Microsoft recently reported a backlog of over $140 billion, and that was up 30%; and Google's backlog increased $51 billion, and that was up 70%. And really, all of this is in contrast to what we see happening in China. The big 4 Chinese hyperscalers underperformed in 2021, primarily due to increased government regulation. Okay. Let's move to Software-as-a-Service. It generated nearly $4 billion in ACV in the first quarter. That was up 22% year-over-year. And like last quarter, the top 10 SaaS providers grew their ACV slower than the rest of the market. And we think that's because the market is becoming more democratized as companies increase the number of SaaS properties they use. And so a good example here is actually in cybersecurity, which is growing its ACV much faster than the rest of the market. The cyber SaaS providers are really thriving here as companies deal with the tsunami of new cyber threats. And of course, Doug is going to update us more on that here in just a minute. Okay. So now let's pivot to our leaderboard. We saw more turnover this quarter than we typically do, in part because several providers shifted up into a higher-revenue category. NTT Data joining the Big 15, as did Kyndryl after its spinoff from IBM. Kyndryl announced several awards this quarter, including infrastructure agreements with Irish Bank, Permanent TSB, and Canadian financial services firm, Desjardins. And on the as-a-service side, Google signed agreements with Kraft Heinz, Bell Canada and BBVA. In The Building 15, BPO provider, Capita, joined the leaderboard, and TietoEVRY shifted up into The Building 15 as well. And Wipro, which actually came really close to joining The Big 15 this quarter, signed a 5-year agreement to help ABB with its digital workplace services. In the Breakthrough 15, nearly half the firms turned over. French engineering services firm, ALTEN, is one of those new names; and BPO firms, EXL and WNS, also moved into this group. And on the as-a-service side, CrowdStrike, Atlassian and Snowflake also moved up into The Breakthrough 15. And that shift left is making more room for some new firms to join The Booming 15 group. So for example, Endava and Ensono and cloud cybersecurity provider, Cloudflare. Okay. So now let's turn to our regional updates. Kathy, it looks like the Americas had a really strong quarter.

That's right, Stanton. After ending with a decline in the fourth quarter, the combined market ACV in the Americas rebounded to start 2022 with a 10% increase over the fourth quarter of 2021. ACV topped $12 billion for the first time. That's a 38% year-on-year growth mark. And it's the third consecutive quarter that we've had year-on-year growth of 35% or above. When we look at managed services, again, we saw the fourth quarter over $4 billion, and that's 22% growth year-on-year, 6% from the prior quarter. In terms of the number of deals, there was over 300 contracts signed in the quarter, and there was a record number of deals in the $5 million to $10 million band, which is interesting. Looking at the recurring -- restructuring activity, that also rose in volume and value. The number of restructured contracts increased 28% year-on-year as well as the restructuring activity itself in ACV grew 57% year-on-year. Last quarter, as-a-service ACV broke through $7 billion for the first time and continues to rise, surpassing $8 billion this quarter. The market is really experiencing high sustained growth, coming in 50% higher year-on-year and accounting for 64% of the combined market ACV. Steve, what are you seeing over in Europe?

Well, all I can say is, wow, Kathy, I was feeling good about my numbers until I saw what Americas was doing, fantastic growth, so that's phenomenal. I would say, since the start of 2021, EMEA's combined market has really steadily grown, and we're seeing that ACV come back. First quarter, we're now above $7 billion for the first time. So we're starting to break a new high there. Growth rates did slow dramatically towards the end of last year to barely 6%, but this quarter, that growth has really rebounded. We're back to 20% year-over-year, and the ACV rose 8% against a really strong Q4. Managed services ACV at $3.7 billion marks the sixth consecutive quarter now that we've been over $3.4 billion. And this has really been -- we've never sustained that level of activity. New scope interestingly really accounted for $2.3 billion of that ACV, which really began a surge that we kind of saw in mid-2020. So we're kind of confident on where the market is going there. The managed services contracting activity across EMEA reached new highs of 256 awards, so we're seeing strong demand. The majority of those deals were in the $5 million to $10 million range, but that's been fairly consistent as we've seen. The U.K. market really continues to return from a strong post-Brexit and post-pandemic recovery. 3 of the last 4 quarters in the U.K. market have delivered more than $1 billion of ACV. [ Dock ] and France are also containing their recovery that started in kind of Q2 of 2021. [ Dock ] was up quarter-over-quarter, while France was flat, but France has seen 4 out of the 5 quarters deliver at least $500 million of ACV, which is significant for that market. Namratha, Asia Pac was up year-over-year, but down fairly significantly on a quarter-over-quarter basis. What's happening in that sector? And why is the traditional managed services down almost 50% quarter-over-quarter?

That's right, Steve. Let me say we're seeing interesting changes here. So to begin with the combined market, Asia Pacific combined market generated more than $4 billion of ACV for the fourth consecutive quarter. That was up 28.2% year-on-year, but down 10% compared to the prior quarter. This quarter, however, managed services dropped nearly 50% to $500 million, suggesting that the market may be entering a pause. Moving to country level. Australia and New Zealand pulled back against a very strong fourth quarter 2021. Korea and Japan were up moderately year-on-year. And ACV in Southeast Asian nations jumped significantly. We saw strong contract activity in the region in fourth quarter. The number of awards was up 50% year-on-year. And interestingly, almost all the contracting activity was in the $5 million to $10 million band. So moving to as-a-service, ACV of $3.7 billion was up 28.3% year-on-year. While the growth looks positive, it was the smallest year-on-year gain in the past year compared to what we have observed. As-a-service growth rate in this region are typically more than 50%. As discussed on many of the prior calls, Asia Pacific is an as-a-service region and makes up almost 90% of combined market ACV.

Okay. Thanks all for the regional updates. Steve, let's pivot to our industry update. As you know, BFSI is the biggest consumer of IT and business services, and it looks like it was another big quarter for that sector.

Yes, it was. Our industry chart really highlights activity across the major industries, and we try to look at the year-over-year change. So we saw some interesting patterns this quarter. First, of the 8 major managed services verticals, 4 had positive growth rates and 4 had negative growth rates, but 3 of the 4 largest verticals were all positive. As you can see, the only one that wasn't was manufacturing. BFSI, which accounts for 30% of the ACV, was very active in the first quarter. The $4 billion of ACV awarded in BFSI in Q1 was 40% over Q1 2021. And there continue to be really large transformation projects in this sector. Telecom and media also generated gains in both managed services and the as-a-service this quarter. Combined market ACV increased by 47% year-over-year. [indiscernible] activity and consumer experience, security and 5G support contracts really stoked the rise. And the telecom-as-a-service ACV soared 49% and the as-a-service now accounts for 65% of the telecoms' combined market ACV.

Thanks, Steve. So other than access to talent, no other topic is more important to our industry right now than cybersecurity. The massive increase in cyber breaches, especially ransomware attacks, combined with a heightened risk due to the invasion in Ukraine, has cyber on top of mind for not just IT leaders, but CXOs and company boards as well. So Doug, take us through what you're seeing and what advice you're giving to your clients.

Thanks, Stan. The increase in large-scale digital transformation programs and associated adoption of cloud platforms has really brought cybersecurity to the forefront of most business and technology discussions. Today, we're seeing even more activity in that space as governments ramp up data protection regulations and most recently with increased cyber attacks, coinciding with Russia's invasion of Ukraine. Critical infrastructure providers, in particular, have been targeted as have banks, leading to increased scrutiny of current regulatory controls in both industries. Threat vectors are expanding. Ransomware is the #1 issue our clients face these days, and it's driving demand for recovery and resiliency services across industries. CIP breaches, like Colonial and the recent [ Kronos ] SaaS platform breach show the breadth and scale of ransomware. However, every day, it seems, we also hear about other types of security breaches, like the sizable supply chain attacks at Samsung and NVIDIA. And all of this impacts services. In the broader market deals we monitor, we saw in 2021, a 23% increase in the number of awards, the cybersecurity services in scope. All of the geopolitical threats, cyber attacks, revenue growth, M&A activity and new entrants make this a very active space. As Stanton just mentioned, cybersecurity firms have outpaced the overall market growth in the past year with a 45% rise in ACV. M&A activity is also very active in this space. We tracked almost 70 cybersecurity M&A transactions in 2021 for a total value of $21 billion. For example, SentinelOne acquired Attivo Networks, and Google bought Mandiant for $5.4 billion.

Thanks, Doug. So Namratha and Kathy just talked about the talent and attrition challenge that we're all facing. But the pandemic also created a huge cybersecurity challenge for enterprises. So Doug, what kind of impact are we seeing in cyber from both of those?

Sure, Stanton. We saw a huge increase in cyber attacks when the pandemic started and companies had to enable technology for remote workers, in some cases, disabling or bypassing controls that were put in place. 2 years into the pandemic, the threat vectors haven't let up. For instance, normally BFSI is about 300x more likely to be attacked than other industries. After the Russian invasion of Ukraine, that number jumped to 500x. Stan, you just mentioned the increasing ACV of Infrastructure-as-a-Service. So clearly, cloud adoption is accelerating. But companies that have adopted multi-cloud are using several hyperscalers and tying them together in their legacy on-prem environment, which inadvertently is opening new avenues of attack. And labor shortages pose a twofold challenge in cybersecurity. First, companies are continuing to operate legacy cyber platforms, like [ SIEM and Endpoint ] technologies. They need people who know how these legacy platforms work to ensure basic cybersecurity protection. Those solutions, however, can't keep up with emerging threats because it takes too long to identify a problem, build a use case, implement a solution and start alerting to the threat. This is driving companies toward managed detection and response, also known as MDR/XDR solutions, and away from traditional [ SOC/SIEM ] setups. Even very large organizations are moving towards MDR/XDR solutions like CrowdStrike, Falcon and Cybereason, sometimes as a replacement for these legacy systems and in other instances, layering this technology on as another layer of defense. The labor shortages and increased regulations in cybersecurity are especially acute on companies that run critical infrastructure. CIP companies are having a hard time attracting and retaining staff to protect their systems. New technology and providers like Dragos and SCADAfence are having a positive impact, and companies are looking at how to layer those providers and technologies into their cyber stack to mitigate risk and comply with new legislation.

Okay, Doug. So let's talk about how these changes are impacting our sector, specifically cyber managed services? And then number two, who do you see is particularly active in this space?

From our contracts database, we have insight into more than 115 managed services deals, collectively worth over about $4 billion of ACV with cyber in scope that are coming up for renewal in the next 2 years. This is important because cyber is no longer viewed as a commoditized service buried within other functions. Instead, cyber is seen as a specialty skill or as a revenue enabler. That differentiation is key to winning services, either as a provider buying for new outsourcing contracts or as a company taking a new digital product to market in a competitive environment. Stand-alone cybersecurity contracts are also bundling in higher-value functions, such as threat hunting, forensics, DLP and identity governance delivered through cyber fusion centers. As Stanton talked about on Index Insider last week, that's a significant shift in the way cybersecurity services are delivered. It's driven by a lack of capability in-house, the need to adopt new technologies at an extremely rapid pace and the recognition that business knowledge is needed to effectively protect the enterprise. We see clear leaders in the managed security service provider space. This chart is from our Provider Lens study on cybersecurity and include some mid-tiers and niche-oriented providers. The leaders in traditional MSSP featured here all have very strong solutions and cover pretty much any security discipline, full stack technology, including application security. These top-tier firms have platform-driven solutions that optimize service delivery. The mid-tiers offer strong commoditized services and more flexible in the way they operate, but they tend to fall back into a staff augmentation mode even though they have managed services contracts. They're also more likely to have dedicated staffing models. The niche-oriented providers tend to be really good at certain things, but they're not full stack and they aren't able to take on a Fortune 50 company. Bottom line, we're under protected across all industries, given the spike in threats, organizations, including the service providers, either prioritize protect functions, while also showing demonstrable proof for ability to recover from a ransomware attack. They have to prove that to their Board, the third parties they work with and increasingly, to their cyber insurance providers. That creates a new opportunity in the market. We expect to see continual market expansion and a multibillion-dollar increase in cybersecurity services and technology spending from cyber alone in the next 3 to 5 years.

Thanks, Doug. As usual, some fantastic analysis and advice on a super important topic. So let's wrap things up with our forecast. Steve, back over to you to close us out.

Yes. Excellent. So we saw some unprecedented deal activity in the managed services sector. And as the quarterly ACV was down slightly, it still remained historically high. ACV for the BPO posted record activity focused on industry-specific BPO solutions and engineering services. ITO pulled back slightly with IT down double digits and ADM down 150 basis points. The as-a-service continued to grow at a brisk rate, though quarter-over compares -- quarter-over-quarter compares to indicate leveling off. The big 3 hyperscalers are quickly developing and increasing sizable backlogs, but the 4 Chinese providers are struggling to reclaim the growth they had pre-pandemic. SaaS became more democratized as the top 10 providers are seeing share to smaller firms. And cybersecurity, as Doug mentioned, has really outperformed the overall market growth over the past few years. Going forward, the tech industry is anticipating an uneven performance this year. On the plus side, we're at the start of a multiyear demand cycle of heightened in investments. Activity is the highest we've ever seen and budgets are rising. There are some headwinds that will make these compares really difficult. First, this is really the last quarter of favorable pandemic-related compares. There's also some geopolitical concerns as Stanton opened up with. We have new virus mutations. We have talent challenges. We have supply chain imbalance. We have inflation, all of which may impact enterprise spending. If we include the impact of energy and the rising costs there, we've seen more market headroom wins with a $10 increase in the price of barrel of oil negatively impacting real GDP growth by at least 20 basis points. So with all of this in mind, we're going to keep our managed services forecast for 2022 at 5.1%, just as we did last quarter. So we've seen 4 consecutive quarters of ACV over $8.5 billion, which is an all-time high. And just to put in perspective, the 5.1% is almost double the growth rate that we've seen over the last 10 years for managed services. The big 3 hyperscalers continue to expand, but we've seen some contraction in the SaaS market. As we mentioned, the Chinese tech giants are declining, that sector accounts for 17% of the ACV, and it's been challenged with growth. Given the continued growth of the IaaS market, though, especially the hyperscalers, we are going to increase our as-a-service market forecast by 200 basis points to 22% for the year. So with that, it's time for questions to join our discussion. [Operator Instructions]. Rishi, we'll start with you for questions.

Thank you so much, Steve, Stanton and the entire team. It was a really wonderful presentation. Maybe I can kick off with a couple of questions and then open up for the broader audience. So first of all, the 1Q numbers seemed to be fairly strong, both on managed services and as-a-service markets. However, your full year guidance hasn't been upgraded. One thing that -- to understand is whether -- by when do you think there would be signs available for investors as well as vendors to start getting worried about potential macro risks? I'm assuming that your guidance is baking in some sort of skepticism or conservatism about the potential risks that could come through in the second half of the year.

Yes. Thanks for that, Rishi, and you're absolutely correct. There is a little bit of risk built into it, and we had quite a discussion about the forecast on this quarter. We're holding at the 5.1% for a couple of reasons. First, as I just said, it's really doubled the normal amount of growth that we have is typically 2% to 2.5%. We're 5.1% right now. But when I look at inflation, the U.S. yield, some of the challenges that we see on supply-demand imbalance, I think there's enough there to make us just a bit cautious to hold it back. Now that being said, we're pretty consistent on the $8.5 billion of ACV per quarter now. That's a fantastic number. Clearly, as you just heard with the BPO numbers, we're seeing this big rise in industry-specific BPO. So we think that's going to help as well. So overall, I think we remain fairly optimistic on the market that there are some headwinds that we just want to balance. We didn't see enough in Q1 or enough in the kind of the broader Q2 pipeline to make us think that there was going to be a bigger push to push up that. Overall, tech spend, though, I think overall tech spend continues to rise as we see forward. So the more we get involved with hyperscalers, the more broader SaaS, the more tech spend in general, we will see that continue to rise.

The second question is something around the inflationary environment that we are witnessing. And the way we see it is there is a tailwind and there is a headwind. In the form of tailwind is, the pricing increases or hikes that the vendors are able to get. If you can give some color on whether how much broad-based it is or when do you think it becomes broad-based across customers and across vendors? And secondly, how does that impact the overall wage hike scenario, especially in the on-site locations, where some of the investors or vendors are fearing that inflation could rise up to mid- to high-single digits versus low-single digits historically from a wage hike perspective?

Yes. This has been the question, hasn't it, for the last -- probably the last 3 months. And we've done a tremendous amount of research. Kathy, why don't you take point on this one? Think about inflation, think about COLA and think about maybe global from a global perspective as well. Then maybe Namratha, you add some insights from India.

Thanks, Steve. When we look at contracts that we reported a few quarters ago, 2/3 of contracts have a COLA clause. And of those, 2/3 are tied to the Index. So where providers have COLA clause that is tied to the Index, more often than likely we're seeing them actually executed against. In the past, with inflation seemed so low, it wasn't such a big decision point in a contract or an inflection point, but we are now seeing those discussions happening. And as inflation continues to rise, clients are expecting that. It's not a surprise that the vendors and providers are coming to them and saying, we really need to talk about raising our rates. Rate increases are obviously happening across the board. And it's easier, obviously, for new work or restructured work versus work that has been contracted for over past years. But if you do have the inflation cost, you're able then to actually raise those prices for continuing and ongoing contracts. I think we'll continue to see increases in prices and rates as we move forward in the next couple of cycles as the contracts come up for renewal. I don't think this is a discussion that clients are not expecting. It's where we are right now in the market. And if you want talent and you're looking to actually move your programs forward, especially with some of the rare and more scarce talents, you're going to have to pay for it.

Yes, that's right. I think, as Kathy mentioned, talent shortage is definitely there in the market right now. And the wage hikes, I mean, the salary benchmarks are constantly increasing. So in order to meet that kind of a supply for the kind of demand that we have in the market, definitely, I think the wage hike and increase in prices is something that we will have to see. And that's what I mentioned in one of my presentations as well. I think invariably, that is going to be the effect that will happen because of the different savvy benchmarks that have completely increased right now due to attrition and the talent war that is going on.

And Rishi, I may add one more point to this. So I just want to continue to reinforce, and Kathy talked about this in her part, is the difference between managed services, pricing and time and materials and project plays great. We definitely still see prices for managed services continuing to decline. It's just the decline in those unit costs is slowing. So for example, around storage or e-mail or workplace or any of those kind of traditional towers in IT services, there's still an expectation that when you sign a multiyear agreement, the unit cost for what you're buying will decline. And it's up then to the provider to determine, okay, how much automation do I need to apply to this? Where can I take the work in order to continue to drive down that cost? So that has not changed, just the reduction is slowing. But as we talked about, really, where we're seeing a lot of the pressure's on the project-based work. And then that's ultimately though the challenge is, that's where a lot of the innovation is happening. A lot of the engineering work, a lot of the ADM work does tend to be more project-based as companies move to more kind of a product line operating model. And then as for -- even in -- as Doug talked about, even in cyber, some of those new emerging areas that are superhot and high priority, that's really where a lot of stuff tends to be project-based and then that's where we're seeing a lot of the pressure on rates.

Just one last question from my side, and then we can open it up for Q&A from the audience. In the last 2 years, a lot has changed in terms of the way business has turned, the way IT spending is being done, and the way it is getting delivered as well. These kind of disruptions typically in every cycle create new winners when it comes to vendors. What kind of vendors do you think are going to emerge as winners without naming any specific one of them, but categorizing as there are -- some of them are considered execution machines, some of them are aggressive acquirers, whereas some of them are domain specialists and others pride themselves in differentiated delivery model. So I would love to get your views on the next round of winners here.

That is a very loaded quite. I love it. So let me start off and, one, acknowledge what you just said. The world is changing incredibly quick. And we talked about how quick it's been moving, and it's accelerating. So there's one part where I look at organizations now, and so many organizations are really moving into Web3, the Metaverse, making big decisions about decentralized economist organizations, blockchain, DLT, other technologies that are really coming forward. And in many ways, you can see that sort of changing the next vision of what we see in our space. So if you think about the workplace of the future, if you think about collaboration, you certainly look at organizations that are working with the hyperscalers in a big way. So anybody that's sort of making acquisitions of being incredibly agile and flexible with those new emerging technologies would be the first ones that I would look at. The second thing I think you've got to say is we are in a really broad ecosystem period now. So you've got to be able to play in the ecosystem in a much different way than what we saw before. So organizations that can demonstrate that they can work really well in a broad ecosystem of hyperscalers, SaaS providers, GSIs, engineering firms, et cetera, and provide value to the client back are going to be incredibly valuable as well. There is a lot of acquisition activity going on. So we follow M&A really closely. I think right now, I like firms that have really invested in cybersecurity and engineering. Those are 2 really just hot areas across the industry that I like, and we see the numbers coming there. And then as we mentioned before, industry-specific BPOs, those industry-specific solutions are absolutely critical. So I gave you kind of a broad brush, but you can imagine the types of vendors that fit within there as we -- as you start looking at your portfolio.

And Rishi, just to follow up on what Steve said. I think I can't underscore enough the importance of the fact that we talked about the fact that the technology budgets are increasing, and that's an important distinction between IT budgets versus technology budgets. So we're talking about the technology budget across the entire firm. So as that increases, that, of course, is going to open up opportunity for more business-led spending, right? So therefore, in order to tap into that business-led spending, firms that have that ability to interact on an industry level, so with business level consulting, understanding their specific industry in order to start projects small and iterate up into bigger projects, eventually turning into longer-term managed services agreements, I think, is incredibly important. Those teams are going to need to be small and autonomous to be able to go kind of chase those opportunities, not just the delivery teams, but the pursuit teams, the commercial teams, all that kind of stuff to be able to bundle that together to be able to attack those industry-specific opportunities. And then I don't think we can underscore enough how much the -- how important it is for organizations to rethink the way their relationship with their employees. So Namratha talked about this a lot in her part. And it's not just about finding the talent. It's about grooming and retaining the talent. So the ability to have a place that people want to be and that's focused on well-being and that's focused on the long-term health and benefit to that employee, putting things in place, like hybrid working, I think that's going to be super, super important. And we're watching that really closely because I think that will ultimately -- we're not going to see the effect of that for a while, but that's ultimately what we think one of those key areas that's going to help companies build up that talent, whether it's the technology talent or the industry talent to be able to go attack these challenges.

Fantastic. On that note, I'm going to pass it on to Steve to take questions from the audience.

Excellent. Thank you. [Operator Instructions] We do have quite a few queued up. So let me start going through these. The first one, Namratha, I'm going to post it up to you. So this is on attrition, sort of like talent and inflation. Attrition has been probably the biggest concern that we've all discussed over the last quarter. You're right there. What can you tell us, [ feet on the street ], and give us a sense of the attrition concerns sort of globally? And then maybe Stan, I know you've got some data on this as well.

Yes, absolutely, Steve. I think the attrition is an ongoing problem right now. It's a challenge, and it's not going to settle any time soon because the demand is increasing. Just this morning, I was reading that there's almost 50,000 more jobs that is going to come into India. So I think this is -- the imbalance of supply and demand is going to continue for a couple more quarters or maybe more until that balance is kind of achieved. Talent war is real. There's definitely a lot of shortage. So there's a lot that is being done, to Stanton's point about retaining, grooming and hiring. So Kathy mentioned about hiring freshers. I think that's one of the key things that's being done. Stanton also mentioned about retaining and grooming the talent. People are getting innovative in terms of how they can retain the talent. Work-from-home, hybrid culture, flexible working options, these are becoming extremely important to retain talent again and also attract new talent, too. So there are multiple things that are being done, but there's still a lot of job openings over there, and there's still a lot of gaps to be filled for sure.

No, that's good. Hey, Doug, from your perspective, and I think Kathy hit on this, cybersecurity is really one of those hot skills. So not only is it one of the skills that's getting the sort of the increase from a wage standpoint, but also a hot skill that we're seeing from an attrition standpoint. What's your perspective on some of the things that service providers are doing or the industry is doing to reduce the amount of labor required potentially? But how does it sort of play out in the cybersecurity space?

Thanks, Steve. So what we're seeing generally in the cyber market is heavy adoption of technology to actually reduce the requirement for L1, L2 type personnel in a traditional sock. There's a lot of AI/ML integration that's happening. The adoption of cyber-fusion centers is also leading to a lower need for L1, L2 skill sets and a higher need for L3, L4 kind of expertise. So the technology adoption is the first thing. The other thing that we see is diverse geographies. Costa Rica, Latin America, there's still work going on in Eastern Europe, although the Ukraine situation is impacting that slightly.

No, that's good. And let me follow just up on that maybe with you, Stanton. The location challenges seemed to be one way that a lot of our clients are addressing sort of the attrition concerns and the talent concerns. What's our perspective really on some of the talent challenges and the location challenges or the location opportunities maybe that are being presented?

Yes, it's a great question, Steve. And unfortunately, as usual, there's no silver bullet. This is a tough challenge for every firm on the planet that's getting -- that needs access to technology talent, and who doesn't need that today? I think there's a couple of patterns kind of emerging that we see. Number one, specific to India, and Namratha has talked about this a lot, but that's really where I think the challenge is most acute. We do see providers and clients looking at Tier 2 and Tier 3 cities in India, a lot of renewed interest in those cities. And we're saying, Tier 2 and Tier 3, it's not in a derogatory way, it's just smaller cities basically would be the term. And one of the things that's so interesting here is that the pandemic really kind of accelerated this and the acceptance of the hybrid working that we've talked about. So the ability for somebody to work in a smaller city and be as productive or more productive has really been accelerated by the pandemic and is, therefore, opening up kind of the aperture to be able to get access to talent in some of these smaller cities in India. Number two, are seeing a pretty significant uptick in interest in Latin America, so various countries across Latin America, obviously, as a nearshore location for U.S. and Canadian companies, similar to how Eastern Europe is for many Western European companies, I think, finally are seeing some focus on repatriation of some work. This is kind of especially happening in the Asia Pacific region. So we do see -- and actually, I think this is one of the key drivers on around why as-a-service or as Asia Pacific is an as-a-service region, as Namratha talked about. Specifically in ANZ, we do see companies starting to take some portions of that managed services work back in-house. And I think that's also related to -- and everybody on this call, we've had lots of discussion internally because we see lots of our clients looking at captives. So building captive centers in response to the attrition challenge that they're facing. Now whether those will be successful is still to be determined, if the biggest service providers on the planet don't have the ability to attract or retain in some cases, right. A lot of times, you would question if a large enterprise has that capability to go stand that up in one of these super competitive countries as well. But the discussions around captive centers has spiked over the last quarter.

Excellent. Thank you for that. So there's a lot of questions on the BPO, which I was hoping there would be because these have just been phenomenal of results. And I think the question on the BPO is what industries and what areas did we see on BPO? And as I said, BPO was up significantly, almost 180%. We crossed the $1 billion ACV mark. Financial services was really hot this quarter. Most of the bigger deals in the BPO space were in financial services, again, on the industry-specific BPO. As I mentioned, we did see growth in facilities management, contact center grew, but that industry-specific where, again, we've used the example of claims processing or mortgage processing, but deep solutions associated with that is really becoming more and more prevalent in the market. I suspect that will continue. And Kathy, if I could ask you, because I know I'm trying to facilitate and watch this, could you review the next question and tee up the next one while I get the -- while I get one going here and just look at the -- thank you. The next question is really around TWITCH wins this quarter. Stan, I know you follow this. Any thoughts on how the TWITCH providers did or maybe the breakout between TWITCH, MMC and tier 1 -- tier 2s?

Sure. So we actually just published this in the Insider last week about deal share of the 2021 ACV. We don't have the Q1 numbers yet. We actually wait a month before we accumulate the quarter share. So in about a month, we'll have the reflection of what the share was in the first quarter. But for all of 2021, if you look at all the ACV in the market and managed services ACVs, we're talking about $33 billion of ACV in 2021; multinational providers, [ 142% ] of that; India Heritage providers, 31%; mid-sized providers, 11%; BPO pure-play, 9%; and then ER&D and other providers, 7%. So qualitatively, we do feel like that the India Heritage providers are likely going to increase their share a bit and multinational will likely shrink share a little bit, but we'll have that data here in about a month or so.

Yes. And I think the big switch on that is really what we talked about for some time is this decline in infrastructure and sort of the different imbalance on the IT side of it. Data center, as we said, was up a little bit, but still weighed down on historical averages, and that's having a bit of an impact on it as well. Kathy, do you have one teed up for us?

Thank you. Namratha, there was a question to clarify about the 50,000 jobs that we see moving from Ukraine to India. Do you think that, that will be all directly placed over into India? Or do you think there'll be more distribution globally on that 50,000 job?

Temporarily, it is going to be shifted to India. Potentially later, it will spread across globally. That's what we see, yes.

I think it's important to remember that on the Ukraine front, as we talked about, there is still a lot of IT delivery taking place from the Western part of the country. And there's also a lot of folks that were based in Ukraine that have moved to other countries, like Poland and Romania, and are delivering work from there. So the Ukraine and most of the Eastern European countries have a really, really strong focus at a government level on building those [ STEM ] skills. I don't think that's going to change. Eventually, those jobs, as the complex settles, we do believe will come back, but definitely see a lot of question about in the near term, getting access to that high-end engineering talent. And most of that focus does appear, as Namratha said, to be focused on India. So Steve...

There was a question...

Sorry. Go ahead, Kathy.

Yes, I would say there was a question in the queue around in-sourcing. Steve, you mentioned you're seeing a little bit about that in a specific, but people are wondering if we're also seeing that in other regions, specifically in EMEA.

Yes. The easy answer is absolutely yes. I think the GEC and the in-sourcing and the repatriation has been a trend that's quite honestly accelerated over the last 18 months. Now I think it still has a very global nature to it. I think organizations, though, are looking at what are those core attributes that really make them special that they should retain. And quite frankly, a lot of this is really associated with the digitalization trends that we talked so much about. So the more we move the cloud, the more we change the consumption model, the more we digitize an organization to create sort of critical capabilities, the more that the enterprise organizations feel that they want to own that. What's interesting though, and this is sort of a different dichotomy that we haven't seen is, in most cases, the demand is still outstripping supply. So even as their repatriating services and in-sourcing more, they're also using that to leverage up through engineering, through other organizations, through product development as they create products. It could be things as digital twins, digital threads, smart elevators, smart cities, those, but the demand is still so high that I don't think we're predicting or forecasting any sort of impact to the -- our traditional models, primarily because, again, demand is just outstripping supply. I think we're just seeing a rebalance of organizations of what they want. I'm surprised, quite frankly, at the level of a number of organizations that do want to go in and do a global engineering center or a global capability center. It's one of the highest I've seen in my almost 15, 20 years here. A lot of that is really driven, I think, some of the talent wars that we talked about in this sense of being able to control their own destiny a little bit. So that was a very good question.

Excellent. There's a couple of questions in the queue that wanted to mention around ESG. And if we're seeing more emphasis around energy and environmental and renewals and sustainable economy as well as around making sure our supply chain is diverse. And there's a lot of great questions around it. I know Stan and I have talked about featuring that in one of our future indexes. So stay tuned for that. We are seeing an uptick in activity around that and questions from our clients, around suppliers and capabilities, but we'll focus on that in a future index. But I think it's really becoming a much more interesting and nuance topic that we should address.

Okay. I think we're just about out of time. So I want to thank everyone very, very much for joining the call today, especially a big thank you to Rishi and his team at IIFL. Just two quick things before we close out. We do have a new quarterly report that we're going to start publishing alongside the Index. It's a deep dive into a lot of the data that you saw here today. So if you're interested in that, I'm going to talk about that a little bit more on the Insider on Friday, so look for details on that on Friday. And then finally, our 2Q call will be on July 13, and we'll be in touch shortly with details on how to register for that. So with that, thank you very, very much for your time and have a fantastic rest of your week. Thanks.