Overall demand for IT and business services in Europe declined by single digits in the third quarter, after the managed services segment reached an all-time high in the previous quarter. This is according to the latest State of the Industry report from Information Services Group (ISG) (Nasdaq: III), a leading global technology research and advisory firm.
The EMEA ISG Index™, which measures commercial outsourcing contracts with an annual contract value (ACV) of $5 million or more, shows that the ACV for the combined market – that is, for both managed services and cloud-based services (XaaS) – was $6.9 billion in the third quarter, down 5 percent from a year ago and 10 percent from the second quarter of 2023.
Managed services ACV fell 2 percent to $3.7 billion from the same quarter last year and 17 percent from the previous quarter, after reaching a record $4.5 billion in the second quarter. A total of 242 managed services contracts were awarded in the third quarter, down 16 percent year-on-year and representing the lowest volume in the region since the end of 2021. This included four megadeals (contracts with an annual value of more than $100 million). The number of new contracts signed increased 9 percent during the quarter to 171 contracts with a total value of $2.5 billion.
“We observed a slight decline in managed services for Europe in the third quarter, primarily driven by a decline in IT outsourcing following record performance in the second quarter,” said Steve Hall, President, EMEA, ISG. “We are holding “This represents a temporary pause in a market that continues to be driven by cost optimization as companies remain cautious in the face of weak economic conditions.”
Within the managed services segment, IT outsourcing (ITO) revenue fell 7 percent to $2.9 billion as most segments posted declines, including application development and maintenance (ADM), which fell 6 percent. Meanwhile, business process outsourcing (BPO) rose 19 percent to $824 million, driven by strong growth in finance and accounting, facilities management and HR services.
Year-on-year demand for cloud services in Europe fell 8 percent to $3.2 billion, driven by an 18 percent decline in Infrastructure-as-a-Service (IaaS) to $2.1 billion U.S. dollar. The Software-as-a-Service (SaaS) sector, on the other hand, increased by 23 percent to $1.1 billion.
“We are currently seeing a broad slowdown in IaaS spending across all regions, as companies that accelerated adoption of hyperscaler platforms during the pandemic now work to make the most of those investments rather than buying more.” said Hall. “However, Europe’s shift to the cloud continues, particularly in the SaaS space where we are seeing increasing demand for collaboration, HCM and ERP solutions.”
Results since the beginning of the year
Year-to-date, the EMEA region’s combined market fell 4 percent year-on-year to $21.7 billion. Managed services rose 2 percent to $11.9 billion on 818 contracts awarded, a decrease of 2 percent. These included 10 megadeals whose ACV was 55 percent higher than that of the 11 megadeals signed in the first nine months of 2022. Within the managed services segment, ITO rose 2 percent to $9.1 billion, and BPO also grew 2 percent to $2.8 billion.
XaaS spending fell 10 percent year-to-date to $9.7 billion, while IaaS spending fell 15 percent to $6.6 billion and SaaS spending fell 2 percent to $3.1 billion dollars rose.
Geographic performance
The UK, the largest sourcing market in Europe, generated ACV of more than $1 billion for the third consecutive quarter, reaching $1.7 billion ACV, up 143 percent year-on-year. This made it the biggest ACV quarter in the UK since the first quarter of 2017, when it exceeded $2 billion for the first and only time. Year-to-date, the UK generated ACV of $4.4 billion, up 49 percent.
The next two largest European markets, DACH (Germany, Austria and Switzerland) and France, reported year-over-year declines in managed services in the third quarter. Sales in the DACH region fell by 54 percent to $529 million, while in France they fell by 60 percent to $309 million. Since the beginning of the year, both markets have also declined, with the DACH region recording a 25 percent decline to $2.2 billion and France recording a 25 percent decline to $1.3 billion.
Of the remaining markets, the Benelux countries increased by 42 percent to $203 million and the Nordic countries increased by 7 percent to $486 million in the third quarter compared to the previous year. Since the beginning of the year, Benelux has increased by 30 percent to $880 million, while the Nordic countries have seen an increase of 8 percent to $1.2 billion.
Global forecast 2023
ISG raised its forecast for managed services growth by 40 basis points to 5.4 percent for the current year and maintained its forecast for XaaS revenue growth in 2023 at 11.5 percent.
“From a macroeconomic perspective, decision-making and spending have improved slightly. However, global interest rates remain elevated and energy prices, a strong dollar and the expectation of an extended period of high interest rates remain concerns,” Hall said.
“Customers continue to transform their IT landscape. They are moving to multi-cloud environments and hybrid work arrangements and are now beginning to experiment with enterprise-grade GenAI use cases. We expect the application market to continue to grow in 2024. ”
About the ISG Index™
The ISG Index™ is recognized as the definitive source of market intelligence on the global technology and business services industries. For 84 consecutive quarters, it has provided financial analysts, corporate buyers, software and service providers, law firms, universities and the media with the latest industry data and trends. Further information about the ISG index can be found on this website.
About ISG
ISG (Information Services Group) (Nasdaq: III) is a leading global technology research and advisory company. As a trusted business partner to more than 900 customers, including more than 75 of the world’s 100 largest companies, ISG helps companies, public sector organizations, and service and technology providers achieve operational excellence and accelerate growth. The company specializes in digital transformation services, including automation, cloud and data analytics, procurement consulting, managed governance and risk services, carrier services, strategy and operations design, change management, market observation, and technology research and analysis. ISG was founded in 2006 and is based in Stamford (US state of Connecticut). The company employs more than 1,600 digital professionals operating in more than 20 countries – a global team recognized for its innovative thinking, market impact, deep industry and technology expertise, and world-class Research and analysis capabilities based on the most comprehensive market data in the industry. For more information please visit www.isg-one.com.
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