XaaS, short for “Anything as a Service,” is an umbrella term for delivering products or business functions over the internet on a subscription or pay-as-you-go basis instead of selling them as one-time purchases. Think of it like renting a streaming service instead of buying DVDs: customers get flexible access and providers earn recurring revenue. For investors, XaaS models often mean more predictable cash flow, faster customer scaling, and different profit dynamics compared with traditional one-time sales.
iaastechnical
Infrastructure as a Service (IaaS) is a cloud computing model that lets companies rent computing resources—like servers, storage, and network capacity—on demand instead of owning hardware. For investors, IaaS matters because it enables faster scaling, lower upfront costs, and predictable operating expenses for businesses, which can boost growth potential and margins; think of it as paying to use a utility grid rather than building your own power plant.
saastechnical
SaaS, or Software as a Service, is a way of delivering computer programs over the internet, allowing users to access and use them through a web browser without needing to install or maintain the software themselves. For investors, it highlights a business model where companies generate recurring revenue by providing ongoing access to their software, often leading to predictable income and growth potential.
annual contract valuefinancial
Annual contract value is the amount of revenue a company expects from a single customer contract over a 12‑month period, adjusted when contracts span shorter or longer terms. Investors treat it like the annual “rent” from a subscription: it makes different deals comparable, helps forecast predictable revenue, and highlights whether customer accounts are becoming more or less valuable — useful for judging growth, stability, and churn risk.
business process outsourcingtechnical
Business process outsourcing is when a company hires an outside firm to perform routine operational tasks—such as payroll, customer support, IT operations, or back-office administration—so the company can focus on its core products or services. Investors care because outsourcing often lowers costs, improves scalability and flexibility, and shifts operational risks; changes in a company’s outsourcing strategy can therefore affect profit margins, growth prospects and regulatory or service-quality risks.
application development and maintenancetechnical
The ongoing process of designing, building, testing, updating and supporting software applications used by a business, plus the routine fixes and upgrades needed to keep them running. Like constructing a house and then paying for electricity, repairs and renovations, it matters to investors because development and maintenance determine how reliable, secure and scalable a company’s technology is and therefore influence costs, operating risk and the ability to grow or compete.
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Combined market ACV up 43%, to record $42.4 billion
Market driven by cloud XaaS, up 65%, with managed services up 2.7%
ISG raises 2026 XaaS growth forecast to 30%, maintains managed services forecast at 2.1%
STAMFORD, Conn.--(BUSINESS WIRE)--
The global market for technology services grew at its fastest pace ever in the second quarter, propelled by soaring enterprise demand for cloud services to support accelerating AI ambitions, according to the latest state-of-the industry report from Information Services Group (ISG) (Nasdaq: III), a global AI-centered technology research and advisory firm.
Data from the global ISG Index™, which measures commercial outsourcing contracts with annual contract value (ACV) of $5 million or more, show second-quarter ACV for the combined global market (both managed services and cloud-based as-a-service) surged 43 percent versus the prior year—the market’s highest growth rate ever—to a record $42.4 billion. It was the market’s eighth consecutive quarter of double-digit growth, up an average of 22 percent in that span.
“The technology services industry continues to ride high, driven largely by AI-fueled demand for hyperscaler services,” said Steve Hall, ISG’s chief AI officer and leader of the ISG Index. “Managed services, meanwhile, continues to show resilience, but the nature of the demand is changing, as traditional labor-intensive work is increasingly displaced by LLMs. Providers are facing more competition and changing economics, include pricing deflation and more provider-funded, AI-powered transformation embedded within contracts.”
Second-Quarter Results by Segment
The as-a-service (XaaS) segment soared 65 percent versus the prior year, to a record $31.5 billion. That was the highest growth rate for XaaS ever recorded by the ISG Index—beating the previous mark set 10 years ago and representing an acceleration of 24 percentage points over the first quarter. The second-quarter results extended the XaaS segment’s double-digit growth streak to eight straight quarters, during which growth has averaged 34 percent.
Within the XaaS segment, infrastructure-as-a-service (IaaS) saw explosive growth, with ACV surging 78 percent, to a record $25.8 billion, or $11.3 billion higher than the prior year, fed by an accelerating appetite for AI. Software-as-a-service (SaaS) also delivered outsized results, up 25 percent versus the prior year, to $5.7 billion, as AI is becoming part of almost every application.
“A meaningful portion of current infrastructure spending is coming from a relatively small number of frontier AI model providers, including companies like OpenAI and Anthropic, which are purchasing enormous amounts of compute capacity,” Hall noted.
The managed services segment generated second-quarter ACV of $10.9 billion, up 2.7 percent versus the prior year, but down 2.7 percent sequentially from the first quarter. A total of 725 managed services contracts were awarded during the second quarter, up 3 percent from the prior year but down 2 percent sequentially. Seven of the Q2 awards were mega-deals (contracts with ACV of $100 million or more), down from 8 such deals last year, and their ACV was down 27 percent.
New-scope awards drove the managed services market in Q2, with ACV up 14 percent, to a record $8.2 billion, and the number of deals signed representing nearly 75 percent of all managed services bookings in the quarter.
“Enterprises are actively reshaping their sourcing portfolios,” said Hall. “Much of this activity appears to reflect work moving between providers and changing operating models rather than entirely new outsourcing demand.”
Among industries, managed services demand was led by the consumer packaged goods sector, with ACV up 59 percent, followed by transportation, up 28 percent; energy, up 21 percent, and banking, financial services and insurance (BFSI), up 16.5 percent. Meanwhile, manufacturing, the second-largest industry vertical after BFSI, fell 11 percent, its third straight quarter of decline.
Within managed services, IT outsourcing (ITO) ACV declined 3 percent, to $7.7 billion. Application development and maintenance (ADM) services remained under pressure, as AI-led work ate into the ACV of labor-based models. Bundled ADM and infrastructure services fared better, with enterprises focusing on cost optimization and transformation.
Business process outsourcing (BPO) ACV, at $2.3 billion, rose 34 percent from the prior year, but fell 8 percent from the first quarter. Strength was seen in such back-office areas as HR, facilities and supply chain management, as well as industry-specific services, while customer experience services declined.
ACV for engineering, research and development (ER&D) services, meanwhile, fell 6 percent against a strong year-ago quarter, to $931 million, even as deal volume rose 34 percent. Like ADM, ER&D is being impacted by AI, especially in areas like software engineering and embedded engineering, where LLMs are displacing human labor.
First-Half Results
In the first half, the combined market was up 35 percent, to $81.3 billion. Managed services, at $22.1 billion, was up 2.7 percent, while XaaS, at $59.2 billion, was up 53 percent year over year. A total of 1,464 managed services contracts were awarded in the first half, up 1.6 percent, including 13 mega-deals, one less than the prior year, with the ACV of those deals down 10 percent.
Within managed services, ITO slid 5.6 percent, to $15.5 billion; BPO climbed 47 percent, to $4.8 billion, and ER&D declined 2.8 percent, to $1.8 billion. On the cloud side, IaaS soared 66 percent, to $48.4 billion, and SaaS rose 14 percent, to $10.8 billion, compared with the first half of 2025.
Sentiment Analysis Added to ISG AI Index™
ISG said it expanded its ISG AI Index™ this quarter to include a new sentiment analysis, which evaluates enterprise views on AI adoption.
“Our research reveals that enterprise confidence in AI remains high, but the focus is shifting to value creation,” Hall said. “Management teams are spending less time talking about AI opportunity and much more time talking about execution, return on investment and business outcomes.”
Further details are available by viewing today’s ISG Index call replay and presentation.
2026 Global Forecast
For the full year, ISG is maintaining its forecast of 2.1 percent revenue growth for managed services, as this market “remains resilient, even as it becomes more competitive and selective,” Hall said. At the same time, ISG is raising its previous growth forecast for cloud-based XaaS by 500 basis points, to 30 percent, reflecting continuing strong demand for AI infrastructure and software services.
Hall commented: “The market is being reallocated. Providers that understand where value is moving—and adapt their business models accordingly—will be the ones that lead the next phase of the AI economy.”
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 95 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 2Q26 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.
