Information Services Group, Inc. ($III)

Hi, everyone, and welcome to our 94th consecutive ISG Index call. So with me today is Steve Hall, ISG Chief AI Officer; Kathy Rudy, Partner and Chief Data and Analytics Officer; Namratha Dharshan, Chief Business Leader for ISG India; and Mark Smith, ISG Chief AI and software analyst. Unfortunately, our host, [ Rishi Jinjin wala ], had a situation come up and is not going to be able to join us on the call today. But for those of you that have been on our calls in the past, you know that Rishi has been hosting the Q1 Index calls for many years now. So Rishi, we wish you well, and we'll see you back here next year. So for those of you that may be on your first ISG Index call, some quick background. The index measures the overall health and growth of the technology industry, which includes both managed technology services, and cloud-based software and infrastructure services. And we do this by tracking and analyzing annual contract value or ACV as a leading indicator of where revenues are likely to be in the future, so just think of ACV as bookings. And starting this quarter, we're excited to unveil the new ISG AI index, which will also start reporting on each quarter. Okay. So let's go ahead and start off with an overall level set on the market. Steve, over to you.

Great. Well, thank you, Stanton, and let me welcome everybody again to the 94th Index call. And as Stanton said, we are so excited about the inaugural launch of the new ISG AI Index as well. But let's stick to the core Index first, and let's take a look at the highlights for the first quarter. So first, the managed services demand really remained steady this quarter. It was supported by larger cost-focused transactions. And even though discretionary activity continued to lag a little bit, we did see good activity at the higher end of the market. Software as a Service had its best quarter ever from an ACV perspective, but the bookings growth decelerated on fears of some AI-led disruption. So Mark is going to talk about that later in the call as well. Demand for cloud infrastructure continued to be exceptionally strong. The hyperscalers are planning to spend over $600 million this year in capital just to keep up with the AI demand or that's in chips, data center, energy, et cetera, but tremendous capital investments across there. Enterprise demand for AI continues to be strong. Firms are still focused on moving beyond pilots and into large-scale deployments, and we're starting to see that across the industry. So overall, I would say the outlook remains solid. You've got dual mandates to scaling AI and reducing the cost, so let's take a look at the global market. Just a reminder before we jump into the results, we're comparing Q1 of 2026 to Q1 of 2025 for the year-over-year compare sometimes these percentages will be pretty significant, especially when we started to the segment analysis. They'll smooth out as we get later into the year and we start reporting year-to-date results. This is just a bit of an anomaly on how we report the first quarter. So the combined market, which makes up our Managed Services plus the as-a-service segment reached $39.4 billion of ACV in the first quarter, which was up 29% year-over-year and 13% sequentially. This, again, was an all-time high and brought the combined market to within reach of a $40 billion mark, which we've never seen. So the combined market added nearly $9 billion of ACV versus the first quarter of last year, and roughly $4.5 billion versus the fourth quarter. It was also the seventh consecutive quarter of double-digit growth with average quarterly growth of 20% over that stretch. The headline number really points to a market that's still expanding, but the underlying drivers were very different across the 2 major segments of managed services and asset service. So as you can see here, our managed services generated $11.2 billion of ACV, which was up 3% year-over-year and 3% sequentially. This was the second best quarter for managed services and only the third time the segment has surpassed the $11 billion mark. So even though you see a little bit of unit growth, it's really at top levels of where we're seeing it. Since the start of 2021, just to give some context here, 18 of the 21 quarters have posted positive year-over-year growth. So the numbers, though, don't signal an acceleration in managed services. Growth is still uneven across the services, industries and regions as the team will discuss, and it's really more aligned with cost takeout initiatives as they're using managed services to still fund AI initiatives. Meanwhile, the as-a-service market delivered $28.2 million of ACV, which was up 44% year-over-year and 18% sequentially. This is also the first time as a service has surpassed the $28 billion of ACV in a quarter and the seventh consecutive quarter of double-digit growth. The majority of that growth came from the hyperscalers, which was up nearly 60% year-over-year. So to summarize, state of the market, managed services is steady as the service is accelerating. And together, they push the combined markets to new highs. Stan, do you want to take us deeper into the managed services space?

Sure. Thanks, Steve. So as Steve noted, managed services finished at $11.2 billion. And what's really notable here is that $8 billion of that total came from new scope. And that new scope was up 20% year-over-year, and that's the highest quarterly total for new scope activity that we've ever recorded. So now the way that we define new scope versus an extension of renewal is important here, new scope includes first-time outsourcing, but it also includes provider consolidation and new larger tower combinations designed to take out cost and as Steve mentioned, fund AI investment. So the increase in new scope here is really, in our view, a signal that aligns closely with what we've talked about over the last few quarters. Much of the focus in the market today on the managed services side is on longer TCO focused deals focused on optimizing costs. And you can see this pattern reflected in our buyer behavior research as well. On the right side of the chart here, you can see that respondents are focused on consolidating providers in order to reduce costs. That's what we just talked about a minute ago. But at the same time, they're also engaging smaller providers to move faster and get access to talent. So in terms of an overall theme for managed services, it's increasingly a market that looks like a dumbbell. So on one side, you have TCO deals focused on cost optimization. And on the other side, you have much smaller short-cycle work focused on getting products and services out into the market quickly. Okay. So let's go ahead and jump into our Managed Services segments, and we'll start with ITO. So ITO generated $7.9 billion of ACV, and that's down 7% year-over-year, though it was up 1% sequentially. That said, it was the third consecutive quarter of a year-over-year decline in ITO. And as you can see here on the right-hand side, a lot of that decline came from applications development and maintenance or ADM. It came in at $4.2 billion. That's down 20% year-over-year, making it the third straight quarterly decline and its lowest level for ADM since the third quarter of 2022. And as we've discussed in the past, around 20% to 40% of an ADM contract can be considered more discretionary, meaning it's focused on project work, typically build on a T&M basis. So when discretionary spending is under pressure, it can have a big impact on ADM. However, as you can see here, also on the right -- on the bottom right, the bundled ADM plus Infrastructure segment posted triple-digit growth year-over-year, and that's the fourth consecutive quarter of that kind of growth. And that bundled category is really key to the theme that we just talked about. There's a lot of strength in the market right now around larger and longer full-scope transactions. Those are the kind of deals consistent with a TCO heavy environment where enterprises are packaging towers together to take out cost. And those deals often involve a lot of transformation. And in today's elevated interest rate environment, they're increasingly enterprises are that said, they're increasingly using service providers to finance that transformation in exchange for longer-term commitments. Okay. Let's now move to engineering. So as you can see here, engineering was flat year-over-year and down sequentially. The Americas fell sharply in the first quarter, while EMEA saw low single-digit growth. That said, the largest industry for engineering services, which is manufacturing remains steady despite the broader macroeconomic pressure that the industry is facing. And like ADM, the segment of the market tends to be impacted more heavily when discretionary spending is under pressure. So the slowdown in Q1 could be an indicator that, that pressure is mounting especially in the Americas. Okay. So let's turn now to BPO, Namratha, over to you.

Thanks, Stanton. So most of 2025 has been a challenging year for BPO. But based on some of the large deals that ISG was advising on and emerging AI opportunities in the pipeline, we had already indicated signs of recovery towards the end of last year. And the good news is the industry started to turn around with 2 consecutive quarters showing more than $2 billion in sequentially. BPO market generated $2.5 billion of ACV, up 62% year-on-year and up 12% sequentially. This is the second straight quarter above $2 billion and the strongest year-on-year growth since the first quarter of 2022. Now this wasn't just a large deal story, but growth across several areas. The market recorded 163 BPO awards, up 36% year-on-year. And the smallest discretionary band in BPO was also up 26%. Now turning to regional results, both Americas and EMEA were up this quarter, with most of the contribution coming from EMEA that grew 25% sequentially. Functionally, industry BPO was up 59%, and it's the strongest since the first quarter of 2024. In the meantime, the weak spot was customer experience, which declined 28% posted its softest quarter since the third quarter of 2020. Now the customer experience services have traditionally been a very FTE-driven business. But with deeper AI penetration contact center platforms becoming more mature with the agentic workflows, we are starting to see more meaningful disruption in this model, including early signs of deflation. So with that, Kathy, let me turn it over to you for an update on regional performance.

Thanks, Namratha. Turning now to our geographic segments, we can start with the Americas. Managed services in the Americas posted $5.7 billion of ACV. This was up 1.2% year-over-year and up 3% sequentially. After turning negative in the fourth quarter of 2025, growth did return to positive territory, and the region has now trended up in 5 of the last 6 quarters. Unlike the global picture, the 2 largest industries supported growth in the region, the FSI was up 7% year-over-year and manufacturing was up 17%. Moving on to EMEA. Managed Services generated $4.7 billion. This was up 5.6% year-over-year and up 4.2% sequentially. It was the second straight quarter above $4 billion. That's only happened twice in the past. By geography, the U.K. posted its second consecutive $1 billion-plus quarter and grew 6% year-over-year. France was up 15%, Benelux rose 22% and Southern Europe was up 8%. Year-over-year dock, however, declined 20% and posted slowest quarter since the first quarter of 2024. While the Nordics fell 33% and posted its lowest quarter since the third quarter of 2024. And finally, Asia Pacific, managed services came in just under $800 million. That was up 1.9% year-over-year, but down sequentially. The positive year-over-year result broke a 4-quarter streak of declines, but the region still has not returned to the $1 billion run rate that we saw several times in 2024. Now if we move to our industry update. We'll start with Banking and Financial Services, which was down 9% year-over-year and represents a shortfall of nearly $300 million for the quarter. Given that BFSI represents 1/4 of the HCV in the market, a shortfall here can have a big impact on the overall market. Most of the weakness came from EMEA. BFSI was down significantly in the region. The Americas was stronger, ACV was up 7%, and we should continue to see a strong recovery for this sector in the Americas. However, inflation and rising interest rates, as we've noted earlier, can impact this sector, and we'll continue to watch this closely. Even though BFSI was down this quarter, it's important to note that overall, the sector saw a strong sequential result compared to the fourth quarter, and we do expect the comparisons to start to get easier as we move further into the year. When we look at the consumer segments, this includes CPG, retail and travel, we see some very strong results in the quarter. ACV for this group was up over 30% year-over-year, especially strong as travel and transportation, 5 of the last 7 quarters in this industry segment has been over $1 billion in ACV. And finally, manufacturing was down 5% year-over-year. This was primarily due to the weakness in EMEA. It was solid in the Americas, flat in Asia Pacific. But unlike BFSI, manufacturing saw a strong sequential result in the first quarter. That was up 22%. Now let's turn it over to Mark, and he's going to give us an update on the as-a-service markets.

Thanks, Kathy. As a reminder, [indiscernible] tools and platforms but excludes cloud infrastructure. In the first quarter, the SaaS segment generated $5.1 billion in ACV, up 5% year-over-year, the first time exceeding $5 billion and the sixth consecutive quarter of growth. Quarterly growth, as seen on the right, though has declined over the last 5 quarters and down 120 basis points from Q4 at 6.2%. Regionally, all markets contributed Asia Pacific cell rate of approximately 15%, though it remains about 13% of total ACV, while the Americas continue to lead at roughly 59%. Among providers, the top 10 SaaS providers, as you see on the right, underperformed the broader market with ACV declining 0.6% in Q1 and from prior quarters, despite representing about 42% of total ACV. At the same time, these vendors are embedding AI across operations and development while continuing meaningful head count reductions. Vertical growth was more muted with business services being the only sector posting double-digit growth while energy declined approximately 7%. Despite AI disruption concerns and SaaS [indiscernible] rhetoric, fundamentals remain solid with stable, though decelerating bookings growth, but the providers are making continued investment in the ingestion of AI technologies and adjustments to their pricing models. However, divergence between large vendors and the broader market points to early structural shifts and public markets have repriced the sector based on long-term expectations rather than near-term performance. Now on to the trends. The SaaS segment continues to face questions around growth durability even as AI adoption accelerates and drives experimentation with consumption-based pricing, AI workload monetization and also digital labor models. Breaking this down by application category, in AI and data software growth, excluding LLM providers, remained steady in Q1. AI grew 12% year-over-year, supported by continued strength in data platforms even as LLM based innovation from players like open AI and anthropic accelerated. Overall, applications delivered 11% year-over-year ACV growth, retie approximately $3.9 billion the latest -- the largest quarter on record with double-digit growth across front, middle and back office segments. From office applications grew 10%, up from 2% last quarter, while commerce and sales declined 16% and CRM and contact center applications grew 16.2% more than doubling sequential growth. And as Namratha referenced the SaaS growth of AI has had an impact to BPO growth related to CX. Middle office applications grew 10% with collaboration of modest 2%, though supported by emerging AI-driven capabilities from vendors like Zoom and Salesforce. Back office applications accelerated 13% and nearly doubling from Q4 driven by modernization efforts. HCM grew 22% and ERP operations and services increased 20%. In contrast, the IT segment declined 22% year-over-year, its lowest since late 2024, reflecting pricing pressures and early AI-driven disruption. Within this segment, the top 10 cybersecurities though grew by 4%. In the infrastructure metrics, cloud infrastructure being a segment that had a standout quarter ACV reached $23.1 billion, up 57% year-over-year and 21% sequentially, the strongest growth since Q4 of 2021 and the first time exceeding $20 billion. This marks the ninth consecutive quarter of year-over-year growth. On an absolute basis, ACV increased by more than $8 billion year-over-year and $4 billion sequentially, with 7 consecutive quarters of double-digit growth and average quarterly gains of 36%. Regionally, the Americas and EMEA saw a strong acceleration. The Americas grew 77% year-over-year, while EMEA rose 72% and the fastest growth for both regions since Q3 of 2018. Asia remained strong, but more moderate, representing 24% of total ACV, its lowest share since 2017. Hyperscalers were the primary beneficiaries. The top 4, as you can see, AWS, Azure, Google and OCI grew 75% year-over-year, their fastest pace in nearly a decade and now account for approximately 85% of total ACV, outperforming the broader market by about 1.3x. Overall, Q1 growth reflects continued hyperscaler driven expansion and strong demand, supported by ongoing investment in AI infrastructure. The segment has experienced hypergrowth but is now -- is facing constraints in meeting AI-driven demand as highlighted by the big 4 hyperscalers. This is not simply a matter of building more data centers. Expansion is limited by capital intensity, resource availability and build time lines that are not keeping pace, driving increased hyperscaler investment. To address capacity and cost pressures, the big 4 are accelerating investments in AI-focused silicon, like AWS [ Trinium], Google TPUs, Microsoft [ Mya200s ] and [ Oracle's and Pier ], both complementing and competing with NVIDIA. At the same time, regional constraints are emerging, particularly in the U.S. where land, power and cooling requirements are becoming limiting factors and driving local resistance. Economics also differ across the stack. Scalers benefit from training demand, while for [ motto ] providers, trainings at cost and inference drives monetization. As a result, Q1 activity focused on expanding AI infrastructure and platforms. Some short highlights from the [ Big 4 ] NVIDIA. AWS is expected to surpass Microsoft in Q2 and ACV growth, supported by its European sovereign cloud and expansion of Bedrock and [ Agent Corp ] for agenticAI. Google Cloud remains highly competitive on pricing, advancing Vertex AI and Gemini with further generic AI and security announcements expected at Google next this month. Microsoft maintained steady momentum through investments in fabric, foundry and confidential computing reinforcing its enterprise AI capabilities. Oracle OCI gained traction through hybrid and sovereign capabilities with AI demand also from its fusion applications and new AI data platform driving infrastructure consumption. Last, NVIDIA's GTC announcements underscore the shift to AI-driven cloud architectures and full stack AI infrastructure, including the new [indiscernible] platform and [ NemoCla ] agent framework. Overall, AI value is emerging bottom-up process stack led by infrastructure, followed by software, and then we will see from services all in the early stages. Okay. Now let's pivot to Steve and unveil our new ISG AI Index. Steve?

Great. Well, thanks a lot, Mark. I really appreciate all the in-depth info that we have now on hyperscalers and SaaS, just a great job bringing that to life. So this is the moment everybody that we've been so excited for. So as we mentioned at the beginning, this is a 94th consecutive index. So for almost 100 quarters, ISG has measured the industry through our ISG Index. But we're just seeing new levels of investment and disruption with AI that we think it's time to really unveil a new Index that really highlights what's happening in the AI space. So this quarter, we're going to launch the ISG AI Index. So as we develop the index, we wanted to keep it understandable and ground everything to a common point, which we refer to as AI inflection point. The best date for the AI inflection point was clearly December 2022, which tied to the global release of ChatGPT, and I think excited all of us on the possibility of where AI was really going. We then track specific metrics to see changes across the technology services sector, including hyperscalers, SaaS providers and managed service providers over that period. So each segment, we combined revenue, profitability and a consolidated stock performance along with one forward-looking AI indicator for each of the sectors. In infrastructure, so with the hyperscalers, we chose capital spending because it really demonstrates how much capacity hyperscalers are building ahead of demand. In software, we use the current remaining performance obligations, or RPO, which is the backlog of revenue that's sold but not yet recognized. And we can see the change in CRPO to understand the impact of AI. In services, we chose revenue per employee is a proxy for productivity, which indicates that output providers are generating from their workforce as AI scales. So let me just -- before I get too far into it, this is a measurement framework. It's not a pure attribution model, especially in the services we are not implying that since the inception point, everything is driven by AI, but it's a great, consistent baseline to understand directionally where the market is going. So when you look at the results, the picture is really clear. Since the AI inflection point, the market is up over 77%. Our data included revenue and operating margins as of 31 December 2025 and stock performance as of 31 March 2026. So AI is real, it's measurable. The value is not showing up evenly, and it's appearing first in the -- with the hyperscalers, than the SaaS providers and services is still a bit early on how we're seeing the layout. So let's go one level deeper, and this is really the scorecard, and this drives a very different view. So in the infrastructure, the hyperscalers, the composite is up 160% with capital spending up over 260%, revenue up over 100%, profitability up about 60% and stock performance up over 110%. This is truly a build cycle. Hyperscalers are investing ahead of demand and really capturing that initial wave of AI value. In the SaaS market, the composites is up 50%. Revenue was up 60%. CRPO is up around 70%. Profitability is up nearly 20%. And the stock performance even with the recent retesting is still roughly up 40%. Now for a comparison, though, on the SaaS side, when we started doing the index early in creating it. It was up over 85% at the end of Q3 to the end of October. So it has come back quite a bit, but it's still up 40% over the period. So the demand picture is strong, but the market narrative, However, as Mark said, we do see a deceleration in SaaS bookings. Enterprises are still buying. Backlog is still solid. But the uncertainty is based on the potential impact that AI has on long-term pricing and long-term economics, especially associated with [ per se ] pricing. Then let's take a look at managed services, and this is where we need to be careful. The composite is roughly flat, but the underlying signals are not. Revenue is up almost 8% over the period. Revenue per employee is up about 8%. Profitability is up modestly but the stock performance is down almost 35%. So operationally, there's movement, but we should not over attribute that to AI alone given this period has also been shaped by a very defensive services market. AI is starting to improve productivity and services, but it's not yet translated into broad-based revenue acceleration or market confidence. So what does all this tell us? This is the first ISG AI Index, but as we track it, you'll begin to see the change in the value based on key parameters to help drive business decisions. We already see some key trends in the data. First, AI is showing up as a growth story before it shows up as a margin story. I think this is different than what we generally believe. Across all segments, revenue growth is ahead of profitability growth. So the idea that AI is just driving efficiency first really isn't what we're seeing, at least not yet. Second, the stock price may not be the best forward working indicator to measure the value and growth of AI. We think the better signals or the operating metrics, CapEx and infrastructure, CRPO in software and productivity and services, those are all moving in the right direction even where the sentiment or the stock may be more volatile. Third, services is really early, but this is where the next phase of value creation likely sits. AI cycles are creating more enterprise work, integration, governance, data readiness, model controls, workforce, redesign are all expanding leading to new layers of complexity. It's clear the hyperscalers and infrastructure players are capturing the first wave followed by the SaaS providers. Our belief this services will continue to expand in the next wave. So I think the logical question is, given the relatively weak services score, driven partly again by the stock performance, I think the natural question is, is AI deflationary to services. From our perspective, the answer is very nuanced. First of all, AI is clearly deflationary to low-value labor. It reduces the effort in areas like routine coding, testing, documentation, back office work, et cetera. And that creates pricing pressure and puts gross margins under pressure particularly for providers that are preferably exposed to those areas. At the same time, though, it's really creating new demand. AI increases complexity, it drives new work in data, governance, security, orchestration, enterprise integration and because enterprises are introducing probabilistic systems and deterministic environment, that work is also more complex. So at a sector level, it's not purely a deflationary story. It's still a shift in where the value sits. So we'll continue to see revenue and gross margin pressure across the services industry and these firms invest in and deliver AI-enabled solutions. So the bottom line is AI compresses commodity work, but expands high-value work. I think the winners are going to be those firms that use AI to increase productivity, focus on industry-specific challenges and capture the integration and transformation opportunities. Firms that continue to rely on labor-based models in areas where the economics are fundamentally changing are going to continue to be challenging. So with this being our premier launch, we really appreciate your feedback. We have new additions we'll be adding in Q2. We're going to look at sentiment analysis. We're going to look at maturity index. We're going to integrate new metrics. So stay tuned and really appreciate you supporting the launch. With that, Namratha, over to you to talk about the leaderboard.

Thank you, Steve. That was a fantastic update. So as a reminder, providers are listed in alphabetical order. Positioning is based on annual contract value signed over the past 12 months. The company is new to the list are denoted with an asterisk and a reminder that the recall leader boats can be accessed on the ISG website. In the largest group, there were very few changes to the leader board. IBM Consulting rejoined our leaderboard as companies such as Morgan Stanley and FedEx are leveraging their technology solutions to infuse GenAI into core workflows. Accenture continues to be a part of the largest group for their work at grocery chain [ Albitsons ] and Bristol-Myers Squibb, both focused on AI-led transformation. In the Building 15, we saw several new providers joining the leaderboard. [ Amdocs ] won several awards and renewals at Vodafone Germany, AT&T, T-Mobile USA and [ Thales ] in Canada. [ Capita ] rejoined the leaderboard on the strength of a very large BPO renewal at [ BBC ] and we are a new market leader, EPAM Systems also joined the top 15 for this category. We also want to highlight [ Tech Mahindra ] as it signed one of its largest deals ever, a 5-year contract worth more than $500 million from [ Telefonica O2 ] to modernize their IT infrastructure. In the breakthrough 15 group, there were minimal changes. New to the leaderboard is [ Stefanini], an IT services provider that accelerates digital transformation through AI, automation, cloud enablement and cybersecurity. And finally, in the booming 15, we'd like to highlight KPIT Technologies, which signed several strategic engagements with automotive firms in China and Germany for vehicle engineering, connected and diagnostics. We also highlight [ L&T Technology Services ] for some of their engineering work across several industries, including automotive, med tech, natural gas and semiconductor. Congratulations to all the leaders for their outstanding recognition. Mark, over to you for an update on software leaderboard.

Thanks, Namratha. As-a-service software leaderboard is based on ACV signed over the past 12 months with providers listed alphabetically within each group. In the big 15 group, [ SAP ] joined the leaderboard, supported by wins, including Adidas, [ HMN ] Group and [ Daimler Truck]. AWS also stood out with major agreements, including BlackRock, Lyft and Visa. In the Building 15 group, Databricks moved up a category with its $4 billion fund raise in Q4 and CrowdStrike was highlighted for wins, including NordVPN and [ EY]. In the breakthrough 15 group, [ Rubik's ] work with [ McLaren Racing ] and [ Shopawy's ] expansion with Estee Lauder and Starbucks and Coach were among the standout examples. In the Booming 15 Group, [ Digital Ocean ] had a major capital raise of $700 million to fund expansion in AI infrastructure and not just its focus on cloud hosting. Congratulations to all leaders for their outstanding recognition. Now over to Steve for our summary and outlook.

Great. Thanks, Mark. And again, congratulations to all the leaderboard winners. And I think I want to join that [ McClaren ] team. I think that would be a fun one. All right. So let's jump right into the summary. So the market hit another record quarter, just under $40 billion in ACV, which was up over 30% year-over-year. The growth continues to be driven by as-a-service, particularly the hyperscalers, the hyperscalers reporting hundreds of billions into capacity. And even though enterprises are investing in hyperscale solutions, the demand environment still remains constrained given the data centers and chips that Mark mentioned. So despite the disruption noise, though, the SaaS market performed really well. Enterprises continue to invest in core platforms and AI enabled add-ons. What we saw, though, is a reset within SaaS organizations that they really shift from hers pricing, the token or outcome-based pricing, coupled with the ongoing platform investments that they're making to enable their offerings. And of course, the capabilities highlighted by the LLMs, [ Claude], OpenAI, Gemini, et cetera, are also making the market question how these businesses transition to an AI centered world. Managed services, though, remained steady with ACV above $11 billion, but it remains a defensive story. Enterprises are consolidating vendors, building towers and taking costs out to fund AI. Now while discretionary spend remains weak, smaller deals are down. ADM is down for the third quarter and [ intranet ] flattened. The demand environment has shifted to larger cost-driven PCO deals. BPO also remained a [indiscernible] as Namratha mentioned, especially with industry-specific and back-office processes. And that's one of the first areas where AI and automation are starting to translate into tangible demand. So looking ahead for 2026, as-a-service continues to be the growth engine, and we've increased our forecast and now expect 25% growth for the year with the hyperscalers and SaaS. Our forecast for managed services remains the same. There remains some political and market headwinds that will continue to suppress discretionary spend. AI will continue to be a tailwind, but not as strong as expected we're going to hold our forecast at 2.1% for the year. So that brings us to the end of the formal call. We'll now open it up for Q&A. Please type your questions and the comments below. And Stan, do you want to lead us through the Q&A?

Sure. Thanks, Steve. So we have a ton of questions and no surprise, a lot of these are about AI. So let's jump in. So Kathy, I'm going to come to you first. We had a couple of questions that are kind of related. The first is what's the impact of AI on pricing and where is it showing up in the market? And then also, how are service providers pricing AI? [indiscernible] those sound kind of related to me.

Okay. So how is AI pricing showing up for the market? We're mainly seeing it or we're first seeing it in managed services, of course. And that is providers are promising really big savings. And a lot of those savings are front-loaded in the first couple of years to get the value out and to give the -- as we mentioned earlier, the cost out, enterprise are looking for cost out. A lot of this is around financial engineering, and we're seeing anything from like 30% to 58% of the promise of the reduction. What we're seeing more realistically is about 30%, and it varies by different areas. So we mentioned earlier that call centers or customer experience was down. Those are areas that we're seeing a huge impact from AI and AI pricing from providers. But again, it varies dependent on how much AI is actually being leveraged by the provider in the different areas. And when we think about AI pricing and how it can be leveraged, it depends on how much human is in the loop and how much automation is actually embedded in the solutions. And Steve has talked a lot about that in the market. I don't know, Steve, do you want to give a little bit of insight on how you're seeing the levels of AI and impact on pricing and in different offerings?

Yes absolutely, Kathy. So we rolled out autonomous level pricing or ALP last October. So it's been almost 6 months in the market. It's really been embedded into several deals now as we go forward. I think the interesting thing about autonomous level pricing is the level of control that it gives enterprises and service providers to really adopt and change the pricing based upon how they solution and integrate autonomy or AI into the solution. And it does a great job balancing the human in the loop aspect of it, the manual work aspect of it, token-based pricing and other things into sort of a common model that will allow us to go forward. We're going to see a really big impact, probably I would say probably over the next 2 to 3 quarters is when it will start showing up in the market as more and more deals start using autonomous level pricing to drive the right behavior.

I think there's an interesting point there. It's not just people anymore and platforms, it's accelerators. It's token usage, it's LLM. So there's a lot more embedded into the pricing making it a little more complex. And I think the ALP model makes it a simplified way to look at it.

Okay. Namratha, going to come to you next. Kathy just mentioned customer experience. You talked about that, Mark talked about that. So what's up with customer experience and how is AI impacting it?

Thanks, Stanton. So customer experience, just like the way I mentioned a few minutes ago, it was traditionally very FTE, human agent-driven model. But that's obviously getting disrupted because AI has accelerated faster in this industry because lot of use cases were identified much more in this industry before we could see actually in some of the other industries. Besides, I think Mark also alluded to this, I did too. The software right now has become much more intelligent. A lot of the agent and workflows have been embedded, which is actually making the work a lot more faster and especially some of the mundane work like the summarization and some of the other work has actually accelerated. Besides, I think what's also impacting is the -- some of the pure-play BPO players. They did not have the broader tech capabilities, which they are actually beginning to sort of invest and expand some of those capabilities. But in the meantime, a lot of the traditional IT players with AI also coming into the picture, it's kind of becoming a level playing field. And they have had these capabilities of AI data and platform much faster. So they are also starting to penetrate this market quite aggressively. So the competition is also increasing and some of the pure-play BPO players who did not have some of these capabilities and just about starting to build are also struggling until and unless if they don't pivot into a new model, which is more focused on some of the industry BPO-specific. Some of them are doing it. Some of them are still investing in the technology, but that's what's kind of driving the changes in this industry.

Okay. Thanks, Namratha. Mark, I'm going to come to you next. So you mentioned there's a question about Anthropic and OpenAI and if they're ready for the enterprise. And I think what's important here is you noted in your update that that's not included in our data when we talked about the growth, ACV growth on the data platform. So I guess the question here appears to be [indiscernible].

Yes. No, absolutely. It seems like every week, we have had announcements and demonstrations of how these 2 LLM based model environments have brought forward agentic AI capabilities in workflows and such. So it is no doubt Anthropic and OpenAI are growing substantively. They're driving significant compute in regards to how they operate. So now the question is, how will these actually operate in an enterprise and are they a governed, secured and able to be orchestrated integrated inside of the enterprise. So we clearly see this is the tension that it will -- is already starting to happen within enterprises and frankly, where they compete and contrast with some of the larger SaaS providers who all in the first quarter, came out with new agentic AI platforms. So all this has created significant interest on significant opportunities for looking at how AI dev should actually happen. And now the question is, how do you really put this together in an enterprise architecture on that can actually work be governed and of course, knowing what the cost of ownership is for these deployments. But we will continue to see more announcements from these 2 providers as they move towards potentially going public later in the year or next year.

Thanks, Mark. And I think this is a super interesting top. We've got a couple of more questions in here, mainly because I think we're seeing numerous examples of clients that have really mature, for example, FinOps capabilities and have really built those capabilities over the last decade around managing cloud cost that have absolutely out of control AI costs. And I think this is a big challenge for the industry right now. And Kathy mentioned really on the pricing front, we're not seeing that kind of model level or token level pricing reflected in managed services. It's still primarily a promise of price reduction. But I think a lot of this, frankly, is just nobody really knows yet what that's going to look like. I think we were starting to get our hands around, okay, on a token-based basis, if I'm just using -- if I'm prompting what does that look like. But when you start adding agents in that are doing multistep processes and potentially going back and hitting APIs over and over again as they start reasoning. I mean, these costs can just get spiral out of control very, very quickly. So that will be super interesting to see where they both go and then how that impacts managed services pricing. Okay. Steve, I'm going to come to you next. We've got a couple of questions -- 3 questions actually around the Middle East. Any impact? And Namratha, maybe you can follow up, Steve. I know you've been covering this in India. Any impact on IT services contract decision-making given the -- as a result of the Iran or in the last few weeks?

Yes. I will know, Stanton you and I have covered this quite a bit over the last month or so. And I continue to say that limited impact specifically to managed services the Middle East sort of evolving area, but it's still fairly low as far as the amount of work and service providers there are very diverse as we go forward. I think the larger impact that we have to look at is really on the [ interparty ] side and to the extent that energy leads to inflation. And that will -- that could absolutely have a much broader impact on the managed services side as we go through. We keep seeing the happy spring surprises. And so we're almost getting used to dealing with them a little bit, but the challenge is we really compress discretionary spending, as we talked earlier in the call to some degree. So if inflation does spike again, which is clearly a concern driven by the energy, then there would absolutely be concerns around what does that mean for the broader environment as we go forward. We would expect again to pull back on discretionary spend. I think we'll continue to drive the top end TCO as we see through and the larger deals just because there's so much cost opportunity right now with a combination of and new operating models as we see through on the managed services side. Namratha, anything from an India perspective?

No, I think you -- I mean we did look at the ACV, I think only about 3% of the ACVs what comes from Middle East for most [indiscernible] and BPO services company. So -- most of them don't -- we don't see any immediate impact. If anything, I think on the enterprise side, we are starting to hear some conversations on location consolidation, and that's kind of happening in terms of where -- like they're looking at India or some of these other locations to consolidate their GCC. So that's one of the other things that we are seeing as an impact.

So I agree.

Yes. And I think the biggest -- I read something this morning, I think the biggest concern -- one of the biggest concerns, Steve, you mentioned energy especially around jet fuel and how hard that's hitting Europe and potentially, especially some of the budget airlines in Europe being dramatically impacted by that jet fuel shortage, which appears to be imminent and how that potentially impacts that sector. Okay. Let's keep going. So we've got another question around -- Mark, I'm going to come back to you. So this is a broader question around Software as a Service. We talked about declining from a market cap and valuation perspective, as Steve talked about ARP SaaS providers responding to AI, economics and economics.

Yes. Thanks, Stan. Two things. One on the economics. I would say that the SaaS providers, especially the large ones where much of the market is focused on spent time last year working through different hybrid pricing models, that being that there is seat-based platform base, consumption base, and in some cases, value function-based pricing. And obviously, by the end of the fourth quarter, we saw that the pressure on adapting away from seat-based pricing clearly in a digital labor model is critical. So we've now seen in the first quarter a rollout of new pricing models. And I would say that the SaaS providers are not just on some annual pricing structure. They're usually in a quarterly update kind of approach, but are making pretty significant changes and frankly, flexibility because in a model where you don't know what your consumption will be just buying tokens. Well, how many tokens will it take to perform certain kinds of workflow or functions. So that's really on the economic side. The other side of the coin on the technology side, remember last year, 2025 was all about agentic AI. And the SaaS providers knew they needed to adapt their underlying platform to support agentic. Now what we've seen is that it wasn't like they were flat footed, infusing AI into enterprise platforms take some engineering and all the major platform providers, if you look at Salesforce, [ SAP], Oracle, ServiceNow, all major announcements, new releases are soft in the first quarter that begin to address the need for how to build better AI agents and digital labor. So it's more that the SaaS providers need to do a better job explaining on how they're approaching this new AI economy. And number two, the market should be putting them underneath more pressure for better answers to how they're in to the economics and technology. So a multisided coin there outstanding.

Okay. Thanks, Mark. So I'm going to take one more quick one, and then we've got a couple of questions on the AI Index, and I'm going to going to pass that to Steve. So we got a question about the FSI growth in managed services and you expect it to slow down the Americas driven by inflation. So a great question, and Kathy did mention this in her update. The FSI was up in the Americas, but it was down significantly in Europe in the first quarter. Just remember, though, when we're doing the first -- these first quarter comparisons, the numbers can really look like this, but down significantly in EMEA up in U.S. that kind of signals that second quarter, that recovery again, we started to see in BFSI late in 2025. All of that said, and we wrote something about this last year, interest rates absolutely do have an outsized impact on that sector. When interest rates go up, more than half the time, ACV comes down quarters later. So if they do go up, the impact would not be immediate. It tends to be a few quarters later. But as interest rates, if that does happen, given where inflation may be headed, that definitely could have an impact on the FSI sector in the second half of 2026. Okay. A bunch of questions on the AI Index. So Steve, I'm going to come to you. I see the new AI -- the Index is based on metrics from providers. You have plans to include customer metrics like client customer revenue, profitability and adoption?

Yes, absolutely. And thank you for the question. The first thing that we're going to do is we're going to start introducing sentiment analysis and sentiment analysis will be introduced in Q2 and that looks at both the buy side and the sell side of the services to understand what the sentiment is through the market, and we've got a defined way to do that. More importantly, ISG acquired a company and some technology in January that really helps us understand the maturity of an organization's AI adoption. So we call it the AI maturity Index, but what it does is it allows us to go in, assess an individual or a firm's maturity across the organization with the adoption of AI and from that, we're going to be able to determine what the overall maturity of adoption is within it. We're going to couple that with use case adoptions that we have. So we'll have a whole series of real data points that show where the market is going and what clients are actually buying and consuming and how it's changing their adoption and use cases within their businesses. So all of that will come in. I know the team is excited to accelerate that because we've introduced a lot of different things in a short period of time, but it should be really exciting as we get through. So great question. And on this, we continue to throw more questions our way because, as I said earlier, this is the first time and the value of the ISG Index and the future value of the ISG AI Index is making sure that we're taking the input from every one of you and helping us make the product even better.

P So Steve, you said keep sending the questions. I think we have time for one more, kind of a follow-on to that. So why? So the question is why do we need a new AI why do we need a new AI Index?

Yes. I mean, fundamentally, the economics of AI are changing so much across every one of the businesses that we model, whether it's SaaS moving from per se to token and outcome-based pricing and what Mark mentioned on the announcements with Salesforce and their new agents, you're seeing the rapid growth of hyperscalers, there's a massive build-out of data center. It's all because of scale, scale, scale, with AI. You're seeing the chip manufacturers accelerate. You see the news that the LLMs are going to wipe out industry after industry. I think it was time to really say what is the true impact and we're working that in fact, we measure and then make real business decisions on what does that mean? And at ISG, we've always believed that data is the best way to make those decisions. So this really helps us level set as we go forward. And again, Stanton, as I said, this is just the beginning as we really start driving this out. It's going to combine with the autonomous enterprise, autonomous level pricing, the AI Index, all to sort of drive what the new thought leadership is for the future services.

Awesome. Thanks, Steve. Okay. We're going to go ahead and close out the call. Thank you all very much for joining us today. And as a reminder, you can access a copy of the slide you just saw, which also includes the regional leaderboards on the ISG website. Thanks again, and we will see you on the Q2 ISG Index call in July. Thanks.