Europe’s Sourcing Market Reaches Record High in Q3, Paced by Surging Cloud Adoption, ISG Index™ Finds
Europe’s technology and business services market reached a record high in the third quarter, paced by surging demand for cloud-based services, even as spending on managed services slowed for the third straight 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, which includes both as-a-service and managed services, reached a record US $6.5 billion, up 36 percent against a soft quarter last year, and up 4 percent against the second quarter of 2021. It was the fourth consecutive quarter the combined market exceeded the US $6 billion mark, with the region adding more than US $1.5 billion of spending in that time.
Cloud-based as-a-service spending soared 59 percent, to a record US $3.3 billion, with infrastructure-as-a-service (IaaS) and software-as-a-service (SaaS) each also up 59 percent, to quarterly records of US $2.4 billion and US $930 million, respectively.
Managed Services, at US $3.2 billion, rose 19 percent versus the prior year, but has declined for three consecutive quarters after posting strong results in the fourth quarter last year. Year-over-year growth was widespread across the region, although its two largest markets—DACH and the U.K.—delivered weaker-than-expected results in the third quarter.
“Demand for IaaS and SaaS solutions remains robust as European companies pick up the pace in their adoption of cloud-based technologies and services,” said Steve Hall, partner and president of ISG EMEA. “The region has been slower than others to move to the cloud due to privacy and security concerns, but that appears to be abating as companies accelerate their digital transformations.”
Speaking to the state of managed services in the region, Hall said: “Deal flow remains active, but we saw a number of deals shift to the right [move to later stages] in financial services, and we continue to see weakness in the manufacturing sector, as the economic recovery in Europe remains choppy.”
For the first nine months of 2021, the EMEA combined market generated a record US $19.1 billion of ACV, up 27 percent, its best growth rate ever for the period.
As-a-service, at a record US $8.9 billion, was up 34 percent, its best growth rate since 2018. Within the segment, IaaS reached a record US $6.4 billion, up 37 percent, and SaaS hit a record US $2.4 billion, up 26 percent.
Managed services, at a record US $10.2 billion, was up 22 percent, its fastest growth rate in 11 years. A record 673 managed services contracts were signed through the first nine months, up 23 percent over the prior year—including a record 533 ITO deals, up 18 percent, and 140 BPO deals, up 46 percent.
ITO ACV reached a record US $8.2 billion, up 15 percent, its highest growth rate since 2018. The ITO sector was driven by application development and maintenance (ADM) services, which generated ACV of US $4.3 billion, an all-time high for the first three quarters, and up 36 percent over the 2020 period. Infrastructure services, at US $3.9 billion, was down 1.3 percent.
BPO ACV reached US $2.0 billion, up 58 percent, its fastest growing nine-month period since 2012, driven by triple-digit growth in engineering and R&D services. Contact center and facilities management services rebounded, but still have not regained their pre-pandemic highs.
Among the significant ITO awards in the third quarter, HCL, TCS, IBM and Accenture split a US $200 million, five-year applications deal with an international food and beverage company. HCL also signed a contract with Munich Re to modernize and standardize workplace services for more than 16,000 employees in 40 countries.
In BPO, notable deals included WNS’s agreement with Centrica to deliver unified CX across all channels to drive seamless omni-channel experiences. In addition, ISS Facility Services won several sizable facilities management deals, including an extension with Denmark-based DSB and a large, five-year contract in Norway with Equinor to deliver a full range of integrated facility services.
In IaaS, Google Cloud Platform signed a large deal with French mass-market retail brand Casino Group, partnering with Accenture to transform retail locations and e-commerce sites with new digital-based solutions. Microsoft Azure also won several notable deals, including with E.On in Germany, where it is teaming with Wipro to migrate IT applications to the Azure cloud, and with Standard Bank in South Africa, to move workloads, applications and platforms to Azure.
In SaaS, ServiceNow landed a deal with Walgreens Boots Alliance to support its digital transformation, and SAP won a sizable contract with French cosmetics company Clarins, which chose SAP’s full HXM suite to transform their HR function. SaaS PLM provider Dassault Systemes won a deal with Alstom to deploy its 3DEXPERIENCE platform, replacing a legacy system to standardize engineering and manufacturing processes and accelerate the integration of recent acquisition Bombardier Transportation.
Managed services ACV grew across most EMEA markets in the third quarter, with France, the Middle East, and Eastern Europe producing record-setting results, even as the region’s two largest markets—DACH and the UK—registered declines.
DACH had its weakest quarter since the first quarter of 2019. Managed services ACV was down 8 percent, to US $518 million, with ITO down 14 percent on ADM weakness offset by growth in infrastructure. BPO, meanwhile, rose 27 percent, led by significant growth in Engineering Services. Traditional BPO services were down in the region.
Hall said: “Q3 is traditionally a slow quarter due to the holiday season and its impact on deal flow. Volume is in-line when normalized for seasonality, so we don’t see a long-term trend or broader concern with the DACH market.”
In the UK, the drop was even steeper, with managed services ACV down 61 percent, to US $405 million, its weakest quarterly result since the third quarter of 2002. ITO was down 67 percent year over year and BPO was down 40 percent. All industry verticals saw lower spending for the quarter, led by declines in banking, financial services and insurance; retail, travel and transport, and manufacturing.
“Despite a weak Q3, the first half of the year was robust in the U.K., and overall ACV for the year should be in line with 2019 and 2020,” Hall commented. “Activity remains robust, though deals did shift, so we anticipate a strong Q4.”
France, meanwhile, delivered record ACV of US $755 million, up 201 percent over the prior year, with the market propelled by triple-digit growth in ITO, including ADM and infrastructure, and BPO. ADM deals in the region have already surpassed US $2 billion of ACV year to date, almost doubling the average ACV over the last five years. All industry sectors showed growth over a soft year-ago quarter, most notably the banking, financial services and insurance sector and manufacturing.
“France is on pace to deliver record-setting ACV numbers this year,” said Hall. “Financial services, manufacturing, and media and telecom are the primary drivers of growth in the region.”
2021 Global Forecast
ISG is forecasting the market for cloud-based services (IaaS and SaaS) will grow 25 percent globally in 2021, up from its 21 percent growth forecast last quarter. The firm also is raising its forecast for managed services growth to 10.1 percent, up from its prior forecast of 9 percent.
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 76 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. In 2016, the ISG Index was expanded to include coverage of the fast-growing as-a-service market, measuring the significant impact cloud-based services are having on digital business transformation. ISG also provides ongoing analysis of automation and other digital technologies in its quarterly ISG Index presentations.
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 700 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 1,300 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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