3Q24 IT Services Vendor Benchmark

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Overall revenue growth year-to-year for the vendors in TBR’s IT Services Vendor Benchmark will accelerate during 2025 aided by managed services activities, innovative portfolios and upskilling

As we review financial results from 3Q24 and 4Q24, we will likely see that macroeconomic uncertainty caused an overall IT services revenue deceleration in 2024. However, IT services spending will continue as clients seek run-the-business managed services opportunities to operate in challenging market conditions.
 
A new wave of outsourcing demand is picking up speed as buyers are inclined to switch from innovation to business resiliency in the event of economic turbulence. Multiple IT services providers are racing to capture as much business in the managed services space as they can before GenAI [generative AI] picks up and threatens the core value proposition centered on human-backed service delivery.
 
While vendors are experiencing a slowdown in consulting activities due to limited discretionary spending, the U.S. Federal Reserve’s three federal funds rate reductions during 4Q24 and general market expectations of two cuts in 2025, will likely improve buyers’ confidence and boost discretionary spending. TBR expects IT services peers with established consulting capabilities will race to capture the potential rise in spending, compelling vendors to constantly evaluate their value propositions to ensure trust and service quality. This is especially important as the prolonged slowdown in discretionary spending has given buyers an opportunity to assess digital stacks and vendors’ performance.
 
TBR expects IT services revenue growth for benchmarked vendors to accelerate during 2025 compared to rates in 2024. Broad-based investments in innovative portfolio offerings and acquisitions along with upskilling existing employees and recruiting higher-caliber talent in onshore and nearshore locations will contribute to revenue growth acceleration.
 

To position for growth in 2025, vendors continue to pursue opportunities around AI and GenAI, expand outsourcing capabilities through engineering services, and build local relationships in India

3Q24 Trends

Vendors invest in AI and GenAI solutions: While the overall short-term revenue growth slowdown in TBR’s IT Services Vendor Benchmark suggests some vendors might be in financial distress, the pipelines of AI- and GenAI-related opportunities suggest vendors are capturing emerging opportunities. Procurement, sales and marketing, customer service and software development are the go-to use cases around GenAI adoption. Use cases with demands on data, dependencies on external data and/or long horizons to ROI remain the subjects of innovation sessions, proofs of concept and road maps.
 
Vendors develop engineering services portfolios: Multiple IT services providers are enhancing their outsourcing capabilities by investing in engineering services and silicon design services. Such initiatives position vendors for a new wave of outsourcing services funded by operational technology buyers, which are a new type of buyers for some of the vendors. GenAI provides a new conduit for managed services opportunities, as the integration of new applications and infrastructure gives vendors a natural starting point to build their managed services pipelines. Enhancing outsourcing capabilities by investing in engineering services and silicon design services will help vendors control the GenAI-related disruption of human-driven service delivery models and mitigate potential revenue cannibalization.
 
Vendors develop innovation capabilities in India: India remains a region of investment — from both a revenue generation and a global service delivery standpoint — as vendors strive to build relationships with local clients to diversify geographic reach. According to TBR’s Fall 2024 Global Delivery Benchmark, “investing in India remains a priority for most vendors, as the low-cost labor in the country continues to offer a way for vendors to improve profitability. The difference this time is that vendors also aspire to drive sales from within the country. Lack of native industry-skilled consultants, combined with a smaller number of industries that are ripe for digital transformation compared to Western economies, might create a profitability headwind if vendors lack the C-Suite permission and brand recognition.”
 

 

Vendors use acquisitions to deepen functional and industry expertise and grow revenues

IT services providers are gradually accelerating acquisition activities compared to 2023 as they strive to diversify portfolios with niche expertise and expand client reach. In 3Q24 IBM used acquisitions to expand client reach across sectors and enhance capabilities.
 
During the first nine months of 2024 IBM completed three acquisitions in IBM Consulting and five acquisitions in IBM Software, supporting IBM’s strategy to expand in hybrid cloud and AI. IBM paid a collective cost of $2.8 billion. In comparison, IBM completed seven acquisitions during the first nine months of 2023 for an aggregate cost of $5 billion, approximately $4.6 billion of which was for the Apptio acquisition.
 
Accenture’s acquisition strategy remains unrivaled, with the company spending $6.6 billion on 46 transactions in FY24 (ended in August 2024), up from $2.5 billion in FY23 and $3.4 billion in FY22. The company plans to spend another $3 billion in FY25. The broad-based targets Accenture pursues highlight the company’s efforts to maintain a diversified portfolio and skill sets while ensuring it captures inorganic revenue boosts and positions itself for long-term organic revenue growth.

Industry view

While financial services is a leading revenue contributor for some of the 17 benchmarked vendors with available data, accounting for 25% of total revenue in 3Q24, revenue growth in the vertical has declined for the past three consecutive quarters. Macroeconomic headwinds in financial services subsectors, such as mortgages, asset management, investment banking, cards and payments, have been negatively affecting vendors’ performance in the sector.
 
These headwinds have been driving revenue growth deceleration for some of the vendors in the U.K. & Ireland and in North America, typically the two largest revenue-contributing geographies for IT services activities in financial services for the covered vendors. Other vendors are alleviating revenue growth pressures by ramping up activities with large banking clients in areas such as cost takeout and transformation programs.
 
Financial services will remain a leading revenue-generating segment for some of the subset of 17 benchmarked vendors with available data. TBR expects revenue growth pressures in financial services to ease in 2025, as some of the leading IT services providers in the segment, including India-centric Cognizant, TCS, Infosys, Tech Mahindra and Wipro, experienced revenue growth in 3Q24, albeit in the low single digits.
 
Such vendors are benefiting from increased interactions among financial services clients, as these clients look to drive IT modernization and optimization for efficiency and enhanced experience. Financial services is a leading revenue generator for India-centric vendors. These vendors — along with Capgemini, which has stabilized revenue growth in the sector — are optimistic about future revenue performance in financial services, as discretionary spend continues to improve among clients in the capital markets, mortgage and card processing sectors in the U.S., a trend that began in 2Q24.
 
Other vendors, such as Accenture and Kyndryl, continue to report declining revenues but are ramping up activities with alliance partners and winning new deals, which will contribute to revenue generation and help alleviate revenue growth pressures during 2025.