ISG’s latest index highlights a technology services and software market that is increasingly defined by cloud momentum and AI-driven investment shifts. While headroom growth remains strong, the underlying dynamics point to a more selective and strategic buying environment as enterprises head into 2026.
Cloud and XaaS Continue to Power Growth
Cloud and as-a-service offerings remain the clear growth engines. The combined market surpassed $34 billion in annual contract value for the first time, driven by a record quarter for XaaS, which grew 26% year over year in Q425 and 29% for the full year. Infrastructure-as-a-service stood out—posting 33% annual growth—fueled by hyperscaler demand and AI-driven workloads. SaaS growth remained solid at 16%, but ISG notes signs of deceleration as competition intensifies and AI reshapes pricing and delivery models.
Managed Services Face Ongoing Headwinds
In contrast, managed services growth was uneven around the globe. The Americas led the way with close to 10% overall growth in 2025, with Europe being relatively flat and Asia Pacific down by more than 25%. This uneven performance underscores the importance of region-specific strategies for both providers and buyers. ISG also noted that while deal durations and total contract values increased, activity was concentrated in fewer, larger strategic deals.
AI Is Reshaping Spending and Buying Behavior
AI continues to dominate enterprise investment priorities. ISG reports that 77% of companies plan to increase AI spending in 2026, with most yearly budgets flowing to new initiatives rather than incremental pilots. Importantly, many AI pilots are now moving into production, reinforcing expectations for measurable ROI. However, ISG also notes that buying behavior is evolving faster than provider pricing and delivery models can adjust—a tension likely to shape the market in the year ahead.
Looking Ahead to 2026
ISG’s outlook suggests modest acceleration in IT budgets in 2026, with spending increasingly directed toward AI adoption, cloud migration, and cybersecurity rather than broad-based cost cutting. Enterprises are prioritizing high-impact outcomes, signaling continued opportunity for providers that can align AI innovation with tangible business value.
What This Means for Clients: Outsourcing Strategy
For organizations evaluating or renegotiating outsourcing arrangements, the ISG data points to a more selective and outcome-driven approach. Slowing managed services growth and deal concentration signals that buyers are prioritizing fewer, more strategic relationships—often with larger providers that can support AI-enabled transformation at scale.
At the same time, enterprises are increasingly supplementing these core providers with niche specialists to access targeted capabilities, particularly in AI, cloud optimization, and industry-specific solutions.
Clients should expect continued flexibility in deal structures, with a focus on shorter commitments, modular scopes, and performance-based outcomes rather than traditional long-term, labor-centric contracts. As AI reshapes delivery models and pricing expectations, outsourcing strategies that balance scale, specialization, and adaptability will be best positioned to deliver sustained value through 2026.