Information Services Group, Inc.

Hi, everyone, and welcome to the third quarter 2025 ISG Index Call. My name is Stanton Jones, and with me today is Steve Hall, partner and president, ISG EMEA, Nirmatha Darshan, chief business leader for ISG India, and Mark Smith, ISG chief software analyst. This is our 92nd consecutive ISG Index Call, so for those of you that have been joining us for many years, thank you for investing some of your time with ISG today. And for those of you that may be on your first index call, just some quick background. The ISG 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. Okay, so with that, Steve, I'll turn it over to you to kick us off.

Great, Stan. Thanks a lot. And welcome, everybody. 92nd consecutive quarters is great. So let's kind of take away sort of the five key takeaways from the year to date and sort of the quarter. So I would say, first of all, we really continue to see enterprise shifting towards cloud-first platforms. The as-a-service market, which includes infrastructure and software as a service, was up nearly 30%. deals tied to AI. So the hyperscalers really saw amazing growth, as we'll talk through later. SAS is also performing consistently well, though, and we saw growth across IT service management, collaboration, and analytics. So I think the key part is I think we're beyond the hype a little bit on AI, and it's really fundamental replatforming that we're seeing with organizations. On the managed services side, the growth was pretty sluggish. The Americas showed solid performance. It was up 15% year-to-date with really strong results in financial services, IPO, and engineering. But the global services market was essentially flat. And really, most of that drag came from Europe and Asia, where delayed decision-making continued to dominate the conversation. And across both regions, we're seeing deal scope, but just not close to date. Third, I would say deal activity. those deals in the sort of the 5 to 10 million ACV range are really going again. And that's really a good sign that transformation-led programs and more targeted modernization efforts are taking place and the return of some discretionary spend. One of the biggies this quarter was really the H-1B policy changes. And I think Offshore for offshore, likely accelerate moves towards automation, local hiring, and more diversified talent models. I'm going to talk about that more, but I think the key is clients will look to have more visa resilient delivery structures as they go forward. And finally, we can't have an index call without really talking about AI adoption. customer support specifically, but it is coming at the expense of some traditional BPO volumes. We're going to talk about this a little bit later, but we saw a big drop in BPO. Good news is we think the overall market is going to expand in this area because of new areas to grow into, but short-term is certainly having an impact with AI-infused backgrounds. But let's take a look at what's going on in the broader market. So in Q3, the global combined market continued its upward trajectory with solid performance across both Managed Services and SaaS. This quarter, again, reinforced what we've seen throughout the year. Priorities have shifted. Cloud, infrastructure, and AI-first strategies are really central to the spending. Year-to-date, as you can see, the combined market is up 18%. As-a-service is up 29%. of the volume now. The manning services of 1.5% was all based on the growth in the Americas, which was up 15% year-to-date. The good thing is that was really driven by growth in financial services, ITO, and engineering. And we're seeing a really healthy mix of large-scale renewals and smaller outcome-based awards coming back to the market, particularly in the U.S., But, you know, the bad part is that strength wasn't really global. EMEA and Asia remain soft. Deal flow weighed down by delayed decision-making and reduced discretionary investment. In Europe, we had energy costs, terrorist concerns, escalating geopolitical tensions, et cetera. Ukraine, NATO, political volatility in France, we can kind of go down that list. It just delays decision-making within the EMEA markets. Meanwhile, the as-a-service continued, as I said, 65% of the market. We're really seeing investments turn more to SaaS, continue to do cloud. Cloud growth is, again, really driven by everything that we're seeing on AI. Service management, collaboration tools, and analytics are really driving that market. So before we shift into the details on ITO and engineering, I do want to touch on the H-1B policies a little bit. So in late December, the U.S. administration introduced the $100,000 fee on each new H-1B visa. There was obviously a lot of dynamics going on at the beginning. That settled, but this was a significant policy shift with really immediate implications for the global delivery. The new fee effectively eliminates the cost advantage of using H-1B labor for lower-wage roles in the states, especially in support roles, QA, junior development, And going forward, we expect H-1B sponsorship to be concentrated on high-value senior roles where the ROI still holds up. But there was a lot of uncertainty that was implemented with it. There's a clause on national interest exemption, which remains loosely defined, making long-term planning difficult to do. It also adds risk to the overall talent strategies for organizations. An example of this is the lottery or high-end skills. So in the new system, these skills will be given four lottery tickets, the senior skills, while the lower-end or non-critical skills receive one. So you've got a higher probability, obviously, of being selected in the pool. Combined, we think that this is really going to skew the market towards high-end talent being awarded. Combine that with what's happening with sort of the the national interest exemption, we think those roles will primarily go to the big tech providers. The timing is also critical, though. Enterprises are already deep in automation and AI adoption, so we're likely to see a further acceleration of that trend, particularly in software development, testing, and support, where we already see automation and AI being very effective. So, in terms of who's impacted, who's not, I think, in general, the large lines on H-1Bs. So I think those firms are going to be okay, but what you'll see is higher offshore ratios, which will reduce that risk to H-1Bs, and their global delivery frameworks will have to adjust accordingly. Means likely more growth in Mexico, Colombia, potentially Canada, other areas as you go forward. Smaller Indian firms are also really less directive because they've really pulled back on the use of H-1Bs relying on lower cost offshore talent, but it does leave them more exposed to delivery disruptions if clients push for alternative models to be on site or other things. So you'll see some hiring in that space. I think the global tech firms and diversified service providers are more likely to shift towards offshore and nearshore. They're going to blend local hiring with increased use of AI and automation. Those tech firms are also likely to receive the national exemption. I think the one thing that we're missing in this whole conversation is the prevailing wage. So in general, the prevailing wage threshold is gaining traction. That's essentially saying that you've got to pay the prevailing wage in whatever city the client is as they go forward. So if that changes, even senior-level business hires could face higher cost barriers. This could further reshape the global talent, absolutely having more of an immediate impact on margins and growth there. So I think the bottom line here is the model is really evolving. We know some things. There's still a lot to figure out. It's not really going to take effect until April of 26. The announcement was for the October lottery, but there will be a lot of time for organizations to kind of manage and mitigate their risks as we go forward. So, Stan, why don't you take us through the ITO business?

Sure, thanks, Steve. So as a reminder, ITO includes areas like applications development and maintenance and infrastructure managed services network and cybersecurity. So in the third quarter, the ITO segment was down 2% year on year. However, as you can see here on a year to date basis, it was up 5%. And year to date this segment of the markets on pace for a record number of awards. And turning to award type. 19 of the 22 mega awards that have been awarded year to date are ITO awards. And we think that's a signal that we continue to see strong preference for bundling technology scope in order to drive scale and cost savings. And I'll talk a little bit more about mega deals here in just a minute. So the Americas accounted for all of the ITO growth so far in 2025 through nine months. The Americas ITO ACV is up 25%. and EMEA is down 11%. And as you can see on the right-hand side of the slide here, by functional area, ADM was up 3% year-to-date, and infrastructure was up 12% year-to-date, and much of that was based on strength and data center activity. Okay, let's move on to our second service line, which is engineering services. So in the third quarter, engineering services was up nearly 60% year-over-year, And on a year-to-date basis, it's up 36%. Large multinational providers like DXC, HDL Tech, Infosys, TCS, and Wipro are driving much of this growth. As a collective, these large providers have won nearly half of the engineering awards in 2025 and more than 40% of the ACV. So as you may recall, we started splitting engineering out from BPO at the beginning of this year. And one of the reasons we did that is that we believe engineering is starting to scale based on a couple of factors. Number one, the average contract value of an engineering services deals is up 26% year to date. So the deals are getting bigger. And number two, historically, much of the activity in this segment was in the smallest deal category, but that's changing as well. Year to date, the number of deals in the $10 to $40 million ACV range is up 14%. So we think this is a signal that deals in this space are starting to scale beyond smaller projects, and the success of the larger players is partly responsible for this dynamic. And finally, as you can see on the right-hand side of the slide here, is the distribution of engineering annual contract value. Nearly 70% of the ACV in this segment is split between software engineering services, so think about things like customer-facing products and commercial software platforms, and embedded engineering. So here, think about things like control units, firmware, and processors inside of physical devices. Okay, let's go ahead and move on to our final service line, BPO. Namratha, over to you.