The global IT services market has shown remarkable resilience, experiencing an 18% growth in the first quarter of 2025 despite economic uncertainties and potential impacts from new U.S. trade tariffs. According to a report from Information Services Group (ISG), the combined annual contract value (ACV) for managed and XaaS (anything as a service) offerings reached $28.8 billion, marking the sixth consecutive quarter of growth and a new record.
Cloud-based services remained the primary driver of this growth, with XaaS witnessing a significant 30% increase in ACV to $18.4 billion — which includes a record $13.9 billion for infrastructure-as-a-service (IaaS), representing a 34% rise compared to last year. Major cloud providers like AWS, Google Cloud, and Microsoft Azure captured 75% of IaaS revenue, collectively growing 48% annually.
Software-as-a-Service (SaaS) also reported strong performance, reaching $4.5 billion in ACV, up 19% from Q1 2024, continuing its trend of year-on-year growth. However, the managed services sector saw more modest gains with an ACV of $10.5 billion, reflecting a slight increase of 2% from the previous year but down 2% from the previous quarter. Interestingly, while the overall number of contracts dipped slightly, large-scale contracts valued at $100 million or more rose to six, an increase from four in the same period last year.
On the other hand, IT outsourcing (ITO) thrived, achieving $7.8 billion in ACV, boosted by strong demand for both infrastructure and application services. Infrastructure services surged nearly 60% compared to a weaker Q1 in 2024, while application services grew by 12%.
Conversely, business process outsourcing (BPO) faced its most significant decline in over a decade, crashing to $1.5 billion in ACV — a 39% year-over-year drop across all subcategories. Likewise, the newly tracked engineering, research, and development (ER&D) services achieved record growth, reaching $1.1 billion and growing 42% year-over-year.
ISG President Steve Hall described the current market momentum as encouraging, yet warned of potential volatility due to ongoing trade policy uncertainties. He highlighted that while cloud and AI are driving digital transformation, some industries are already showing signs of deferred spending and extended decision-making processes.
Looking ahead, ISG foresees two potential scenarios for 2025 based on the trajectory of trade tensions. If trade policies stabilize by mid-year, XaaS growth may reach 18% while managed services could see a modest increase of 1.3%. However, if uncertainties linger into the second half of the year, managed services might experience a downturn of 2.4%, with XaaS growth slowing to 15%.
Hall pointed out that smaller contracts, particularly those between $5 million and $10 million, have also seen a decline, indicating cautious sentiment regarding discretionary IT investments. Despite these headwinds, ISG remains confident in the market’s long-term strength, driven by ongoing demands for operational efficiency and modernization through cloud-native technologies and AI innovation. As uncertainties clear, many paused projects are expected to resume, suggesting sustained momentum within the market.
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