Global Technology Services Market Surges to New, AI-Fueled High in Q1: ISG Index™
Combined market ACV up 29%, to record $39.4 billion, powered by AI-driven growth in cloud services as demand for managed services remained steady
ISG increases 2026 XaaS growth forecast to 25%, maintains managed services forecast at 2.1%
New ISG AI Index™, measuring AI’s impact on tech services, up 77% since end of 2022
STAMFORD, Conn.–(BUSINESS WIRE)–
The global technology services market surged to a new record in the first quarter as enterprises accelerated their AI adoption and continued to seek cost savings, the latest state-of-the industry report from Information Services Group (ISG) (Nasdaq: III), a global AI-centered technology research and advisory firm, finds.
Data from the global ISG Index™, which measures commercial outsourcing contracts with annual contract value (ACV) of $5 million or more, show first-quarter ACV for the combined global market (both managed services and cloud-based software and infrastructure services) reached a record $39.4 billion, up 29 percent year over year, its highest growth rate in four years. It was the seventh consecutive quarter of double-digit, year-over-year growth for the combined market, a period that averaged nearly 20 percent growth per quarter. In dollar terms, the combined market added nearly $9 billion of ACV year over year and roughly $4.5 billion (or 13 percent) versus the fourth quarter.
“The headline numbers point to a market that is still expanding, but the underlying drivers are very different across the two major segments,” said Steve Hall, chief AI officer of ISG. “On the managed services side, demand remained steady, supported by larger, cost-focused transactions, while discretionary activity continued to lag. On the cloud side, the as-a-service market delivered another record quarter, driven by exceptionally strong demand for AI as enterprises now focus on moving beyond pilots to large-scale deployments.”
New ISG AI Index™ Launched
In a separate press release today, ISG announced the launch of its ISG AI Index™, a first-of-its-kind benchmark that measures how AI is impacting the global technology and business services sector. The initial findings, presented during today’s ISG Index call, show that infrastructure-as-a-service (IaaS) has seen the greatest impact from AI, up 160 percent. Software as-a-service (SaaS) has risen 53 percent while managed services is up only slightly, at 0.3 percent. On a market-weighted basis, the composite ISG AI Index was up 77 percent since inception, dating to December 2022, just after the launch of ChatGPT 3.0 and the start of the current AI era. Further details are available here and by viewing the replay and presentation from today’s call.
First-Quarter Results by Segment
The cloud-based as-a-service (XaaS) market soared 44 percent, to a record $28.2 billion, its highest year-over-year growth rate in more than four years—since the fourth quarter of 2021, when ACV rose 55 percent. This extended to seven XaaS’s streak of year-over-year, double-digit growth quarters, during which time quarterly growth averaged 30 percent. Sequentially, XaaS was up 18 percent from the fourth quarter of 2025.
The majority of XaaS growth in the first quarter came from IaaS, which was up 57 percent year over year, to a record $23.1 billion. SaaS, meanwhile, rose 5 percent, to a record $5.1 billion.
“Enterprises continue to increase their spending on cloud infrastructure, driving hyperscalers to invest upwards of $600 billion this year on new data center capacity to keep up with AI demand,” Hall said. “The XaaS market also saw continued resilience in enterprise software demand, despite fears of AI-fueled disruption.”
Managed services returned to growth and had its second-best quarter ever, with ACV of $11.2 billion, up 3 percent versus the prior year after two straight quarters of year-over-year declines. Still, 18 of the last 21 quarters have trended positive, ISG noted.
Within managed services, IT outsourcing (ITO) slumped 7 percent from last year, to $7.9 billion of ACV, although it was up 1.2 percent from the fourth quarter. Most areas of ITO were down, with the exception of full ITO (ADM and infrastructure) and end user computing (EUC) services. Standalone application development and maintenance (ADM), the largest area of ITO, was down 20 percent.
In the business process outsourcing (BPO) segment, ACV soared 62 percent against a weak first quarter last year, to $2.5 billion, and was up 12 percent sequentially from the fourth quarter. It was the second straight quarter that BPO generated ACV of more than $2 billion, marking its strongest year-over-year growth in four years. Growth was led by industry-specific, facilities management and HR services, while contact center services declined nearly 30 percent.
Engineering services, meanwhile, continued a five-quarter streak of ACV over $800 million, but was flat year over year and down almost 9 percent on a sequential basis. The volume of deals in the engineering space rose 5 percent in the first quarter, with double-digit growth in Europe.
By industry, managed services spending was led by retail, telecommunications and media, and the travel and transportation segments. However, spending by the two largest industries for outsourcing—banking, financial services and insurance (BFSI) and manufacturing—was down.
A total of 744 managed services contracts were awarded in the first quarter, up 0.8 percent from last year. Included in that total were six mega-deals valued at $100 million or more, even with the prior year, although the ACV of the 2026 mega deals was up 22 percent. At the other end of the spectrum, smaller deal activity moderated from its surge in the third quarter last year, with the volume of deals in the $5 million to $10 million range down slightly from last year, marking the fourth time in the last five quarters this segment has declined.
In terms of deal type, new-scope volume rose 11 percent, with ACV up 20 percent, to $8.0 billion, while the volume and ACV of restructured contracts were down 19 percent and 24 percent, respectively, versus the prior year.
2026 Forecast
ISG said it is raising its full-year forecast for XaaS revenue growth to 25 percent, up 400 basis points from its January forecast, and is holding its managed services growth forecast at 2.1 percent for the year.
Commenting on the revised XaaS forecast, Hall said, “The market continues to be driven by XaaS spending, as the hyperscalers pour hundreds of billions of dollars into capacity to meet AI-driven infrastructure demand. SaaS is holding up better than expected. Despite the disruption noise, enterprises are still investing in core platforms. What’s changing is the narrative. The market is starting to question what these businesses look like in an AI-first world, and that’s showing up more in valuations than in bookings, at least for now.”
Regarding ISG’s managed services forecast, Hall said, “Managed services is steady, but it’s still a defensive story. Enterprises are consolidating vendors, bundling towers and taking cost out to fund AI. Demand has shifted from small, discretionary spend, to large, cost-driven TCO deals, with BPO a clear bright spot, particularly in industry-specific and back-office processes. These are among the first areas where AI and automation are starting to translate into tangible demand.”
Commenting on the AI market, Hall said enterprises have moved beyond experimentation and are trying to scale. “This is driving infrastructure demand, reshaping deal structures, and starting to change how services are bought. But it’s not a clean transition,” Hall said. “There’s still friction around data, governance and trust. And until those get worked through, you’re not going to see AI fully translate into broad-based services growth.
“We’re effectively in the infrastructure phase of the AI cycle today. That’s where the value is being created first. We expect software to benefit next as applications adapt, and only after that stabilizes do we expect to see services fully participate, similar to how the cloud cycle played out.”
About the ISG Index™
The ISG Index™ is recognized as the authoritative source for marketplace intelligence on the global technology and business services industry. For 94 consecutive quarters, it has detailed the latest industry data and trends for financial analysts, enterprise buyers, software and service providers, law firms, universities and the media.
The 1Q26 Global ISG Index results were presented during a webcast today. To view a replay of the webcast and download presentation slides, visit this webpage.
About ISG
ISG (Nasdaq: III) is a global AI-centered technology research and advisory firm. A trusted partner to more than 900 clients, including 75 of the world’s top 100 enterprises, ISG is a long-time leader in technology and business services that is now at the forefront of leveraging AI to help organizations achieve operational excellence and faster growth. The firm, founded in 2006, is known for its proprietary market data and research, in-depth knowledge and governance of provider ecosystems, and the expertise of its 1,500 professionals worldwide working together to help clients maximize the value of their technology investments.
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Press Contacts:
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Eric Arvidson, Matter Communications for ISG
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