In a rapidly evolving technological landscape, the global IT services industry is on track to reach a staggering $2 trillion in spending by 2028, according to a new Forrester report titled “Global IT Services Market Forecast 2023-2028.” Despite projected annual growth of 4.6%, challenges around automation, competition, and the rise of generative AI could reshape how services are delivered.

The IT services industry is often overlooked in favor of flashier tech segments like cloud computing and AI, but its growth story is no less remarkable. Forrester’s report reveals that IT services currently capture over a third of global tech spending, dwarfing the annual expenditure on computer equipment.

“By 2028, annual spending on IT services will reach $2 trillion,” noted Michael O’Grady, principal forecast analyst at Forrester. “Despite strong forecasted growth over the next few years, IT service firms must stay ahead of current challenges, including optimizing headcount for cost and efficiency, staying abreast of competition from software and engineering firms, and utilizing GenAI judiciously to reshape service delivery.”

Key Drivers of Growth

Financial Services and Manufacturing
Financial services, manufacturing, and energy are central to the IT services industry’s growth, with the ten largest companies generating 44% of their revenue from these segments. Accenture estimates that only 5% of manufacturing and engineering companies scale mature digital capabilities across their organizations, highlighting a significant opportunity for IT service firms to expand.

Managed Services
Infrastructure as a service (IaaS) is projected to nearly double its share of the IT services market, growing from 8% in 2022 to 15% in 2028. AWS, Microsoft Azure, and Google Cloud are leading the way, benefiting from an enterprise shift toward cloud-based infrastructure. Google Cloud and AWS saw growth rates of 26% and 13%, respectively, in 2023, while Azure and other cloud services experienced 17% growth for Microsoft.

Cybersecurity
Cybersecurity spending remains a critical driver of growth. Canalys estimates that two-thirds of the $224 billion projected for 2024 will be allocated to IT services such as consulting, outsourcing, managed services, solution deployment and integration, maintenance, and support.

Generative AI and Automation
Generative AI (GenAI) is reshaping how IT services are delivered. In the US, 57% of the jobs lost to automation in professional services are expected to be directly attributable to GenAI. By increasing productivity and reducing project delivery costs, GenAI could free up resources to tackle project backlogs and support the shift toward project onshoring as parts of consultant roles become semi-automated. For IT service companies, harnessing the productivity gains of automation will be crucial to improving margins while managing headcount reductions.

Market Overview and Regional Dynamics

The global IT services market is poised for robust growth, with Forrester forecasting annual spending to reach $2 trillion by 2028. This growth will be fueled by an average annual growth rate of 4.6% across the industry. While infrastructure as a service (IaaS) is expected to lead the way, averaging nearly 16% growth annually, other critical segments like cybersecurity and managed services will also contribute significantly.

Regional Trends and Dynamics
Growth in the IT services market will not be uniform across regions. Asia-Pacific is set to outpace the global average, with nearly 6% annual growth driven by rapid digital transformation in emerging economies and a growing appetite for advanced IT solutions. Countries like India, China, and Japan are becoming innovation hubs for technology services, particularly in areas like cloud computing, artificial intelligence, and cybersecurity.

North America remains the largest market for IT services, with the US leading the charge in cloud adoption, cybersecurity, and managed services. The region’s financial services, healthcare, and retail sectors are substantial consumers of IT services, reflecting their need to stay competitive through digital innovation. Major US companies like Accenture, IBM, and Cognizant are investing heavily in emerging technologies like generative AI to bolster their service offerings.

In Europe, the IT services industry is expected to grow more modestly, at approximately 4.5% annually. This growth will be driven by heightened regulatory compliance requirements and the need to modernize legacy IT systems across the continent. European companies are increasingly partnering with US and Asian IT service providers to gain access to global expertise and advanced technologies, particularly in cybersecurity and cloud computing.

Latin America and the Middle East and Africa (MEA) are emerging as promising markets due to rising IT adoption rates and their respective governments’ digital transformation efforts. Latin American companies increasingly source IT services from global firms with nearshoring capabilities in the region, such as Eastern Europe. In MEA, governments invest in digital infrastructure projects, creating opportunities for IT service firms to capitalize on cloud computing, data analytics, and cybersecurity services.

Strategic Challenges for IT Services Firms

Despite strong projected growth, the global IT services industry anticipates subdued results in 2024 due to economic headwinds like trade conflicts and geopolitical tensions. Forrester outlines several key challenges IT services firms must address.

Optimizing Headcount and Automation
One of the primary challenges facing IT service companies is balancing headcount and automation. Many firms expanded their workforce to meet the pandemic-fueled surge in demand, only to now find themselves needing to reduce their payrolls. According to Forrester, headcount and revenue have historically been closely linked, meaning that workforce reductions could negatively impact service quality and profitability.

Automation, especially through generative AI, offers significant productivity gains that could help IT service companies cut costs and improve margins. However, while many firms explore automation, most of its benefits remain unrealized. For instance, integrating generative AI into professional services could reduce 57% of jobs due to automation, according to Forrester. Nevertheless, these productivity gains could free up resources to address project backlogs, optimize project delivery costs, and streamline internal processes.

Managing Competition from Software and Engineering Firms
Competition from adjacent sectors, particularly software and engineering firms, poses a significant challenge for IT service companies. These competitors are increasingly moving into consulting, security, maintenance, digital, and networking services, traditionally dominated by IT service providers. This competition drives firms to forge closer partnerships with software companies to bolster their capabilities.

A prime example is Cognizant’s acquisition of Thirdera, strengthening its strategic partnership with ServiceNow for AI-driven automation. Collaborating with software companies allows IT service firms to tap into cutting-edge technology and offer a broader range of services, helping them stay competitive in the rapidly evolving marketplace.

Integrating Generative AI into Service Delivery
Generative AI is set to reshape service delivery by automating processes, reducing project costs, and freeing up enterprise dollars for additional modernization. Companies like Capgemini and Accenture plan to increase their in-house data and AI specialists by 17% and 11% over the next three years. However, fully integrating generative AI into service delivery presents challenges in managing workforce reductions and ensuring a seamless transition to semi-automated processes.

As parts of consultant roles become automated, firms must identify areas where human expertise is essential and upskill their workforce accordingly. This will require comprehensive training programs and strategic workforce planning to ensure employees can add value to the new AI-driven landscape.

Navigating Economic Uncertainty
Economic headwinds, driven by trade conflicts, geopolitical tensions, and budgetary caution, have dampened IT services revenue projections for the near term. Forrester predicts that real global GDP growth will only exceed pre-pandemic levels in 2025, making it crucial for IT service companies to navigate this period of uncertainty strategically.

Firms must remain agile in adjusting their business models, pricing strategies, and service offerings to align with changing market conditions. They should also explore diversifying their client base and expanding into new geographies to mitigate the risks of economic downturns in specific regions.

In summary, the IT services industry stands at a crossroads where strategic foresight, adaptability, and embracing automation determine which firms thrive and which falter. Forrester’s report emphasizes that companies that skillfully navigate these challenges will be well-positioned to capture a significant share of the $2 trillion market opportunity by 2028.

Co-Innovation and Global Collaboration

In an increasingly interconnected global economy, co-innovation and collaboration are emerging as essential strategies for IT service companies to differentiate themselves and drive growth. According to Forrester, the technology services market represents nearly half of the $4.2 trillion global tech economy, and companies that leverage strategic partnerships can maximize their potential in this rapidly evolving landscape.

To understand how organizations select and work with technology services providers, Forrester surveyed 1,955 enterprise service decision-makers globally. The study revealed that 29% of respondents see investment in emerging technologies as a primary benefit of partnering with IT service firms. In particular, generative AI has the potential to significantly enhance productivity and streamline processes, enabling organizations to focus on higher-value activities.

Generative AI exemplifies how co-innovation can revolutionize service delivery. Providers like Accenture, Cognizant, and Capgemini actively incorporate AI tools and methodologies to transform their service offerings. Accenture, for instance, has invested billions in AI development and workforce upskilling. The firm sees a significant opportunity in AI consulting and has already booked $600 million in new generative AI-related projects. Meanwhile, Capgemini plans to increase its in-house data and AI specialists by 17% over the next three years to meet the rising demand for these skills.

Global collaboration has also become a cornerstone of IT service delivery. Nearshoring is gaining traction as enterprises seek to balance cost efficiency with the benefits of proximity. More than half of the decision-makers surveyed expect their providers to source labor from Eastern Europe, while 41% anticipate sourcing from Latin America. Working with nearshore and onshore providers facilitates seamless collaboration in blended agile teams and enables transformative work across multiple time zones.

However, successful collaboration requires a solid commitment to coordination. In the survey, 70% of respondents working with multiple providers to implement business applications indicated using outcomes-based contracts. By aligning providers with common outcome metrics, enterprises can motivate collaboration and ensure that all parties work toward shared goals.

These trends underscore the importance of treating technology services providers as extensions of an organization’s internal capabilities. Companies that adopt a strategic partnership approach focusing on shared goals and mutual success can unlock new levels of innovation and business value.

In this context, IT service companies must adapt their business models to become indispensable co-innovation partners. By fostering strategic alliances, investing in emerging technologies like generative AI, and optimizing global collaboration, they can enhance their value proposition and capture a significant share of the $2 trillion market opportunity by 2028.

Pivotal Juncture

The global IT services industry is at a pivotal juncture, facing significant opportunities and considerable challenges. Forrester’s “Global IT Services Market Forecast 2023-2028” paints a picture of substantial growth, with annual spending expected to reach $2 trillion by 2028. However, this growth is contingent upon the industry’s ability to navigate an evolving landscape shaped by automation, competition, and the rapid rise of generative AI.

Generative AI, in particular, stands as a transformative force capable of reshaping the industry. While it promises to enhance productivity, streamline project delivery, and reduce costs, it also presents challenges regarding headcount optimization and displacing traditional roles. IT service firms will need to strike a delicate balance between embracing the efficiencies of automation and maintaining a skilled workforce capable of delivering high-quality services.

Moreover, competition from software and engineering firms intensifies, with adjacent sectors increasingly encroaching on traditional IT service domains. Strategic partnerships and acquisitions will enable IT service companies to bolster their capabilities, particularly in emerging cybersecurity and AI-driven automation technologies.

The concept of co-innovation is poised to redefine how companies engage with their technology service providers. The survey findings underscore that clients seek more than just capacity and expertise; they seek partners who can bring cutting-edge technologies, strategic alliances, and a commitment to shared outcomes. Firms that deliver on this promise will stand out in a crowded marketplace.

Global collaboration and nearshoring trends offer additional avenues for growth. By sourcing talent from regions like Eastern Europe and Latin America, IT service firms can enhance their agility and facilitate closer collaboration with clients. The shift toward outcomes-based contracts further reinforces the need for coordination and shared goals across multiple providers.

The road to $2 trillion presents a complex yet rewarding journey for the global IT services industry. As Michael O’Grady, principal forecast analyst at Forrester, aptly notes, “IT service companies that manage these challenges well will thrive and scale globally.” The firms that embrace strategic partnerships, harness the power of generative AI, and navigate the intricacies of global collaboration will be best positioned to lead the market in the years ahead.