AI Drives Tech Services, Software Spending to New High in Q3: ISG Index™

Combined market ACV up 18%, to record $32.7 billion

Market driven by cloud XaaS, up 31%, as managed services ACV declines 2%

ISG raises 2025 XaaS growth forecast to 25%, maintains managed services forecast at 1.3%

Accelerating interest in AI continues to drive the global market for technology services and software, propelling spending to an all-time high in the third quarter, 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 third-quarter ACV for the combined global market (both managed services and cloud-based as-a-service) was up 18 percent versus the prior year, to a record $32.7 billion. It was the fifth straight quarter the global combined market has advanced by double-digits versus the prior year.

"We continue to see enterprise spend shifting toward cloud-first platforms, led by infrastructure-as-a-service tied to AI adoption," said Steve Hall, president and chief AI officer of ISG. "This isn't hype—it's a fundamental re-platforming of enterprise technology."

Hall said AI is disrupting demand for managed services, particularly business process outsourcing (BPO). "The growth in AI is coming at the expense of traditional BPO volumes. The model is shifting fast. Spend is moving to AI-infused, data-driven platforms."

The change in H1-B visa policy will also impact the industry, Hall said. "The new $100,000 visa fee introduced in September is reshaping how firms think about labor-based delivery. It raises the cost for offshore resources and will likely accelerate moves toward automation, local hiring and more diversified talent models."

Third-Quarter Results by Segment

The as-a-service (XaaS) segment climbed 31 percent versus the prior year, to a record $21.6 billion, its fifth straight quarter of double-digit, year-on-year growth. Sequentially, XaaS was up 11 percent versus the second quarter.

Within the XaaS segment, infrastructure-as-a-service (IaaS) ACV soared 35 percent, to a record $16.8 billion, and was up 13 percent sequentially from the second quarter. Collectively, the big three hyperscalers—AWS, Azure and Google Cloud—saw topline growth of 41 percent in the third quarter.

Software-as-a-service (SaaS), meanwhile, rose 18 percent versus the prior year, to $4.8 billion, and was up 4 percent from Q2, with growth across IT service management, collaboration and analytics.

The global managed services segment, at $11.1 billion, turned in a sluggish quarter, down 2 percent versus a record-high third quarter last year, despite 22 percent growth in the Americas. Global growth was led by the healthcare and pharmaceutical industry, up 37 percent, with the energy, media and telecom, and banking, financial services and insurance (BFSI) sectors also growing by double digits.

A record 785 managed services contracts were awarded during the third quarter, up 8 percent from the prior year and 12.5 percent sequentially. Among them were eight mega-deals (contracts with ACV of $100 million or more), down from nine in the prior year. On the other end of the spectrum, the volume of deals in the $5 million to $10 million range, the smallest measured by ISG, rose 6 percent versus the prior year.

"Mega deals are stable and smaller deals are growing again," said Hall. "This tells us enterprises are moving ahead with both large, transformation-led programs and more targeted modernization efforts—often tied to AI and automation."

Within managed services, IT outsourcing (ITO) produced ACV of $8.4 billion, off 2 percent against the prior year but up 7 percent from the second quarter. Business process outsourcing (BPO) ACV, at $1.9 billion, was down 16 percent from the prior year, but up 8 percent from the second quarter.

Engineering, research and development (ER&D) services, meanwhile, soared 59 percent versus the prior year, to $811 million. It was the fourth straight quarter that the ER&D segment has grown year over year, averaging more than 30 percent growth during that span.

Nine-Month Results

Through the first nine months, the combined market generated $93.2 billion of ACV, up 17.6 percent versus the prior year.

XaaS climbed 29 percent, to $60.8 billion, a strong acceleration from its 11 percent growth in the same period last year. The XaaS market now accounts for 65 percent of combined market ACV, up from 60 percent in the prior year. Within XaaS, IaaS rose 33 percent, to $46.4 billion, and SaaS rose 16 percent, to $14.4 billion.

Managed services, at $32.4 billion, was up 1.5 percent, the lowest growth rate for the period in five years, after averaging more than 5 percent growth the past three years. A total of 2,214 managed services contracts, including 22 mega-deals, have been awarded year to date, up 1 percent from the prior year.

Within managed services, ITO rose 5 percent, to $24.7 billion, while BPO slumped 22 percent, to $5.1 billion. ER&D, meanwhile, grew 36 percent year to date, to $2.6 billion. Software engineering, at 45 percent, represented the largest portion of ER&D spend.

Top growth industries for managed services year to date included energy, up 23 percent; healthcare and pharmaceuticals, up 13 percent; manufacturing, up 9 percent, and BFSI, up 8 percent.

2025 Global Forecast

For the full year, ISG is maintaining its forecast of 1.3 percent revenue growth for managed services, with strong growth in the Americas offset by weakness in Europe and Asia Pacific. At the same time, ISG is raising its previous growth forecast for cloud-based XaaS by 400 basis points, to 25 percent, led by continuing strong, AI-driven demand for IaaS.

Hall commented: "Macroeconomic signals remain mixed. Tariffs, delayed decision cycles, and geopolitical uncertainty—especially in Europe—are weighing on parts of the stack. Bottom line: AI is the growth engine. IaaS is leading. SaaS is scaling. And managed services is adapting."

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 92 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 3Q25 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, in-depth knowledge of provider ecosystems, and the expertise of its 1,600 professionals worldwide working together to help clients maximize the value of their technology investments.

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Julianna Sheridan, Matter Communications for ISG

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