Business Digital Transformation a Gold Mine for Managed IT Services

Source: pixabay

The International Data Corporation (IDC) has released recently its Services Contracts Database: Worldwide, indicating there were 720 managed services deals signed worldwide in the first half of 2022. These deals had a Total Contract Value (TCV) of $48 billion.

Compared to the same period in 2021, the total number of contracts decreased. However, the average deal size increased by 20% and TCV almost doubled. Nearly 58% of the deals were signed in the United States and 32% were signed in Western Europe. The Asia-Pacific region (excluding Japan and China) has also experienced an increase in contracts compared to the previous year. India and Australia were the two countries that had the most impact on the managed services contracts in APAC.

Digital-First Organizations

According to the database, 94% of the deals were IT outsourcing contracts. The remaining 6% were Business Process Outsourcing (BPO) deals. This is both good news and bad news for the industry.

The good news is that most companies are prioritizing their digital transformation. The COVID-19 pandemic experience is largely the reason for this move. Companies focused on IT outsourcing contracts because they want to provide a secure and reliable digital workspace for employees.

Moreover, they want to ensure business continuity through flexible work setups and software that can be accessed remotely. By adopting a digital-first mindset for their organization, companies are able to effectively evaluate the solutions that could support their business goals.

Managed services that provide IT outsourcing are the main beneficiaries of this digital-first strategy. Most of the IT outsourcing contracts consisted of cloud migration and technology modernization. Relying on managed services providers is also an effective and less costly way to address other serious concerns in operations. These include IT staff shortage, cybersecurity, and hardware investment and maintenance.

Automation’s Downside

The bad news is that BPO deals are down. The database revealed that the first half of 2022 saw a 40% decline in BPO deal signings. Also, there was an almost 50% decline in total contract value compared to the same period of the previous year.

So what caused the decline? Automation and artificial intelligence.

For years, the tech world has been hailing emerging technologies such as AI and machine learning and how they enable automation for many businesses. Artificial intelligence statistics show that 80% of retail business executives, for example, expect their companies to adopt AI between 2020 and 2027.

However, the increased adoption of automation and AI-enabled technologies is now showing its dark side. As more businesses incorporate automation and AI into their workflows, these solutions are also replacing many of the traditional BPO services commonly outsourced by businesses. The database notes that there was only one BPO deal that exceeded the $500 million threshold compared to two deals during this time the previous year.

What’s In Store for Managed IT Services?

Based on the trends we learned from the database, managed services for IT outsourcing are likely to see sustained growth. The growth might not be in the quantity of the deals but surely in the quality—or more specifically, in total contract value.

Furthermore, it’s not only private organizations that are prioritizing digital transformation. The database revealed that managed services providers (MSP) also closed important deals with governments. In fact, public sector deals contributed about 60% of the total contract value for the first half of 2022.

Although there’s a looming economic slowdown, companies aren’t sacrificing spending on IT and digital services. Managed services have become an integral part of business growth. MSPs don’t only reduce costs but also improve the delivery of services and products by companies to their customers. This certainly has a net positive impact on a company’s bottom line.