Welcome to the third quarter 2024 ISG Global Index call. I'm Sumeet Jain with CLSA, and I'd like to thank the team at ISG for their valued work on the industry and for asking us to introduce this call today. ISG has been hosting these index calls on the IT and business services industry for more than twenty years. ISG influences $200 billion of technology spending each year, giving them deep insights into the industry, as well as key changes in enterprise demand. I will turn the call over to Stanton Jones, Distinguished Analyst at ISG. Thanks, Sumeet, and hi, everyone. With me today is Steve Hall, President of EMEA and ISG Chief AI Officer, Kathy Rudy, Chief Data and Analytics Officer, and Dave Menninger, Executive Director of ISG Software Research. This is our eighty-eighth consecutive index call, so whether you've been joining us for all of these years or are new to the call today, thank you for investing some of your time with us today as we give you ISG's point of view on the health and growth of the IT and business services industry. Steve, I'll turn it over to you for a level set on the market. Great. Well, thanks, Stanton, and it's great to start the eighty-eighth call. So there was a lot of good news to report this quarter. I think overall, we had much more positives than negatives in the IT and business services industry, and we're continuing to recover from an uncertain macroeconomic environment. The industry saw large deal activity return in the third quarter, as well as an increase in new outsourcing activity. This uptick was really based on a 5% increase in the deal sizes under 40 million ACV. So we saw nice growth, especially in that mid-market. IaaS bookings continued to gain strength as cloud migration started to pick back up, and as we all know, AI project work continued to accelerate as enterprises focused on use cases that drove efficiency and productivity. Areas of weakness, though, still exist. The banking and financial services sector, which makes up more than a quarter of the market activity, continues to be under pressure, especially in the Americas and EMEA, and Kathy will walk us through this a little later in the call. The SaaS recovery is also taking longer due to a shift towards consumption-based usage of software, which is putting some pressure on the SaaS providers. Most of the GenAI cases also aren't fully in production yet, so enterprises are in this situation where they're transitioning, integrating AI, and really being able to modernize and update their data strategies. From a macro perspective, recent rate cuts by both the Fed and the ECB have sparked optimism with the IT and business services industries for a more positive 2025. An easing rate environment will be particularly crucial for the BFSI sector. Stanton, you wanna go in through a deeper dive on the global demand? Sure. Thanks, Steve. So we'll start with the combined market first, and as a reminder, this is the combination of the managed services market and the as-a-service market, which we believe provides the best representation of the overall health of the IT and business services sector. So the global combined market had its best quarter ever at $26.7 billion of annual contract value, or ACV. This is only the second time ever that it surpassed $26 billion. It was also up 7% over last quarter, which is a great sign for the industry, because the last several quarters have seen low single-digit quarter-over-quarter growth. As you can see here, on a year-to-date basis, the global combined market is up 8.5%. Moving on to managed services, it also had its best quarter ever. ACV of $10.9 billion was up 5% year over year. The managed services market continues to be very resilient. 15 of the last 17 quarters have seen year-over-year growth. Mega awards, or awards with a hundred million or more of annual contract value, were strong in the third quarter after a pretty slow start in the first quarter. Deal durations are also up across the board, an indication that transformation is prevalent in many outsourcing awards today. New scope awards also recorded their best quarter ever, which could be an indicator of easing pressure on discretionary spending, and year to date, the managed services market is up 1.3%. The as-a-service segment continues to accelerate, primarily due to growth in infrastructure as a service. The $15.8 billion of ACV from Q3 was up 23% year over year, and that's the best year-over-year growth since early 2022, and year to date, the as-a-service segment is up 14%. Let's do a deeper dive on managed services, and we'll start with ITO, which includes infrastructure and applications outsourcing. On a year-to-date basis, ITO ACV of $22.7 billion is flat. Europe and Asia were both strong here, while the Americas, the largest ITO market, saw an 8% decline compared to a year ago. From a functional perspective, applications, development, and maintenance, or ADM, was solid in the third quarter. ACV was up 5% year over year. However, first half weakness here means that ADM is down 6% year to date. We've published a number of points here recently on the impact of generative AI on ADM, including a new edition of our State of GenAI report. We think the impact of GenAI will be quite significant, especially in areas like coding and testing, which will have a big impact, we believe, on the overall market. I encourage you to download the report. It's available on the ISG homepage. Another key trend we wanna highlight here is the continued surge in deals bundling applications with infrastructure. Enterprises are increasingly sourcing applications and infrastructure together in support of a product-aligned operating model, and providers are also doing more deal shaping than ever. As a result, year-to-date ACV here is up 20%. Infrastructure outsourcing that does not include applications was up 10% year to date. However, the increase here is really more reflective of a softer comparison to 2023. Okay, let's take now a look at business process outsourcing. So the BPO segment had its second-best result ever through three quarters. ACV of $8.4 billion was up 4.5%. BPO in EMEA and Asia Pacific are both up. However, the Americas, which accounts for over half of global BPO activity, was down 5% year to date. By functional area, industry-specific BPO, which includes outsourcing services specific to industries like banking and healthcare, was up 15% year to date. Though strong, the results are still below the record-setting pace of 2022. Engineering services was up 22% year to date. The $2 billion of ACV signed here was the best result ever, and most of that growth came from the EMEA region. We continue to see a surge of engineering deals in the market and believe the segment will continue to expand. As we've discussed recently on the Index Insider, AI and automation continue to positively impact productivity in business operations, which is driving down deal sizes, especially in areas like customer experience and F&A, and we continue to see strong activity in the GBS and GCC markets, as well as organizations seek out new operating models to drive efficiencies. Okay, let's take a look at demand on a regional level. Kathy, over to you. Thanks, Stan. Let's start with the Americas. The managed services market in the Americas continues to be under pressure. The $5.2 billion generated in the quarter was down 15% year on year. This is the second consecutive quarter with fewer than 350 contract awards, a slowdown from the prior six quarters where the market surpassed this number. On a year-to-date basis, the Americas is down 7%. As we wrote in The Insider a few weeks ago, the lack of large deals in the BFSI sector is a major contributor to the year-to-date weakness. That said, on the ground with clients in the Americas, we're seeing growing demand for transformational sourcing, with a focus on savings gained from transformation to meet client cost optimization goals. Let's look at EMEA, which is showing more signs of recovery than the Americas. EMEA had its best quarter ever in terms of ACV and number of contracts awarded. The $4.9 billion of ACV awarded in the quarter was up 35% year on year. Deal volumes are up significantly as well, especially in the DACH region. The DACH region ACV was heavily influenced by one client that was awarded a series of mega deals over an eight-year period. When we normalized the data for these deals, EMEA was up 2% to date. ISG advised on 3 of the mega deals this quarter. In addition, we saw a mega deal in the Netherlands in the utility segment, won by a consortium led by CGI and Accenture, and Accenture signed a large deal with AWS and SAP at their long-term client, Sainsbury's. Regionally, the UK posted its seventh consecutive $1 billion-plus quarter, and the DACH segment generated $2 billion in awards, making it the best quarter ever, trailing only the fourth quarter of 2020. Year to date in 2024, EMEA's managed services segment achieved $12.8 billion in ACV, up 8% compared to 2023. 12 mega deals were awarded year to date, up 33%. Although the ACV from their deals is still lagging by 4%. The BFSI sector in EMEA faced significant challenges, mirroring a shortfall in the Americas. Let's close out with Asia Pacific. After two consecutive quarters of $1 billion-plus in ACV, Asia's ACV normalized to $800 million during the quarter, which is up 17% year on year. Smaller deals and contract volume drove the growth. On a year-to-date basis, ACV of $3.2 billion was up 24%. Smaller markets like China and Japan saw triple-digit growth, and Southeast Asia is up 67% year to date. However, the largest markets, ANZ and India, struggled throughout the year. On the ground with clients in the ANZ region, we're seeing enterprises being cautious, with a strong focus in ERP, driven largely by increased demand for SAP S/4HANA upgrades. Okay, now let's take a look at industry demand. Let's start off with BFSI managed services, which, as you can see, are down 11% to date. As we've discussed, BFSI makes up 25% of the ACV in the sector, so its performance has a significant impact on the IT and business services industry. A lack of large deal activity in the Americas and in EMEA has been the major factor. On a trailing twelve-month basis, deals over $50 billion in ACV have fallen under $3 billion for two quarters in a row. On the ground with large banks, we're seeing continued focus on realization of transformation programs. In some cases, we're seeing them scale back on new IT service awards and instead focus on extending and renewing existing agreements. We believe there's a good chance that BFSI spending will rebound in 2025 based on the Fed's most recent rate reduction. We've conducted some interesting research on the topic that we'll publish in the Index Insider in a few weeks. Keep an eye out for it. Other industries are performing quite well. Take the consumer sector, which you can see here has ACV up 13% year to date. Retail's been the main driver, with ACV up 30% year to date. It's important to remember that inflation is having a big impact on consumers, and consumer discretionary budgets continue to be under significant pressure, even as inflation comes down. On the ground with our clients, we're seeing, just like the other areas, a strong focus on cost optimization as well, specifically around SAP and mainframe modernization. Additionally, BPO activity has picked up in this sector. And finally, the manufacturing sector has performed well in twenty twenty-four. ACV is up 11% year to date, with much of that growth coming from the Americas, where ACV is up 28% year to date. On the ground with clients, we're seeing a continued focus on cost optimization as manufacturing firms manage through continued labor and wage pressure. We're also continuing to see significant amount of interest in sourcing from mid-market manufacturing firms. With that, we'll be back to Stan with an update on cloud demand. Thanks, Kathy. So let's start with infrastructure as a service. So it appears that the cloud recovery is in full swing. In the third quarter, infrastructure as a service generated $11.9 billion of ACV, which was up 30% year over year. That's the best result for this segment of the market since the first quarter of 2022. The big three hyperscalers, AWS, Google, and Microsoft, make up 75% of the ACV in our infrastructure as a service segment, and they fared even better this quarter. Their ACV was up nearly 50% year over year. So we think this growth has legs, because nearly 40% of enterprises plan on increasing IaaS consumption over the next 12 months. We think most of this is due to increasing cloud migrations as well as demand for AI. And the AI component is really important here because it's going to make the management of cloud infrastructure even more complex, especially in areas like model training. So this is another good sign for managed services providers. However, a word of caution here, nearly 50% of enterprises plan on consolidating their cloud-managed services providers over the next twelve months. So while enterprises plan on using more cloud and more AI in the cloud, they also plan on using fewer providers to manage it. Okay, let's move on to software as a service. So the SaaS market is not recovering as quickly as infrastructure as a service. SaaS ACV was up 5% year over year, but was flat quarter over quarter. So we think the shift towards consumption-based pricing in SaaS in a cost-constrained environment is part of the reason for the slower recovery here. That said, the top ten SaaS firms have performed better than the overall SaaS market. As you can see here, ACV for the top ten is up 8% year over year, and this is a big turnaround from a year ago, where the top ten were down 4% year over year. So while new SaaS players are entering the market, large incumbents do hold a significant advantage here. They benefit from having pre-approved contracts inside of procurement and legal departments, giving them an edge as enterprises look to consolidate budgets and reduce the number of software providers they use. We do think that SaaS demand will continue to rebound, and like cloud, AI is the reason. As you'll hear from Dave here in just a minute, we're projecting spending on GenAI to increase significantly in 2025. And of course, SaaS providers want a big chunk of that new spending, so they're rapidly adding generative AI features into their platforms. However, as we discussed last quarter, turning on these AI features is not going to be like turning on a light switch. In many cases, enterprises are gonna need to modernize their business applications in order to get access to these new AI capabilities, which could mean a new upgrade cycle for the IT and business services industry in 2025. Okay, Dave, over to you for more on AI. Thanks, Stan. It should come as no surprise that enterprises intend to increase their AI investments. Our buyer behavior research shows that spending on generative AI initiatives is anticipated to increase by 50% in 2025. We estimate that will translate into nearly 7% of IT spending by the end of 2025. What's justifying this increased spend? Enterprises expect to capture a significant share of the anticipated ROI in 2025, so a lot are banking on the successful deployment of these use cases, which tend to focus primarily on increasing efficiency and profitability in areas like customer experience, testing, and workflow. That said, very few GenAI initiatives are in production today, only 15%. Nearly 80% are still in testing or pilot mode, and of that, around 10% are still in the evaluation phase. One of the challenges of getting these use cases into production is that most enterprises are not data ready, meaning having data that is clean, well-organized, and compliant with regulatory standards. AI is nothing without data, and data is nothing if you can't put it to use. The lack of data readiness can impede the ability to get these use cases up and running and for them to show value. As enterprises recognize this gap in their data readiness, it's leading to growth of data platforms and services to help with implementation and management of them. We see several converging trends creating the market for data platforms. The collection and management of unstructured data, which has been exacerbated by the advent of GenAI, led to growing use of object stores and gave rise to data lakes. But relational technology is still the foundation of much of the data processing market. Consequently, demand for data warehouses also grew. Inevitably, these two worlds collided, and some coined the intersection of these two technologies as data lake houses. A broader, vendor-neutral term, which we prefer, is data platforms. In addition, massively parallel processing architectures needed to handle the growing data volumes are driving hardware consumption via cloud services, either IaaS or SaaS. So all the major data platform vendors created cloud-based offerings. They also recognized that AI is driving large amounts of consumption, so nearly all have added AI capabilities to their platforms. The result is a set of cloud-native data and AI platforms. This ramp-up in data platforms has, of course, led to more and new types of services to implement and manage them. For example, in our forthcoming ISG Provider Lens on analytics and AI services, we've identified three primary types of data services: data science and AI services, including identifying business use cases and developing, implementing, and deploying enterprise-wide AI projects at scale, data modernization services, including assessment, modernization roadmaps, data migration services, and complying with regulations such as GDPR, and advanced BI and reporting modernization services, including integrating and implementing sophisticated BI tools to create interactive dashboards for strategic decision-making. In our view, this collection of services will likely emerge into a new tower for the services industry as each of these areas mature and as demand for AI continues to grow. Think of these areas as an emerging data tower like we think about ADM, infrastructure, or BPO today. We're seeing this pattern on the ground with several clients today. In fact, 50% of enterprises we surveyed recently are using a service provider to support one or more of these areas, with much of these services focused on data management and analysis. The challenge for providers here is that the most common reason enterprises cite for not using a provider is that they want to build these capabilities in-house. That may be aspirational, however. As I mentioned a few quarters ago, enterprises indicate they don't have the AI talent they need, and they cite these skills as the most difficult to hire and retain. In our most recent study, more than half, 56%, reported they don't have the expertise and skills they need to adopt AI. Let's stay on the AI topic and talk about how we see it impacting provider growth. Steve, over to you. Great. Thanks, Dave, and very insightful. The service provider revenue from AI projects continues to increase. In Q3, we were reporting $15.2 billion of revenue on a trailing twelve-month basis, which is up 42%. AI revenue is based on the service providers that report bookings or revenue on earnings calls. We now see 24 service providers reporting revenue, which provides a pretty strong base for our analysis. We've also seen two distinct categories of growth. The first, we'll call it the Super Seven. These are service providers with the most AI revenue to date, and then the top five under five. These are the top service providers under $5 billion of revenue. AI-related projects in these categories now account for 5% of the total revenue for SIs. While this may seem small, the growth is very promising, and we think it'll still take two to three years to see a substantial revenue from pure-play AI projects. The growth of AI is also covering the revenue gap in traditional services, though. In early 2023, the revenue gap due to GenAI was minimal, but as we progress into 2024, the top 10 firms would have seen negative 1.4% revenue growth without AI. And in the past two quarters, that revenue growth has exceeded 600 basis points each quarter, indicating that AI is already making a significant contribution to the quarterly year-over-year growth with these providers, and that's even in the early stages of adoption. So as the AI market matures, the metrics for analysis are improving. It's allowing for clear discussions and early leaders to really understand how AI is driving their revenue contributions, and probably more importantly, the industry-specific use cases that will carry us to the future. In 2025, we expect the focus to shift towards scaling smaller AI use cases into larger, more effective programs in many of the areas of that Dave discussed earlier. So, Stanton, let's take a look at that leaderboard. Thanks, Steve. As a reminder, providers are listed in alphabetical order, and positioning on this leaderboard is based on annual contract value, or ACV, signed over the past twelve months. The companies new to the leaderboard are denoted with an asterisk, and also a reminder that the regional leaderboards for the Americas, EMEA, and Asia Pacific are available on the ISG website under Research, ISG Index. Okay, let's start out with the Big Fifteen group. In the UK, Sainsbury's is partnering with Accenture, AWS, and SAP, as Kathy mentioned, to modernize its legacy systems, and Accenture is also expanding its partnership with Unilever, focused on boosting productivity using generative AI. Hitachi Construction Machinery chose Oracle Cloud Infrastructure, or OCI, as the platform for its business systems, and Panasonic Information Systems has also adopted OCI as the cloud database infrastructure for their in-house systems as part of its modernization efforts. In the Building Fifteen group, Genpact signed a deal with Aldi retail operations in the U.S. and Australia, focused on technology platforms like S/4HANA and ServiceNow, and Computacenter was awarded a six-year, GBP 1.3 billion ITO award, leveraging most of their service lines. In the Breakthrough Fifteen group, L&T Technology Services signed a long-term framework agreement with Shell. The agreement provides engineering services, data governance, and procurement and project management services for Shell's global assets. And finally, in the Booming Fifteen, Zensar established a new global capability center, or GCC, in Hyderabad with Old Mutual Technology. Zensar has been working with Old Mutual since 2016, and this hub will be part of its multi-year IT transformation strategy. Okay, Steve, back over to you to close us out with a forecast. Great. Thank you, Stanton. So to summarize, the managed services sector continues to grow with its best quarter ever and 8 consecutive quarters over 10 billion of ACV. EMEA particularly performed well this quarter, driven by the UK, Germany, and engineering services. If there's concern, though, it's still with the BFSI sector. It continues to struggle globally, with the ACV down over 10% year to date, as Kathy discussed. In the IS segment, hyperscalers have seen strong growth fueled by AI and cloud migration, while the SaaS market is consolidating as enterprises focus on fewer vendors and shift to consumption-based models. At a global level, recent interest rates cuts by the Fed and ECB are expected to boost IT spending, especially in the BFSI, though our models are still dependent on future rate cuts for us to have more confidence of that BFSI spending coming back. The 2024 revenue forecast remains at 14% for the as-a-service market and 2% for managed services, with stronger growth expected in 2025. That leads us to the end. You can enter your questions in the chat, and Sumeet, I'll turn the call back over to you to kick off the Q&A. Yeah, hi. Thanks, team, for the insightful presentation. So maybe first question, you know, around the BFSI, I think that's the most discussed topic in the recent earnings calls of all the Indian IT companies, and if you look at, you know, TCS and HCL results in the last one week, both have shown a recovery in that vertical with an improvement in demand commentary by almost all the other Indian IT companies as well, but that clearly doesn't match with the color what ISG has laid out, where BFSI, ACV activity is still quite muted, and you are not seeing a recovery in this quarter either, so just want to understand the disconnect between these two. Yeah, absolutely. I'll take that one, Stanton. Thank you, Sumeet. Great seeing you as well. I think the challenge in BFSI is still just weakness across the globe with it. So as other service providers take a look at what their impact is and what they're doing, as an overall industry, it's still, as Kathy said, down 11%. Still some big challenges that we go there. I think we are seeing signs of recovery, but as we said, I think it's really going to drive and depend on interest rates coming down a bit more. The correlation is just really high there. I think when we break down retail, capital markets, insurance, et cetera, you see little pockets. I think insurance is probably a little healthier right now than retail banking, but I do think we've got a bit of time. Hopefully, you know, rates come down a little bit in November. We will probably start seeing a bit of growth Q1, Q2 again in the BFSI sector. I'll say, though, from a broader market standpoint, it's probably one to two quarters before it will actually go through all the reporting, 'cause you'll see spend turn back on, but then you'll see strategies, initiated thoughts coming through, and it'll take a couple of quarters for that to wind through. Kathy, anything you wanna add on that? Sorry, coming off mute. No, I think you covered it, Steve. It'll be interesting to see where the banking sector recovers and when it recovers. And I know Stanton's been really tracking that closely. Yeah, Sumeet, just from a technical perspective, we talked about that a little bit in the pre-call. Just from a technical perspective, really a lot of the pressure in BFSI has been specifically in banking, and then on large deals. So we published something a couple of weeks ago. If you look at deals with $50 million of ACV or greater on a trailing twelve-month basis, that's been under $3 billion for the past two consecutive quarters in a row. So that's really where a lot of it is. Just from a market technicals perspective, that's where a lot of that pressure is: large deal activity within banks, and then on the ground, as Kathy talked about, a lot of focus on realizing value inside of existing transformation programs. So that's where a lot of that pressure is coming from. Then in a couple of weeks, we'll publish something a little bit more detailed on what we think 2025 could potentially look like, depending on further rate cuts. Got it. No, that's helpful. And maybe, you know, can I just extrapolate that? I mean, is it that some IT companies, maybe of Indian heritage, are actually gaining market share in BFSI vertical in the last few quarters, whereas the global IT vendors like Capgemini or Accenture, which has actually - which have actually not showed any improvement, are actually losing some market share? Could that be the trend out here on the ground? Steve, do you wanna take that? Yeah. I would say everybody's exposure to this sector, Sumeet, it's a little bit different as we go through, both their percent of the market that they have and what their overall exposure is, is to it, right? I think if I look at HCL and TCS, who you've mentioned, they both have really strong BFSI businesses. They did well last quarter, you know, or in those sectors. Some of their clients have extended. They've certainly won some deals, which has been pretty good. Overall, the market is down, so it would be easy to say they're probably winning market share, you know, from others, at least in this quarter. But the suppressed demand is really the more concerning piece. Once we see that demand come back, I suspect those high tides are gonna rise all the, you know, all the boats, if you will, in that sector as we go forward. You know, you've heard us, you know, talk about it on previous calls, but it's, you know, it's typically 30% of the market. So if you have 30% of the market being down 11%, it's really hard for the rest of the market to pick that up, and that's why you're seeing, you know, growth. Good numbers, don't get us wrong, but not the growth that we could expect with all the other macro environment issues that are going on. Right. Well, that clearly makes sense. So maybe moving over to the order booking trend, I mean, if we look at, you know, Accenture's Managed Services order book for the last two, three quarters, that has shown a significant improvement, which is actually not the case with the large Indian IT vendors like TCS, Infosys, HCL, and Wipro. So it's been almost a year since they last reported mega deals of more than $1 billion-$1.5 billion in TCV. And, you know, even if I look at your managed services deal ACV in U.S., it is down 15% this quarter and 5% year to date. So clearly, I guess in U.S., there is a bit more pressure compared to Europe or India. So just want to understand, is it that, you know, the Indian IT vendors not announcing these large mega deals has to do something going into the U.S. elections, where the large enterprises in the U.S. do not want to be seeming like doing IT outsourcing and moving jobs to offshore locations? That's a brilliant question. Sure ... because this goes on to the political motivations for announcing or not announcing deals. I would say in general, we're very confident with the data that we have, and, you know, we've got a very broad view of the market from multiple data sources and deals, both that we advise, are announced, unannounced, etcetera. So I don't think that's suppressing the market. Though I would suspect there's probably corporations that haven't signed mega deals until the election goes forward as well, so that's some of the normal delay. You know, I think, again, if you look at the overall market, and I did some analysis on the mega deals, we always look at mega deals in this market, you know, really more for bragging rights, quite frankly, than anything. When you look at the impact on mega deals over the overall market, they've really gone down tremendously in their impact. You know, the early days, let's take the period sort of 2004 to 2014, mega deals accounted for up to 25% of the total market award. Today, they're sort of almost under 10%. You know, call it 9%-12% is really where they're at. So the impact of mega deals aren't as high. But, man, it's fun to be on the cover saying you know, you signed a new $1 billion deal with whomever, right? And so there, there's some bragging rights for all of us as we go through that. Same way, there's bragging rights for ISG on the number of mega deals that, you know, that we advised on. I think we did get, you know, a little over 30% or 40% of the mega deals that were advised in this quarter. But they don't really move the market in the same way. If I looked at it, 2004 to 2014, there were nine years where the mega deals were over 30 mega deals a year, and most of them were the mid-thirties, some of them, a couple of years, 40 deals. But there was a lot of first-gen mega deals during that period. If you look 2014 to 2024, there's really only three years where you had over 30 mega deals, but the overall market has grown tremendously in that period. So it's interesting. I get the excitement about mega deals, but it's not really the driver of the markets. I think there's so many other things as we see the spend come from industry-specific BPO, from engineering, from AI. There's a lot of other factors that are actually more positive influences on the market than mega deals right now. Stan, I know you've looked at this as well, but any other insights? Yeah, I was just gonna say, Sumeet, just again, a reminder, for a mega deal, the way ISG defines $100 million of ACV or greater. Just as a comparison, I'm just looking at our data right now. We're actually pretty close to last year, and last year was the best year in a decade for mega awards. In terms of accounts, we've got 23 year to date, or 26 year to date, the same period last year. So on account basis, the difference is ACV. Year to date, we're at about $3.2 billion, last year is $4.7 billion. So as Steve said, like the overall impact is coming down. They still meet that mega deal threshold criteria, but the overall impact on the sector is decreasing, but volume is definitely up. Yeah ... compared to historically. Right. No, makes sense. So maybe moving over to the IS activity, I think that IS deal activity improving for the last four quarters is clearly reflected in the improvement in hyperscalers' revenue growth as well. But we are not seeing any broad pickup in the IT services industry per se. I just want to understand, you know, where is the disconnect between the two, or is it that IT service companies are also seeing a material growth on the IS deployment? Yeah, I can take a first stab at that, and I'll hand it off to Dave to talk more about what's happening in infrastructure as a service. So yeah, you're right, Sumeet, as I'm looking at our data, infrastructure as a service ACV up 30% year over year, and 50% for the big three. A couple of things. So we think that there's a couple of drivers there. That's an increase in starting to pick up an increase on cloud migrations, which you know may have a big impact on service providers' top-line revenue, and also just underlying demand for AI-related services. The signals are quite strong. So as we said in the presentation, about 40% of enterprises plan on increasing their infrastructure as a service consumption over the next twelve months. It's a big change from where we were a year or two ago, when most of the focus was on consolidation. The risk there is that about half of enterprises feel like they're planning on consolidating the number of managed services providers that they use. There's always, and we probably talk about this on every call, there's always this sort of push to consolidate, and whether that actually comes to fruition or not, you know, we have to wait and see, so the signals are: demand is up, I think primarily focused on cloud migration and AI, and a plan to increase consumption, but that's gonna take time to hit provider pipelines, especially the AI-related work, as we just talked about. Most of that work is pretty small and is still in prototyping phase, only about maybe 10 to 15% fully in production today, so we view infrastructure as a service as a very strong indicator, and it's a great sign for the sector, but it just takes time. It's gonna take time for that to hit provider pipelines. Dave, I don't know if there's anything else you wanna add in terms of- I was just gonna add- Infrastructure as a service. Yeah, it's if you think about it, there are two things that are challenges in the AI-related workloads. Anything related to GPUs, right? Getting your hands on GPUs is a challenge. You go to your IaaS provider, and it becomes a lot easier. The other thing is volume, right? The volume of data that's being processed requires a large number of nodes, and you know, trying to do that on your own, in your own data center, on premises, is a much bigger lift than just using an IaaS provider, right? So I think both of those things are going to drive demand for IaaS workloads. No, got it. Got it. That's helpful. Maybe moving over to SAP, you know, S/4HANA opportunity, given that SAP will stop supporting their on-prem deployments by 2026, 2027. Just want to understand how big is that opportunity for IT services industry in order to migrate on-prem workloads of SAP to S/4HANA on cloud? And will it happen over a two to three year period, or will it be more largely back-ended? And which industry verticals or geographies will actually see that demand? Sure. Dave, why don't you kinda give us your perspective on what you see happening? I know you're close, covering SAP closely. Why don't you cover kinda maybe what's happening on the AI transformation side, and then we can attack the rest of it after that? SAP, like all the large providers, are infusing their applications with AI capabilities. Theirs happens to be GenAI capabilities. Theirs happens to be called Joule. We see it, you know, permeating the whole stack. You know, I think that the challenge, the risk for SAP, is that any time you have a major disruptive migration, you're opening up the door for others to come in and to compete. So, I think it'll be interesting to see how it all plays out. I don't have a crystal ball. I wish I did, but I think it is a risk. It's a big risk for SAP. Steve, anything you wanna add there in terms of what you see on the ground with clients in Europe around SAP? Yeah, I mean, I would certainly say the clients are preparing for S/4HANA and RISE, the transformation and the transition to do it. And almost every client that you talk to is already in the process of thinking through what that strategy will be. I think it will be an uplift for the overall SI community as we go forward with it. I think if I looked at sectors, I would certainly look at life sciences and manufacturing, energy, oil and gas as the key sectors that will be impacted. Given the complexity in those sectors, they'll move sooner rather than later. So you're not going to see those really big sectors that, you know, run hundreds of billions of their business on SAP, wait until the last minute to decide. A lot of those decisions have already been made in moving forward. The interesting aspect of that piece, though, is, as Dave mentioned, part of the Joule strategy is to really go back to a core and go back to sort of a base SAP implementation that's not customized. Well, as we know, this whole IT industry has grown significantly because of the level of customization and RISE components and everything else that have been built into it. I think that's actually going to lead to more work for the SIs, whether that's customization outside of SAP now, to have a clean core that works with Joule, or to integrate with multiple LLMs. There's going to be this whole technology approach on: how do we bring differentiators to that environment that are so critical for organizations? I think, like Dave, I wish I had a crystal ball, but I do think that's a piece that's absolutely gonna grow as we go over the next several years. Steve, just one more thing that, I've seen lately, is more clients are considering what the needs are of their teams. ... so more focus on OCM and on training, and how this transition will impact on the ground, and how they can get the value out of it as quickly as possible by training their teams and considering large change programs. Yeah, that's a great point, Kathy. It's much more than just the technology. There's a massive change aspect to this. Right. No, that's very helpful and insightful, Steve. And maybe last question on GenAI. I think on the BPO side, clearly, if I look at the number of projects you mentioned in the slides, the AI-related projects are significantly higher for the pure-play BPO companies. And we have seen some of the BPO companies of late have given a positive commentary about their pricing and profitability after incorporating these GenAI technology and delivering on these GenAI projects. So clearly, that is proving to be a revenue additive, at least for the BPO companies. And I guess somewhere on the call you mentioned that GenAI will be revenue accretive for SIs as well. So just if you can give us some insight as to how do you think that equation panning out over the next two to three years? Yeah, absolutely. You know, the data is pretty impressive here, and one of the reasons why this call is so important is it really takes sort of a fact-based approach that looks at what we see in the market and sort of what we hear, the sentiment analysis and everything else. And I think the AI piece is a great example of that. So the AI piece, what we hear from a sentiment oftentimes is they're not scaling yet. There's a lot of things in pilot. We're not really expanding as we go through it. But when you look at the data, and you look at what's being reported, and you do the analysis, you see what we've reported today, $15.1 billion of AI projects, GenAI projects, quite frankly, over the trailing twelve months. 40% plus quarter-over-quarter growth with it, and a really big pipeline of use cases and opportunities that are being developed. Now, that's just from the service providers that are reporting publicly and bringing their data in. So when we first started this, it was a small number. I think we now have 24 service providers reporting. I think you'll see more and start getting much more insights into what's really happening from a fact-based piece on that growth. The use cases are incredible, whether it's on the BPO side, whether it's on the IT side, both productivity, top-line growth, we're seeing lots of use cases now come to market. At the same time, though, we do have concerns in different environments. You know, I spend the majority of my life in Europe, in the UK. You've got the EU AI Act. You've got a lot of regulatory questions and legislative questions that are probably suppressing adoption right now, just until they get sorted. But that doesn't mean there's not a lot of interest in what can happen, and pushing the right pieces. I think in the U.S., where we're seeing a lot of the use cases right now, there's a lot of exploration, and there's certainly a lot of things that are going to market. So I would... You know, I'm pretty bullish on 2025, and I think, like most analysts in this space, we see really strong growth kicking in by 2026, which, you know, four quarters, and we're already seeing this level of growth, so it's, it's pretty impressive. Sumeet, I'll add to that on the BPO pure play. A couple of things on the BPO pure play. I think some of them have done a really good job of taking their data and analytics practices, for example, right? And using that as a springboard to take advantage of these AI-related opportunities because there's a lot of work happening here, where, for example, you know, BPO firms tend to deal with a lot of data, and then using that data to understand a process, really mine that process, understand where those efficiencies or where those lack of efficiencies are. And I think this kind of folds into the discussion that Dave talked about, of these emerging set of services around data integration, data modernization, right? Circling around a data platform. I think several BPO firms have a pretty unique opportunity here to really kind of tap into what's happening in the market right now, where generative AI is obviously a world-changing technology, but it's also driving more interest in technology we've already had around predictive AI. I think the BPO firms are kind of uniquely positioned to take advantage of that. But then it's also important to remember on the delivery side, BPO firms, like other IT services firms, you know, they've been using workflow, labor arbitrage, RPA, predictive AI, these tools for years now to drive productivity into their offerings. So in terms of the delivery, I think it's important to think of generative AI as yet another tool that they're putting into their toolkit to drive productivity in their offerings. So in terms of their delivery, I don't view it as a competitive differentiator. It's now a required tool to deliver on the productivity that they need to deliver on, but then they're also transferring that to the top-line growth and the opportunity it's creating for them to help their clients modernize and integrate their data to go scale these GenAI use cases. We got it. That's very helpful. I think that's all the questions I have. Thanks a lot, team, for giving us this opportunity, and back to you, Scott. Okay. Thanks, Sumeet. Okay, we've got about ten minutes left and a bunch of questions in the queue, so let's start getting through some of these. Kathy, I'm gonna come to you first. We've got a question around any early budget indicators for next year. Any... Basically, any early indications on 2025 IT budgets? ... Gee, okay. Let's think about that a little bit. I think we see people being cautiously optimistic that 2025 will see a loosening, obviously, in some spending. What we have seen in twenty twenty-four is that there's not a lot of new spend in some areas, but it's renegotiation or, you know, extending the spend that they currently have. I think we need to consider AI, and as I think Dave and Stanton have told us, most of these use cases are now becoming out of the pilot stage and into the actual implementation stage. So I think we'll see increased spend in those areas. So I think there could be an uptick in budget, but potentially just using the budgetary figures that have been set to allocate it in a different way. So it remains to be seen. Okay, and just as a FYI, we're actually kicking off our 2025 budget buyer behavior study as we speak, so we'll have a lot of data on that here shortly. Okay, next question is around HCM software. Can you discuss the demand environment for HCM software? So I can talk about the demand environment at all. Dave, I'll come to you to talk about kind of key trends that we see happening. So in terms of demand on the HCM category, within our overall SaaS category, it's up 3% year to date, so that's below the overall SaaS growth, which was up 5%. It is up 6% sequentially, so quarter over quarter. Dave, any commentary on what you see happening on the HR software space? Sure. There's a couple of key trends. Not surprisingly, AI is one of them. Sure. And the other is related to skills and really how AI is influencing skills development in organizations. But let's go to the AI side first. As you might imagine, the easiest entry point for AI into the HCM software world is around writing tasks, right? So creating job descriptions, creating material to help people, you know, content for learning purposes, those kinds of things. And then on the skills development side, a couple of things. Well, you know, GenAI obviously can help complete tasks, so it can enable people to do those tasks, but it can also help them learn how to do the tasks. And then there's traditional AI and ML here as well, in terms of identifying skills gaps in an organization, figuring out how to fill those skills gaps, right? What are the best places to identify the resources to fill those gaps and even to the point of things like workforce scheduling, so you have certain skilled employees and they need to be available for certain types of activities, so there's a lot of traditional AI and ML going on there as well, so AI and skills, I would say, are the two big trends in HCM software. Okay. Thanks, Dave. I can take the next one. Can you share some insights around the 24% decline in healthcare life science as managed services? Yes. That's more of a comparison issue, we think. Five of the last seven quarters have been over $1 billion in ACV. In that sector, it's actually been quite strong, and a lot of that demand actually coming from healthcare providers. And one of the things that we see on the ground, you know, obviously primarily in the U.S., is a lot of demand around regional healthcare systems as well. So there's a lot of focus on modernization of EMS and revenue lifecycle management. So we have definitely seen a strong uptick in demand for transformational sourcing in order to bring savings forward for both large and regional healthcare systems. So I would say that down, that 24% down is more of a comparison challenge than a decline in demand. Okay, next question. So we had a question around services cannibalization. Are we seeing services cannibalization due to GenAI? Steve, I'll come to you there. Yeah. I would say not right now. It's interesting because we probably spend 95% of every discussion talking about AI and the impact of GenAI, and it's only 5% of the market right now, though it's growing at 40%, and I think we're all very excited by it, right? The other 95% of the market is actually still growing in capabilities. I think what we're seeing on the GenAI side is a tremendous amount of promise and capabilities around productivity improvement. Stan, as you know, we wrote a series of white papers on software. We've got a series of white papers on IT ops. We just came out with our state of GenAI research piece, all of which show tremendous productivity, and that's starting to hit the market. But I don't think it's cannibalizing work yet for SIs. As a matter of fact, when I look at what we just talked about with Sumeet for S/4HANA and those capabilities, that's a big uptick in the market. When I look at the capabilities around data towers and new services associated with enabling GenAI, that's a new capability. So I think I see more offsets that are gonna continue to grow the market than I do cannibalization driven by the productivity. So overall, I think it's easy to look at that, and by 2030, we'll probably have a discussion about all the new growth areas and not even concern ourselves to what we were doing in 2024 or 2025, in the heyday of managed services, if you will. ... Okay, thanks, Dave. Kathy, I'll come to you next. There's a question around pricing, so I think the question is, "Any changes or differences in pricing versus large versus mid-size deals? So for pricing, what we've seen a lot in the market increasingly is service providers are putting together pricing centers of excellence. And these centers of excellence really look at what the current market is for all types of deals, mid-size, large deals, and are working to really drive competitiveness on one hand, but value on the other. I was talking to some service providers where they said they provide what the details or scope is to the pricing center of excellence, and they put together the pricing and turn it back over to the team on the ground. And then they work together to figure out the best value for the pricing. So I don't think there's any difference between mid-size and large deals. I think they're being competitive in how they're putting pricing together, and these pricing centers of excellence, I really think are helping providers hone in on what the market will bear at any given time and giving them an advantage. Okay. All right, we've got time for one more question. So Dave, we, of course, have to close it out with an AI, another AI question. So the question is around, "You've talked a lot about generative AI." Yes, we have. "What's happening with traditional AI and ML? So I think we've shared previously that about 50% of the spend is still on traditional AI and ML. So yes, generative AI is you know, getting all the attention. It's certainly growing, you know, from a zero base, it's growing very rapidly. But 50% of the spend is still on you know, good old-fashioned AI and ML, we like to say. I mentioned a couple examples in the HCM software category, right? But there are problems that GenAI doesn't solve. So if you need to be doing any type of you know, customer segmentation, if you need to be doing predictive maintenance, if you're you know, doing drug discovery, none of those things. They may be aided by GenAI, but they're not solved by GenAI. So, we do still see that as a significant part of the market. And, you know, the software vendors all have those capabilities. Even, you know, NVIDIA has put out a whole software platform, you know, based around traditional AI capabilities, as well as GenAI. All the data platform vendors are doing the same things. So, traditional AI is not going away. It's still there, and it still has an important role to play. Probably delivering more value in specific use cases. Maybe not, you know, in aggregate, GenAI may be lots of little contributions, but AI and traditional AI and ML are big, valuable activities. Okay. Thanks, Dave. Okay, we're gonna go ahead and close out the call. Sumeet, a big thanks to you and to your team for hosting the call today. So as a reminder, you can access a copy of the slides and the regional leaderboards on the ISG website. Thank you very much for your time today, and we'll see you on the fourth quarter 2024 call on January 16th.