Economic uncertainty driven by inflation, a tight labor market and foreign-exchange pressures may push CIOs to rethink investment priorities, but demand for managed services is expected to continue to grow.
The urgency to advance technology-modernization will drive demand for third-party managed services, helping firms digitize and reduce costs through faster integrations, access to talent and tailored services, according to analysts.
“I would say the market has never been as hot as it is right now,” said Steve Hall, partner and president of Information Services Group (ISG), a technology research and advisory firm.
“With inflation and the possibility of a recession looming, we think we’re going to have more enterprises turning to outsourcing and managed services to lower their delivery costs,” he said.
In the second quarter of this year, managed services spending was valued at $8.8 billion, ISG said. But the firm is lowering its growth forecast for managed services to 3.5% for the year – down from its previous forecast of 5.1% – to reflect “the negative impact of foreign currency translation and inflationary concerns,” said Hall.
Gartner estimates of overall IT spending growth for 2022 were revised downward slightly from its first-quarter update – from 4% to 3% – in part due to economic pressures.
The IT services market, driven by investments in business transformation, cloud migration and managed services, is expected to grow 9.6% in 2022, Gartner said. That’s down one percentage point from the previous year’s growth. In 2021, it said the total IT services spend was $1.2 trillion.
Managed Service Providers as efficiency drivers
Companies plan to digitize operations, which will generate ongoing demand for managed services, including more-efficient IT strategies.
Tata Consultancy Services (TCS), a global managed service provider that offers integration, cloud platform services and digital transformation services, said clients are partnering with the firm to consolidate vendor relationships.
“People are preparing for different scenarios,” said Amit Bajaj, president of TCS North America. “We see a wave of vendor consolidation … [customers] see an opportunity to work with fewer sets of providers, partly to get a better end-to-end service and to better leverage on scale,” he said.
Commercial real estate firm Jones Lang LaSalle (JLL) works with third-party MSPs and also acts as a managed service provider to other companies, offering real estate technology advisory services. It said demand for MSPs will likely remain consistent, though the focus might be different.
“In troubling times or in difficult times, perhaps your application of that strategy may change,” said Edward Wagoner, CIO of digital at JLL Technologies, a division of JLL. If firms need to become more efficient, they may need to partner with managed services firms to help implement these plans and fill skills gaps, he added.
‘Automation as a service’
Digital transformation is expected to continue to drive demand, regardless of economic pressures, said Brett Sparks, senior director analyst at Gartner.
Automation technologies are a key part of this. Investing in automation will reduce the need for humans to perform certain tasks, and managed service providers can help facilitate that transition, he said. “[Companies want] advanced technologies to come in and start offsetting labor arbitrage and move into a digital arbitrage mindset so that they can reduce their spending year over year.”
Accelirate, a Sunrise, Florida-based managed service provider, helps firms get up and running with robotic process automation software UiPath through license management, implementation and support.
“I’m seeing an uptick in demand for support work because people are implementing more automations,” said Ahmed Zaidi, the firm’s co-founder and chief executive.
While MSPs come at a cost to companies – often through subscriptions – demand is accelerating because businesses can rely on them as a turnkey option to implement automation technologies, said Jason Warrelmann, VP of global services and process industries at UiPath.
“Most mid-market organizations – for example, your local hospital down the street – they want the benefit of automation, but they don’t have the people or budget to make that investment,” he said. “All they need to do is set up a connection … and let that managed service provider drive automation as a service.”
From a CIO’s perspective, managed service providers could help companies lay the groundwork for a strategy to cope with a downturn, including addressing technical and process debt, said Sparks.
“I would spend more with them now where it made sense [so] I would be reducing my expenses going forward,” he said.
As a result, companies may seek MSPs to tackle a specific problem instead of using them more broadly to keep technology operations running across an enterprise.
“It’s more focused on outcome,” said UiPath’s Warrelmann. “If I want to improve my bad debt, I might find a managed service provider that’s focused on revenue cycle management. They’re very focused on specific outcomes rather than creating a program for everything in the enterprise.”