AI-Driven Cloud Demand Propels Q2 Growth in Global IT and Business Services Market: ISG Index™
The global IT and business services market is experiencing a significant surge, driven by the rising demand for cloud-based services as enterprises increasingly turn to artificial intelligence (AI) to enhance their operations. According to the latest report from Information Services Group (ISG), a leading AI-centered technology research and advisory firm, the combined annual contract value (ACV) of the global market rose by 17% year-over-year in the second quarter of 2025, reaching a record $29.2 billion. This marks the seventh consecutive quarter of sequential growth, underscoring the resilience of the industry amidst macroeconomic and geopolitical uncertainties.
Cloud Services Dominate Growth
Cloud services, particularly the “as-a-service” (XaaS) segment, have been the primary driver of this growth. XaaS ACV surged by 28% compared to the prior year, hitting a new high of $18.7 billion. This marks the fourth consecutive quarter of double-digit year-on-year growth for the segment. Within XaaS, infrastructure-as-a-service (IaaS) saw a remarkable 34% increase, reaching $14.5 billion, fueled by substantial investments from the Big Three hyperscalers—Amazon Web Services (AWS), Microsoft Azure, and Google Cloud. These companies are ramping up their infrastructure capabilities to meet the anticipated acceleration in AI demand.
Software-as-a-service (SaaS), while growing at a slower pace of 9% year-over-year to $4.1 billion, reflects the cautious approach many enterprises are taking towards discretionary spending. Despite this, SaaS continues to benefit from the integration of AI features, which are driving adoption across various industries.
Managed Services Show Steady Growth
While cloud services dominate, managed services also showed steady growth, albeit at a more modest rate. The managed services segment generated $10.6 billion in ACV during the second quarter, representing a 2.3% increase over the prior year. Although sequential growth flattened in Q2, the market remains resilient, avoiding the bearish results some analysts had anticipated. Notably, the transportation sector led the charge with an impressive 81% year-over-year increase in ACV. Other sectors showing double-digit growth include energy, healthcare, retail, and manufacturing. The banking, financial services, and insurance (BFSI) sector also demonstrated recovery, rising 8% from its 2024 lows.
A total of 701 managed services contracts were awarded in Q2, marking a 5% decline from the previous year but reflecting strategic shifts in spending. Larger deals, including eight mega-deals (contracts with ACV exceeding $100 million), contributed significantly to the segment’s performance, with their combined ACV increasing by 13% year-over-year.
Engineering and Research Drive Innovation
Engineering, research, and development (ER&D) services emerged as a standout performer, with ACV soaring 72% year-over-year to $1.1 billion. This growth highlights the ongoing innovation across key industries such as telecommunications, transportation, and manufacturing, all of which are leveraging advanced technologies to stay competitive.
First-Half Highlights
For the first half of 2025, the combined market ACV reached $58.3 billion, representing an 18% increase over the prior year. Managed services accounted for $21.2 billion, up 2.8%, while XaaS contributed $37.1 billion, reflecting a robust 29% year-over-year increase. A total of 1,427 managed services contracts were awarded during this period, with 14 mega-deals signed, matching the number from the prior year but showing a 15% increase in total ACV.
Within managed services, IT outsourcing (ITO) grew by 8% to $16.1 billion, driven by strong demand for application development and maintenance (ADM) services. Conversely, business process outsourcing (BPO) experienced a 25% decline to $3.2 billion, though it showed signs of recovery in the second quarter. The ER&D segment continued its upward trajectory, advancing 31% to $1.9 billion.
2025 Forecast: AI Continues to Fuel Growth
Looking ahead, ISG maintains its forecast of 1.3% revenue growth for managed services in 2025, reflecting a stabilizing tariff environment but acknowledging persistent challenges in discretionary spending. However, the firm has raised its growth forecast for cloud-based XaaS by 300 basis points to 21%, highlighting the enduring impact of AI-driven transformation on the market.
Steve Hall, president and chief AI officer of ISG, noted, “Our macro outlook has improved over the last 90 days, yet business uncertainty remains high. That said, AI has emerged as the dominant theme, overcoming many of these concerns to drive the overall market forward.”
About the ISG Index™
The ISG Index™ is recognized as the authoritative source for marketplace intelligence on the global technology and business services industry. For 91 consecutive quarters, it has detailed the latest industry data and trends for financial analysts, enterprise buyers, software and service providers, law firms, universities and the media.
The 2Q25 Global ISG Index results were presented during a webcast today. To view a replay of the webcast and download presentation slides, visit this webpage.
About ISG
ISG (Nasdaq: III) is a global AI-centered technology research and advisory firm. A trusted partner to more than 900 clients, including 75 of the world’s top 100 enterprises, ISG is a long-time leader in technology and business services that is now at the forefront of leveraging AI to help organizations achieve operational excellence and faster growth. The firm, founded in 2006, is known for its proprietary market data, in-depth knowledge of provider ecosystems, and the expertise of its 1,600 professionals worldwide working together to help clients maximize the value of their technology investments.
