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 Capital, welcome you all to the First Quarter 2025 ISG Global Index Call. I'd like to thank the team at ISG for their valued work on the industry and for asking us to host this call today. ISG has been hosting these index calls on the IT and business services industries for more than 20 years. ISG influences $200 billion of technology spending each year, giving them deep insights into the industry as well as key changes in enterprise demand. It is one of the largest outsourcing consultants in the world, helping more than 500 corporates globally. With that, I'd like to pass over the call to Stanton Jones, distinguished analyst at ISG. Stanton, over to you.

Thanks, Rishi, and hi, everyone. With me today is Steve Hall, Partner and President ISG EMEA; Kathy Rudy, Chief Data and Analytics Officer; Namratha Dharshan, Chief Business Leader for ISG India; and Alex Bakker, distinguished analyst. This is our 90th consecutive index call, and we have a lot to talk about today. There's been a tremendous amount of macroeconomic disruption over the past several weeks, especially over the last week. So we're going to try to accomplish 2 things today. First, we'll give you our point of view on how we believe recent U.S. trade policy changes may impact the IT services sector and then we'll cover the results of the first quarter. And as always, we'll save plenty of time for Q&A at the end of the call. So with that, Steve, I'll turn it over to you.

Thanks, Stanton. This should be an interesting call, but let's begin with a balance view of the market first. So despite the heightened macro uncertainty, the global IT and business services market continued to show resilience in Q1. The combined managed services and as-a-service market grew 18% year-over-year and 2% sequentially, really signaling continued structural demand even as decision-making slows in some areas. Managed services increased by 2% year-over-year, with BFSI rebounding strongly, up 8% year-over-year, driven by renewed momentum in cloud transformation and hyperscaler growth. AI-related activity remained robust, up almost 28% on a trailing 12 months basis, really reinforcing the enterprise shift from experimentation to scale deployment. These are all positive signs for the long-term health of the market. Cloud and AI continue to drive transformation across all sectors. GCCs are accelerating product development and hybrid development delivery adoption, which is helping clients manage geopolitical risk while advancing speed and efficiency. Even with the volatility in this macro environment, enterprises are remained focused on cost resiliency, productivity and platform modernization. But I think we all know we're entering a period of increased caution. So let's take a look at that. So the introduction of the sweeping tariffs and potential retaliatory measures has raised short-term uncertainty, particularly across the discretionary IT spend. From a technology spending perspective, the discretionary app spend is the most immediate pressure point. So application services accounts for 47% of the total outsourcing market for nearly $4.9 billion per quarter and over 40% of that, so almost $2 billion is related to Application Development. Application Development tends to be the variable and the project-based work that we talked about at as a market with a dip in discretionary spend. So just imagine a 10% pullback in discretionary spend could result in a $200 million drop in Q2 ACV or approximately 2% per quarter. These large capital projects like SAP S/4HANA migrations are particularly exposed. These programs account for an estimated 10% of the current provider pipelines, delays or cancellations tied to these extended tariffs may not only pressure service provider pipelines, but could also prompt SAP to reconsider its 2027 and support deadlines. So let's take a quick look at the industry view. I'll just say cautious optimism, but with some sector-specific pressures. So financial services is nearly 30% of the total outsourcing market has shown signs of recovery, and that momentum is now slightly at risk. Expansion projects are being delayed with activity shifting to renegotiations and better consolidation. Manufacturing, especially automotive and electric vehicles faces the steepest near-term headwinds with capital potentially redirected to supply chain localization and factory build-outs. We estimate a decline in engineering and IT capital expenditure projects, resulting in a decrease as much as 600 basis points over Q2 and Q3. Travel and Transportation is expected to feel the impact of a projected 30% drop in inbound U.S. tourism resulting in reduced spending on customer platforms, mobility apps and core SAP initiatives. We expect to see at least a 5% impact on this sector over the next 2 quarters. Life Sciences remains resilient, benefiting from sustained investments and a strong pipeline of ERP projects. However, with global supply chain inflation is creeping in, we're watching for a potential slowdown in Q3 and Q4 particularly in noncore discretionary spend in travel budgets. So if we take a look at the impact of AI, AI-driven transformation continues to be one of the most powerful growth engines in the market. AI and automation are now embedded in nearly every sourcing conversation with clients pushing for 20% to 30% productivity improvement across both BPO and ITO. This is fueling a new wave of buying impact, efficiency-driven deals and creating a clear runway for providers who can scale delivery with speed and intelligence. At the same time, global capability centers or GCCs, remain one of the fastest-growing components of the global delivery ecosystem. We're witnessing a steady rise of GCC-led innovation, particularly in product development, AI operations and engineering. Many clients are also accelerating hybrid GCC models to enhance resilience, reduce capital exposure and localize critical skills. We'll explore that in more detail later in the call, but the long-term trajectory for GCC remains highly constructive. So Q1 results offer reasons for optimism. We're clearly operating in a more volatile demand environment with a wide variance by sector, geography and client strategy. And hopefully, our job is to help you navigate this period with agility and insights. So let's turn to the forecast. So just as a reminder, for those that are new on the call, we measure 2 categories in the ISG Index, Managed Services and as-a-service. Managed services are multiyear IT services or BPO contracts and as-a-service includes bookings from Infrastructure as-a-service and Software as-a-service providers. We measure the health and growth of these 2 markets through the lens of annual contract value for what we refer to as ACV. Think of ACV as bookings and for the analysis, we're only looking at the commercial sector contracts. We don't look at -- we did not include the public sector in our analysis. So with that context, Managed Services remained above $10 billion for the tenth straight quarter, generating $10.5 billion in ACV, and that was up 2% year-over-year. Compared to other parts of the tech sector, Managed Services is remain resilient and has averaged 4.1% year-over-year growth since 2023. In the first quarter, 6 mega deals were awarded, a mega deal was an award with $100 million of ACV or more. And the 6 in first quarter was up versus 4 in the first quarter of 2024, but was down compared to fourth quarter of 2024. At the same time, we saw a pullback in the number of smaller awards for deals between $5 million and $10 million in ACV, which is our smallest ACV segment we monitor, the number of awards was down 6% year-over-year and down 13% sequentially. It was also one of the lowest outputs based on a number of awards for this small category in the past 2 years. There's a concern as this deal band is a good indicator of the discretionary spending when it's down, it really indicates that discretionary spending is under pressure. The as-a-service market accelerated to over $18 billion in ACV this quarter, ACV was up 30% year-over-year and 5% sequentially. That's the third straight quarter with double-digit year-over-year gains. However, growth in this segment did slow from last quarter. So let's drill into the ITO market. The ITO ACV of $7.8 billion was up 12% year-over-year. That's the best quarterly acceleration since the fourth quarter of '23. By functional area, ADM ACV of $4.9 billion was up 12% year-over-year. And if you recall from our past calls, the industry saw declines in ADM through most of 2024. However, those metrics rolled over, so there should be easier comps in 2025. And as I mentioned, the intro ADM is more susceptible to discretionary spending pressure. So as that goes up, you'll likely see more pressure on the discretionary spend. Infrastructure, which makes up about 25% of the ACV in the market was down 18% quarter-over-quarter, but was up nearly 60% year-on-year against a very weak start to 2024. Much of the strength was driven by data center, network and bundled infrastructure categories. Also, as I mentioned earlier, there were 6 mega deals in the quarter, and all of them were ITO awards. The smallest band of ITO awards also did well in Q1. Award counts in this band were up 6% year-over-year. So let's drill into the Engineering segment. For those of you that have joined the calls for the last few years, you know that we've included engineering in our BPO segment for many years. We decided to start to split out that going forward, given how large this segment of the market is becoming. Engineering is now about 8% of the total market and represents everything from traditional engineering services like CAD design and heavy manufacturing to software engineering and financial services. In Q1, Engineering generated its best quarter ever with $1.1 billion of ACV, which was up 42% year-over-year. That represents the fifth consecutive quarter of double-digit growth for this segment. By industry vertical, there were gains across most verticals, led by telco, media and BFSI. Both of these verticals produced a record high ACV for the quarter. Communication service providers have continued to invest in their networks and satellite communications are becoming mainstream, and these are presenting growth opportunities. By contrast, the largest vertical for engineering, manufacturing declined 13% year-over-year. The automotive sector is facing unfavorable macroeconomic conditions, tariff uncertainty and heightened competition from Chinese OEMs which is negatively impacted engineering spending in this sector. All right. Let's pivot over to BPO, Namratha, over to you.

Thank you, Steve. On a trailing 12-month basis, the BPO segment is down 5%. However, in the first quarter, there was a broad-based weakness across the BPO segment. BPO ACV was down nearly 40% year-on-year, as you can see here. The 39% year-on-year decline was the biggest quarterly drop decline in over a decade. By functional area, customer engagement pulled back the least of all the functional areas, down about 11% year-on-year. Industry-specific was down nearly 50% year-on-year, although the number of awards increased sequentially. That's a strong indication that the BPO award sizes continue to decrease and AI is making inroads impacting the overall deal sizes like we have mentioned in our previous quarter index calls. Obviously, these results are very different than what we saw in 2024. So it's important to keep in mind that ACV or bookings can be lumpy when measuring a short-term period like we are doing here, with the first quarter of 2025 versus the first quarter of 2024. Kathy, over to you for an update on the regional demand.

Thanks, Namratha. The Americas generated $5.3 billion in Managed Services ACV in Q1, and that was down slightly year-on-year, as you can see here. The decline was the third time in the past 5 quarters where we've seen year-on-year pullbacks in the Americas. Out of the 6 mega deals Steve noted, 3 of them were in the Americas. However, small deal activity was down 5% year-on-year and 3 of the past 4 quarters, we've seen year-on-year declines in this deal segment. As we mentioned earlier, this is an important area to watch in terms of discretionary spending pressure. The EMEA region posted $4.4 billion in ACV, and that was up 13% year-on-year. Of the last 10 quarters in EMEA, only 5 have been positive, which shows the choppy nature of the IT services bookings in this region. The 3 other mega deals in the industry were in EMEA in Q1, and the small deal awards were down 1.5% year-on-year and 15% quarter-on-quarter. In Asia Pacific, ACV of $777 million was down 26% year-on-year and representing a notable turnaround of the previous 4 quarters of double-digit year-on-year increases. During those 4 quarters, the Asia managed services market averaged 31% year-on-year growth. Award counts in this region were down 14% year-on-year, and the major driver for the shortfall was the small deal category. Okay. Let's move on to the industry date. The BFSI sector, which makes up almost 30% of the annual contract value in the managed services market was down 2% in Q1. Even though BFSI was down, it is showing signs of green shoots, as the last 6 months are up 12% sequentially off midyear 2024 lows. However, as Steve mentioned, the big worry here is the bank's clients canceling capital expansion projects, which would put a lot of pressure on discretionary spending. In manufacturing, which makes up nearly 20% of the market, ACV was up slightly year-on-year. EMEA and Asia led the growth, and this offset weaknesses in the Americas, which pulled back 7%. This is a sector that we're most concerned about as it will likely be hit hardest by the new tariffs, especially the automotive sector. And finally, both the energy and the transportation verticals each finished up over 20% in the first quarter. Energy tends to be a more defensive sector and has performed well during the past 3 years with at least $3 billion of ACV awards each year. However, as previously noted, we see a significant drop in travel to the United States which could have negative impact on the travel transportation and hospitality sector. And now Stanton over to you for an update on what we're seeing happening in cloud.

Thanks, Kathy. So we're pivoting now to the other market segment we track, which is as-a-service. As Steve mentioned upfront, as-a-service includes bookings from Infrastructure as-a-service and Software as-a-service providers. So let's start with Infrastructure as-a-service. It generated nearly $14 billion of ACV and that was up 34% year-on-year. That's the best ever quarterly result for this segment, but growth was down sequentially. The big 3 hyperscalers make up 75% of the ACV in our Infrastructure as-a-service basket, and they posted a 48% year-on-year growth rate in the first quarter, as you can see here. However, like the overall Infrastructure as-a-service basket, their growth decelerated sequentially as well. The big 3 hyperscalers are heavily investing in CapEx to build out the infrastructure required to meet the exceptionally strong demand for AI services we see and despite concerns over high CapEx levels and the DeepSeek announcement earlier this quarter, elevated spending on AI hardware is expected to continue as the Big 3 race to capture new AI workloads. That said, the hyperscalers have all noted that they're facing supply constraints for GPUs and it's important to keep in mind that this massive wave of data center build-outs we're seeing is heavily reliant on imported capital goods, which, of course, could see an impact from recent tariffs. Okay. Now let's take a look at Software as-a-service. So the SaaS segment posted its best quarter ever breaking the previous record set 3 years ago. It generated nearly $4.5 billion in ACV, and that was up 19% year-on-year, and that's the fourth consecutive quarter of year-on-year growth. And as you can see here, the top 10 SaaS providers moved in tandem with the broader SaaS index unlike what we saw in Infrastructure as-a-service with the big 3 hyperscalers. But what was different this quarter is that the year-over-year growth in SaaS accelerated from the fourth quarter. So Agentic AI is dominating the conversation in the business software market today and a broad range of software providers are claiming agents to be a panacea that can improve performance and lower costs. And while we do believe that Agentic AI will present enterprises with a significant opportunity, it's likely going to take several years to get there. That's because it's important to remember that the readiness of an organization to adopt Agentic technology from software providers is likely to vary significantly depending on the level of customization they've done to their applications and how thorough and clean their data is, which is a critical topic Alex will hit on here in just a minute. Okay. Now let's take a look at the leaderboard. As a reminder, providers are listed in alphabetical order and positioning is based on annual contract value or ACV over the past 12 months. The company is new to our list are denoted with an asterisk, and a reminder that the regional leaderboards can be accessed on the ISG website. In the largest 2 groups, we continue to see minimal changes in the leaderboard with the top companies maintaining their strong positions. A highlight in the first quarter was Accenture announcing a proposed 7-year joint venture with Australian Telecommunications Firm, Telstra focused on data and AI. As part of these changes, Telstra would consolidate from 18 service providers down to 2 joint ventures, Quantium Telstra and the proposed joint venture with Accenture. In The Building 15, we saw a French IT services firm Sopra Steria, joined the leaderboard as it won deals at French firms Airbus and EDF. Also in The Building 15, Genpact won a deal at BJ's wholesale to provide expertise across F&A, procurement, HR and merchandising. In The Breakthrough 15, we saw 2 new providers join the leaderboard. Innova Solutions, a product engineering and cybersecurity firm join the top 15. And we also highlight Coforge here in The Breakthrough 15 for their 13-year, $1.5 billion mega deal at Sabre focused on accelerating product delivery for the Travel Technology Firm. And finally, in The Booming 15, we saw several new firms joining the leaderboard, like data center service provider, 21Vianet, Swedish network provider, Eltel and Engineering Provider KPIT Technologies. Congratulations to all the providers who made it to the leaderboard this quarter. Okay. Now let's pivot to a red hot topic, Global Capability Centers or GCCs. Namratha, over to you.

Thanks, Stanton. So the rapid growth of GCCs in recent times was once perceived as a threat to the IT and the BPO services industry. But in our recently completed ISG Provider Lens Quadrant Research on the global capability centers. We observed that the GCCs and the IT services providers will continue to support and coexist in this space. We evaluated more than 25 providers across 2 broad segments. The first segment being designed and set up which focuses on providers helping enterprises to set up GCCs ground up and optimization and enhancement with the evaluated providers who are working with both new and established GCCs to transform the existing digital landscape. On the design and setup, there are specialist providers like ANSR who bring differentiated offerings like real estate, facility management, et cetera, along with some of the other services while the big 4s play a significant role in this space, especially with a wide range of specialized services such as tax consulting. Second segment, which is optimization and enhancement that focuses on talent acquisition, processes and technology. Both large providers like Accenture, Infosys, midsized IT services providers like Persistent Systems and Hexaware play an active role here. Leveraging their capabilities and capitalizing on opportunities within the segment to effectively cater to evolving needs of GCCs. What we observe is providers offer a wide variety of services to GCCs. Providers have flexible engagement models and are offering from curated solutions to specialized micro services like setting up offices, office spaces within their premises, implementing tech solutions and supporting skill-based hiring and staffing, et cetera. Providers are actively investing in expanding partnerships to offer one-stop shop solution to GCCs from setup to transformation. Now as GCCs are focused on cost optimization and transformation, our research indicates that nearly 60% of the GCCs plan on increasing or continuing the use of IT services over the next 2 years which means leaving more opportunities on the table for service providers who are already driving nearly 80% of the GCC revenue from optimization and enhancement type of engagements. With the uncertainty around tariffs, and macroeconomic factors playing out and the impact it might have in GCC's cost optimization will continue to be a key focus area, and AI adoption to drive efficiencies will become essential. As Steve mentioned earlier, we believe that the hybrid GCC models will gain more prominence for enhanced agility to access skilled and diverse talent and also reduce capital exposures. Shifting focus on the enterprise side, Alex, over to you.

Thanks, Namratha. In addition to the Provider Lens report that Namratha mentioned, we have also completed some new research on why enterprises are investing in building GCCs and what specific business objectives they hope to address with this delivery model. Organizations want to leverage GCCs to drive cost reduction in their operations, followed by achieving productivity gains. In the near-term, the expectation is reduced labor costs will provide the primary cost savings. While over the longer-term, investments in process efficiency, technology and AI will ensure that they remain a driver of productivity for their organizations. For those organizations that have GCC locations overseas, we see evidence that to pursue continued productivity gains, the talent mix is expected to change in order to favor more AI, data science and engineering roles. For all organizations, there is an expectation that reliance on capacity to perform manual work and basic business process support will decline over time. Still, GCCs will be forced to compete with managed service providers in an increasingly competitive labor market for these skills, and this may drive up costs or delay plans. Over half of all businesses in our study expect GCC productivity gains this year to come from leveraging AI. However, so far, it appears that much of the AI adoption has been slow to leave the pilot phase. Compared to our study on Generative AI adoption from last summer, average time lines for having use cases in production appear to have slipped by 6 to 9 months. The most frequently cited challenges relate to either managing data quality issues or being able to demonstrate ROI from the spend required. On the bright side, we see a growing recognition from enterprises but to leverage AI successfully requires a different strategy for managing and maintaining data than they've had before. We are just beginning our research to more formally define this space, but we expect this emerging data tower to be a growing component of Managed Services and GCC responsibilities over the next few years. As our research on this topic is in flight now, I look forward to discussing this in more detail with you on the next index call. Steve, back over to you to close us out with the forecast.

Great Alex and Namratha. Great insights on the GCC, really good to see. Hopefully, everybody will be able to access the insights and the reports as we go forward. So let's summarize, and I'll summarize by saying strength in the market, but really there is some caution on the horizon. So let's start with the good news again. The combined IT services and as-a-service market grew 18% year-over-year and 2% sequentially in the first quarter of 2025. This is really a strong signal of the underlying demand resilience. Managed services increased by 2% year-over-year and BFSI, which had really been troubled over the past couple of years, rose 8% year-over-year, driven by robust cloud and hyperscaler activity. Momentum in AI adoption continues to accelerate with over $18 billion in AI-related project awards over the trailing 12 months. Enterprise clients are now moving from pilots to scale programs and really integrating AI as a cost optimization and productivity lever across IT and business operations. Cloud and AI remain foundational to enterprise transformation whether it's data-driven reinvention or platform modernization, we're seeing sustained investment across sectors, even amid policy-driven uncertainty. And as Alex and Namratha just walk -- talk through, GCCs are evolving. They're accelerating product development cycles and adopting hybrid delivery models to further reduce costs and deal with the geopolitical exposure. So while there's no question, we've entered a more volatile macro cycle, we continue to see structural demand for digital services, long-term growth across both the combined markets and clear enterprise focus on resilience and cost optimization. So despite the solid Q1, I think we all know that there's heightened uncertainty from trade policy, geopolitical tensions and the evolving regulations are beginning to weigh on second quarter forecast. Clients are lengthening decision cycles, holding discretionary budgets and really reevaluating capital-intensive projects particularly in industries like manufacturing, retail, automotive and even financial services. So in this environment, for the first time in 90 indexes, we're really going to provide 2 distinct scenarios for our full year outlook. Let me kind of walk through these. So the first scenario is what we'll refer to as transitory tariffs. And in this scenario, we sort of expect a recovery in the second half of 2025. In the current tariff environment stabilizes by midyear, so say, mid Q2, early Q3, we expect to return to stronger decision-making in the second half and under this scenario, we would really see the as-a-service market to grow by 18% in 2025, which would be driven by AI, cloud and consumption-based scaling. The managed services, we're going to reduce our forecast in this scenario from our original forecast of 4.5% to 1.3% annually. We think that delayed discretionary projects in Q2 and Q3 will be difficult to convert and grow on the back side of the year. This path reflects really a temporary market pause not in shipped in the enterprise intent or the global scale of the market. The second scenario is really a prolonged disruption or structural impact with tariffs. If the tariffs extend through Q3 and beyond and especially if compounded by immigration enforcement with H-1Bs, prevailing wage issues or retaliatory digital services taxes in the EU, we would anticipate a longer pullback in discretionary demand and a larger delay in award conversion. Under this more bearish case, taking a look at as-a-service, we would lower our forecast 300 basis points to 15% growth. So still strong growth, again, that's going to be driven by the hyperscalers and the as-a-service. The Managed Services market we forecast would contract a negative 2.4% or nearly a 700 basis point swing from our original 4.5% forecast. We remain cautious in our base case, but not pessimistic. The signal in Q1 are fundamentally strong, the shift we're seeing is not one of demand collapse, but really a delayed commitment. We'll continue to monitor these dynamics closely. For now, we remain cautious in our base case, but see meaningful upside potential if conditions begin to stabilize in the coming months. As always, we'll keep you up to date through the index insider and our sector briefings as new signals emerge. So that brings us to the end of the formal call. We'll now open it up for questions. Please type your questions into the comments on the right. And Rishi, would you like to start the questions?

Yes. Thank you so much, Steve and team. That was a great presentation, very much need of the hour based on how things are progressing. So why not kick off the first question on what has happened in the last 15 days, but more importantly, yesterday in terms of how the tariff conditions are changing pretty much on a daily basis. How do corporates navigate through that, right? I mean how do you see the overall contracting activity and the IT spending pan out? You have clearly articulated 2 different scenarios, but would love to understand how do you see what has happened yesterday in terms of the overall moves? And if you can give some color on the vertical specific commentary as well around that, that will be helpful.

Great. Thanks a lot, Rishi. And I know you and so many analysts have been so busy. So thank you for that and keep the advice coming this way as well. I'll start off by saying the only certainty right now is uncertainty because we're seeing the situation where things are very fluid. Things are very dynamic as we go forward and it's really why we decided to give 2 different scenarios this time for really the first time ever in 90 indexes. We knew that there was a possibility that things could pull back. We didn't know if they were, but it was or they would, but we always knew that, that was a possibility. And really is why we came out with sort of the transitory and more of the permanent tariff piece. I think the administration has been very clear that there's lots of discussions going on, lots of different negotiations. The EU has been clear on that as well. So when I think about the forecast, especially for the Managed Services, I think that plus 1.3% to minus 2.4% is likely still the best range of where we'll be. I think any time you have uncertainty, it's going to be difficult to make large-scale decisions for impactful decisions. And that's what we're seeing in the market right now. It's good to see the market come back, it's good to see a little bit of a pause. We're going to have to continue to see what the next 90 days brings. I think, though, there's still some structural issues, though, that we have to make -- that we have to work our way through the system on. You still have the challenges in manufacturing. You still have the overcapacity and challenges with EVs. You still have a regulatory environment that's difficult to manage. Those sort of fundamental issues are still there, which was causing a lot of the pressure even as we were coming into Q2 or on a calendar year Q2. So I think those are going to stay. The good news, as we think through it, and Namratha and Alex talked about this, we're seeing really big advances on new operating models, GCCs, AI, cloud are really driving across the board. And as I said at the beginning of the year, if there was 3 mega trends that were really going to shape our business this year, sort of the whole industry, it was going to be cloud at scale and that's clearly what we're seeing. It was going to be the rise of GCCs at scale and what that meant and sort of the shift to GCCs and all the capabilities that, that unleashes for the entire market and it was going to be AI. So I think those 3 fundamentals are still really strong. You heard us say $18 billion of AI spend over the last trailing 12 months. That's up 26%. You're seeing all sorts of real capabilities come to the market, which are all really positive this week as we think through that. So overall, when we balance that, we've got this uncertain market, a lot of headwind on that, but we've got these tailwinds that are actually fairly favorable right now. I don't know what the dollar is that we're going to have to look at. I think right now, on a reported basis, I think there's some good FX tailwind in the European market specifically and against the pound. So that could be strong as well.

Okay. And Rishi, I just would want to reinforce what Steve talked about in his intro is the degree to which ADM is potentially exposed here, and that's really what's driving a lot of this downside, frankly, on the forecast is that's about 50% of the ACV in the market, about 65% of ITO. Think about 30% to 40% of an ADM award potentially is discretionary. And as Steve mentioned, it's just the uncertainty in the environment, and that's where we really are starting to see a lot of this, let's pause until we know what will happen. But it doesn't appear that anyone really knows what will happen. So that's the concern here. There's a lot of pausing because of uncertainty and then that's going to have an outsized impact on ADM, which makes up a big part of the ACV.

Great. Fantastic. The other question is a couple of interesting trends that I observed and which felt counterintuitive. One was the strength in the ER&D space. And the other one was somewhat moderation on the BPO side. And the common understanding is that both of them ER&D should potentially be more impacted from how the global macro is going to pan out. And on the flip side, BPO potentially could be more defensive. But if you take into account what is happening at the AI and GenAI adoption side, do you think that has to contribute something to these trends? And how do we think about it over the next year?

Steve, do you want to take the engineering question, and then Namratha, you can take the BPO?

Yes.

Yes. I can take that. So I think on the engineering side, we broke it out because we're seeing so much growth there, Rishi, across the board. And I think as a couple of big things come together, software is becoming sort of the driver for so much product engineering piece. That opens the door for kind of a global delivery models as you go through that. We're finally seeing those bigger deals come to market. We're at over $1 billion per quarter now on an ACV basis. So there's just a lot of growth and that growth is coming from multiple sectors. It was originally almost predominantly manufacturing but now we're seeing it in utilities, we're seeing it in telco, we're seeing it in banking. So it's really lifting so much to the market. I think when you combine it with GCCs, Namratha as well, it's going to continue to have a nice tailwind and really drive higher value for organizations.

Yes. And on the BPO side, Rishi, I think on the last trailing 12-month basis, if we see the BPO market is down about 5%. The quarter decline is not necessarily defining the trend for the rest of the year. And when we compare the shorter periods, the numbers could get a little lumpy over there. But broadly, I think even in the last couple of quarters, we have reported that the deal sizes in BPO has been shrinking over a period of time. Certainly, the AI is definitely picking up quite significantly. It does have an impact on the deal sizes for sure. Providers are having to bring the AI much early in the conversation and pass on the benefits to the clients. So obviously, that sort of disrupt the traditional models that most of the BPO providers have been running. But at the same time, I think most of the BPO providers are also optimistic about the GenAI bringing more opportunities potentially in the next couple of quarters? And also the industry-specific BPO, which has kind of been a growth driver for a few quarters now. What we say is though the ACV has kind of decreased. The number of awards has kind of increased by almost like 4%. So some of these factors will drive more opportunities moving forward. But for now, I think this quarter, it's just kind of been a bit lumpy.

Yes. And Rishi, I'll follow up some of Namratha's commentary on BPO. I know that's kind of -- it's a big number. Just a reminder, typically, this first quarter call, given the rolling comparing a quarter to a quarter, the number can be pretty lumpy as Namratha mentioned. And I think it's also just important to remember, there's also -- there's -- whenever we're comparing quarter-to-quarter, there can be kind of a technical compare consideration to this. So if you go back to the first quarter of 2024, that was the third best quarter ever for BPO. There was a pretty large mega deal in the first quarter of 2024, no mega deals this quarter in BPO. So those 2 factors, if you start to pull those together, that's the reason we also included that TTM analysis to show that it was down. Obviously, some providers are doing quite well in that space, but there are some that are reporting low single-digit to negative growth. It's just a big space with a lot of different providers in it. But I think the important point to note here is that we continue to see activity is really strong, like the number of awards but in most cases, award sizes continue to decline, and we think that AI is having a big part of that.

Got it. And just one last question. In the presentation, there was a lot of insights around the GCCs and how they are playing out. We have observed in the Indian landscape that a lot of corporates have now started outsourcing GCCs, trying to give those contracts to third-party outsourcing providers to manage GCCs, which is quite interesting given that historically, there's always been a dichotomy between where the GCCs move and where the work to the IT outsourcing vendors work. So can you give us some color on how -- what are the reasons that this trend is developing? What are the contours of that -- those kind of deals? And do you see any risk to the entire GCC theme, given what is happening in U.S. on the tariff side as well?

Sure. So Alex and Namratha have been covering that closely. Alex, why don't you start? And then hand it to Namratha.

Yes, absolutely. So we see a lot of evidence that GCC's and service providers are going to collaborate. There's a lot of the process that Namratha has been covering on the setup of GCCs being supported but it also looks like there's a fairly high level of support expected during the run phase of a GCC, on things like HR or end user computing in the GCC, where if the GCC is focused on a business process, it isn't necessarily going to specialize in running its own IT. As far as the setup models go too, there's a -- I think a difference between the organizations that have already set up or already had some presence growing their presence and organizations leaning on service providers. A lot of organizations have talked about build operate transfers with service provider support. But there's also from our recent study on this, just as many organizations who are planning to build centers considering just starting with kind of an outsourced model of dedicated capacity so kind of a virtual GCC. And kind of not worrying immediately about the real estate, the setup and the entity and really working with a service provider to support that and really remodeling having dedicated capacity. Namratha, would you like to add something about how the set up part of it is looking?

Yes. No. I think the other key point to add is the objective with which the GCCs are being set up from the traditional way is not just about cost optimization. While that continues to be a key lever, I think the other objective is how can we transform these centers to be more innovation centers. So there's obviously compared to how it was earlier, the investment is slightly different in the sense from skilled resource technology, the transformation. So that's basically the larger intent of setting up some of these GCCs. So and that, I think service providers are playing a huge role especially where when it comes to optimization and enhancement kind of projects, they're deriving almost like 80% of the revenue over there. So which means they are helping the GCCs with skill-based hiring, they're actually helping GCCs with their AI road maps, building even the engineering COE. So these are some of the requirements in addition to, of course, the setup that Alex spoke about, which is also kind of driving the growth on the service provider front.

Great. Thank you so much. Shall we open the floor for questions?

Awesome. Thanks, Rishi. And just a follow-up on the GCC commentary from Namratha and Alex. So Namratha and I will actually be at the NASSCOM event here in a couple of weeks in Hyderabad. So if you're going to be there, make sure and look us up. Okay. So thank you very much, Rishi. So let's go ahead and jump into some of the questions. We've got a lot coming in and no surprise, a lot of focus on the how the tariffs are impacting demand. So Steve, I'm going to come to you first. I've got a question about deal signing activity. Have you seen a notable difference in enterprise behavior in signing deals over the second half of March and April versus what you saw in January and February?

Yes. I would say on the deal signing piece, no, because there was already so much deal flow. I look at it from sort of 2 angles. First, our pipeline remains really robust. And we haven't seen that pull back at all. And deals that we have in the pipeline appear to be moving forward. There's been a very, very little movement on those. We're also not seeing a lot of changes on the deal flow. If I take sort of the, call it, the first 10 weeks and the last 10 -- the last 6 weeks, we're really not seeing any big change right there right now. I think we expect it I think there's going to be some things just as we listen to the dialogue and our conversations with our clients. You also got to remember a lot of the service providers are in their quiet periods for their reporting pieces as well. So we probably won't have a good perspective on that until probably the end of April.

Okay. Kathy, I'm going to come to you next. So we've got a question about how will rate cards be impacted by tariffs?

Well, for now the tariffs are focused on goods, not services. Although we've been hearing that could change and I think Steve said the keyword is uncertainty here. So we'll continue to watch that. I think in the short-term, not a lot. The deals that are in play already, the rates are set. I think longer-term, providers are going to have to protect their margins, and they are going to be hit with tariffs on some of the goods. So I think we may see an increase in rates, as I said, providers try to protect margins. AI will have an impact on helping drive efficiency and maybe reducing or improving margins. And as always, you need to stay competitive. So we will keep a look at rates. But for right now, again, uncertainty if the services start to get hit with tariffs, that will be a whole different story, and we'll continue to manage that and monitor it.

Okay. Alex, coming to you next, you mentioned that AI was continuing to grow. Can you provide color on the types of projects or use cases that are being funded?

Yes. So AI is continuing to grow. I mentioned it in the context of GCCs, where the objective is still absolutely to drive long-term cost reductions and efficiencies. If we look overall at growth in AI use cases, we still see a lot of supply chain optimization approaches. We see focus on kind of contact center on support of customer agents and kind of market research and better understanding of customer decision-making.

Okay. So I can take the next one. So we've got a question about HCM software bookings. Do you expect it -- do you expect HCM software bookings to increase in 2025 compared to 2024? If yes, how much? We don't forecast bookings. So I'm not going to give you a hard number, but I can tell you what we are seeing. So HCM is a category was up 2% so basically flat as that was compared to the broader SaaS basket, which is up 19%. So obviously, much slower growth for the HCM category than the broader SaaS basket. One of the things we talked about this a little bit on the last call, a couple of things. There was a big focus in 2024 around adding AI specifically generative AI capabilities into HCM systems much slower take-up there given the organizational change and data requirements, a lot of stuff that Alex talked about clean data in order to get value out of those AI investments. And then also something that we still continue to see is sort of spans the services and HCM side, which would be a decisioning around kind of 2 paths, either kind of an all in one, all in HCM solution or more of a focus on employee experience of finding the right tools for each employees based on experience and that can be like chat and case management, that kind of thing with more of a wrapper type solution around that, either homegrown or more of a workflow type solution that they're buying in the market. I think the risk there is that in terms of HCM software growth, I think just with the uncertainty in the market, as Steve talked about a lot of the capital investment starting to slow down that if that path of the more kind of wrapper-based approach is more popular because it's going to require less capital investment that could be negative for the large pure-play HCM vendors. We talked about also last time that we think a lot of that growth this year would come from the mid-market. And obviously, again, given uncertainty and pull back on discretionary spending, we think that, that could probably slow as well this year. Okay. Let's go to another question here. So we talked about -- there's a question, Steve, around -- I guess, Steve and Alex will come to you guys on this. What characteristics around Agentic AI. What characteristics are most important that will separate the services vendors, winners versus losers as it relates to Agentic AI?

Yes, go ahead, Alex.

Sure. So I think the real question with Agentic AI is going to be which service providers can get the data models of their customers into good enough shape in order to actually get in production workloads performing and delivering business value. One of the things we talked about a lot internally is that initial optimism about generative AI came from the fact that the generic models that everyone can play with and use are built on very clean, nice data sets in order to train them and make sure that they're accurate. As organizations try to build differentiated value on top of that, they're finding out their data sets are not clean enough to support that differentiated value. And when you get into Agentic AI, where the systems are expected to behave autonomously, no one wants to build on top of unpredictable data or data that isn't ready for prime time. So kind of as a precursor to building and deploying fully autonomous systems, there's a lot of background work in actually making an enterprise's data available the way that an AI expects to use it. And I think the service providers that are able to propose solutions for that data model are going to be in a better position to actually build the Agentic solutions on top of it.

Yes. That's a great summation, Alex. I think data is the key here. I'm pretty bullish, though, on what we see across industries. So focusing across industries where data consolidation, data insights are critical. The promise of Agentic to make better decisions and drive that forward is coming. We've certainly seen a lot of really strong demos of late and some really strong use cases that can drive out how you can pull that together. So think of organizations focus on the data and focus -- and have a good understanding of what the workflow is. I think there's a lot of promise on the tech side with that as well. Absolutely.

Okay. Time for a couple more. So I'll take a first stab at this one, and I'm sure my colleagues have some commentary on this as well. IT CEOs have said that headcount addition it's not the right metric to look at due to AI and revenue per employee -- I'm sorry, AI and revenue per employee is the metric now. What leading indicator should we look at how to gauge how companies grow? So I would say the desire to move to a nonlinear revenue model has been sort of the holy grail of the services sector for decades now. That said, hiring does continue. We actually wrote about this a few weeks ago. If you look at what happened last quarter, there was a second consecutive quarter of headcount growth although by headcount, total headcount industry is actually still a little bit smaller than it was a couple of years ago. So we're watching that closely to see if we see signals of revenue growth and employee growth decoupling, I think absolutely in some cases, you can start to see that happen in areas like BPO, whereas Namratha talked about, that's where it's impacting the most. I think if you look at areas like and one of the reasons that we're splitting out engineering is given the growth there. We also see more of that kind of metric happening in the engineering space or revenue per employee or profit per employee. So I don't disagree that that's an important metric. We do track it but I don't necessarily think that even with generative AI that we're starting to see a broad-based decoupling of revenue with people. Steve, Kathy, any disagreement there?

No, I think it's a super interesting metric to watch though.

Yes. I think the only thing I would add Stanton is if I look at metrics for product engineering, I think it's really common to look at revenue per employee or profit per employee and making sure that we can nail that. And then metrics around the R&D intensity or your revenue as a percent of the -- or your cost as a percent of the product revenue. I think the more we go to pod designs and some of the other new operating models, the more we'll incorporate some of those, which I think will be good, but I agree with you fully that we're not seeing that across the board yet in IT or BPO.

Got it. Okay, Steve, I'm going to come to you for the last question. So we've got a question around -- specifically around EMEA and what regions in EMEA are most at risk from tariffs?

Yes. I think this -- that's a great question. But I think it starts with what sectors are at most risk with tariffs. And then what regions are because of that. So if you look clearly at the risk, it's going to be manufacturing initially, and I think we all have an appreciation for that. Some of the impacts there are not only going to be the OEMs but the entire supply chain coming down. Even with some of the things with the tariffs on China, there's still a lot of parts that will have to be brought through other means, both in the U.S. which influences others as we go through that. So I think Germany is probably the one that comes top of mind because of a strong manufacturing sector. I think that will be difficult. Italy, France have less of a concern from a manufacturing side but still have a strong manufacturing base. I think the telco equipment manufacturers will also have challenges or the health care manufacturers. So anybody sort of in that space. Again, I'm more optimistic that we'll get a resolution for this, if we don't get a resolution for this, then you'll see a pullback on capital, you'll see that go into the banking financial services sector as well as we go forward. I think probably the safest right now is likely life sciences or pharmaceuticals, which should offset some of the downside. If you look at that space, that's Switzerland, that's Germany, that's France, a little bit in the U.K. So that could offset provide a little bit of a tailwind, but the big manufacturing sectors are the one that I'm most concerned with. U.K., I'm really -- that's primarily a services business now there will be some pullback there, but not massive. And I think the other thing from a European standpoint that you've got -- that we're recognizing is the governments are going to step in and do a lot more on the defense side. And so even if there's a pullback on consumer product goods or OEMs and others, I think that will be offset by some of the defense spending that we're seeing. There's a fairly big meeting today taking place just to understand how to increase that spending and what to do across the board. So that should balance it, I believe.

Okay. Thanks, Steve. Okay. We're going to go ahead and close out the call. Rishi, big thanks to you and your team for hosting today. I know you are very, very busy right now. So thank you again. As a reminder, you can access a copy of the slides and the regional leader boards on the ISG website. And we will see you in July for the Second Quarter 2025 ISG Index Call. Thanks.