Demand for IT and Business Services in Europe Down in Q3, ISG Index™ Finds
Overall demand for IT and business services in Europe fell by single digits in the third quarter after the managed services segment reached an all-time high in the previous quarter, 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 annual contract value (ACV) of US $5 million or more, shows ACV for the combined market – both managed services and cloud-based services (XaaS) – at US $6.9 billion in the third quarter, down 5 percent from the prior year, and down 10 percent versus the second quarter of 2023.
Managed services ACV was down 2 percent from a year ago, to US $3.7 billion, and down 17 percent sequentially after hitting a record US $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 the region’s lowest volume since the end of 2021. Included in that total were four megadeals (contracts with annual value of more than US $100 million). The volume of new-scope contracts rose 9 percent during the quarter, to 171 deals with a combined annual value of US $2.5 billion.
“We saw a slight pullback in managed services for Europe in the third quarter, driven largely by a drop-off in IT outsourcing after a record performance in Q2,” said Steve Hall, president, EMEA, for ISG. “We see this as a temporary pause in a market that continues to be driven by cost optimization as enterprises remain wary of weak economic conditions.”
Within managed services, IT outsourcing (ITO) fell 7 percent, to US $2.9 billion, as most segments saw declines, including application development and maintenance (ADM), which dropped 6 percent. Business process outsourcing (BPO), meanwhile, rose 19 percent, to US $824 million, fueled by strong growth in finance and accounting, facilities management and HR services.
Demand for cloud services in Europe fell 8 percent versus the prior year, to US $3.2 billion, driven by an 18 percent decline in infrastructure-as-a-service (IaaS), to US $2.1 billion. Software-as-a-service (SaaS), meanwhile, rose 23 percent, to US $1.1 billion.
“We are seeing a broad-based slowdown in IaaS spending across all regions, as enterprises that accelerated adoption of hyperscaler platforms during the pandemic are now working to get the most out of those investments, rather than buying more,” Hall said. “Still, Europe’s move to the cloud continues, especially in the SaaS arena, where we’re seeing growing demand for collaboration, HCM and ERP solutions.”
On a year-to-date basis, EMEA’s combined market was down 4 percent versus the prior year, to US $21.7 billion. Managed services rose 2 percent, to US $11.9 billion, on 818 contract awards, down 2 percent. Among them were 10 megadeals whose combined ACV was 55 percent higher than that of the 11 megadeals signed through the first nine months of 2022. Within managed services, ITO was up 2 percent, to US $9.1 billion, and BPO was also up 2 percent, to US $2.8 billion.
XaaS spending year to date fell 10 percent, to US $9.7 billion, as IaaS declined 15 percent, to US $6.6 billion, while SaaS rose 2 percent, to US $3.1 billion.
Europe’s largest sourcing market, the U.K., generated more than US $1 billion in managed services ACV for the third straight quarter, clocking in at US $1.7 billion of ACV, up 143 percent year on year. It was the U.K.’s largest ACV quarter since the first quarter of 2017, when it topped US $2 billion for the first and only time. Year to date, the U.K. has generated US $4.4 billion of ACV, up 49 percent.
Europe’s next two largest markets, DACH and France, both saw declines in managed services in the third quarter from the prior year. DACH fell 54 percent, to US $529 million, while France dropped 60 percent, to US $309 million. Year to date, both markets were also down, with DACH off 25 percent, to US $2.2 billion, and France down 25 percent, to US $1.3 billion.
Among other markets, Benelux advanced 42 percent, to US $203 million, and the Nordics rose 7 percent, to US $486 million, in the third quarter versus the prior year. Year to date, Benelux is up 30 percent, to US $880 million, while the Nordics is up 8 percent, to US $1.2 billion.
2023 Global Forecast
ISG raised its forecast for managed services growth by 40 basis points, to 5.4 percent for the year, and maintained its forecast for XaaS revenue growth in 2023 at 11.5 percent.
“From a macroeconomic perspective, we've seen modest improvement in decision making and increased spend, but global interest rates remain high and concerns persist with energy prices, a strong dollar, and the expectation of a prolonged period of high interest rates,” Hall said.
“Clients continue to restructure their IT landscape to adopt to multi-cloud environments and hybrid work arrangements, and are beginning to experiment with enterprise-grade GenAI use cases. We expect the applications market to continue to expand in 2024.”
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 84 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. For more information about the ISG Index, visit this webpage.
ISG (Information Services Group) (Nasdaq: III) is a leading global technology research and advisory firm. A trusted business partner to more than 900 clients, including more than 75 of the world’s top 100 enterprises, ISG is committed to helping corporations, public sector organizations, and service and technology providers achieve operational excellence and faster growth. The firm specializes in digital transformation services, including automation, cloud and data analytics; sourcing advisory; managed governance and risk services; network carrier services; strategy and operations design; change management; market intelligence and technology research and analysis. Founded in 2006, and based in Stamford, Conn., ISG employs more than 1,600 digital-ready professionals operating in more than 20 countries—a global team known for its innovative thinking, market influence, deep industry and technology expertise, and world-class research and analytical capabilities based on the industry’s most comprehensive marketplace data. For more information, visit www.isg-one.com.
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