Spending on cloud services in Asia Pacific rose in the fourth quarter, making it the only region to see both Year-on-Year (YoY) and sequential quarterly growth in this segment, according to the latest state-of-the-industry report from Information Services Group (ISG). For the Asia Pacific market, the increase in cloud investment is encouraging, stated ISG.
According to the Asia Pacific ISG Index, which tracks commercial outsourcing agreements with an annual contract value (ACV) of at least US $5 million, overall expenditure on Software-as-a-Service (XaaS) increased by 10% annually and 2% sequentially to reach US $3.6 billion. Software-as-a-service (SaaS) saw an increase of 18% to $443 million in this area, while Infrastructure-as-a-Service (IaaS) had an increase of 9% to US $3.2 billion from the previous year.
For managed services, the outlook was less optimistic. In contrast to a robust quarter last year, the managed services ACV for the fourth quarter of the year fell 34% year over year to US $885 million. Whereas business process outsourcing (BPO) fell 53% to US $202 million, IT outsourcing (ITO) fell 24% to US $684 million.
Thus, for the sixth consecutive quarter, year-over-year results for Asia Pacific’s combined market (XaaS and managed services) decreased by 3% to $4.5 billion in the fourth quarter compared to the previous year.
- story continues below the photo -
“The rebound in cloud spending is a welcome sign for the Asia Pacific market,” said Michael Gale, partner and regional leader, ISG Asia Pacific.
The Positive Impact of AI
“The rebound in cloud spending is a welcome sign for the Asia Pacific market,” said Michael Gale, partner and regional leader, ISG Asia Pacific. “Combined market spending was up more than 7 percent sequentially from the third quarter, the best quarter-over-quarter growth rate in the last two years, led by 36 percent sequential growth in managed services. This could be an early sign that the Asia Pacific market has bottomed out and is poised for a rebound in 2024.”
From a global perspective, Mr. Gale noted that inflation is cooling rapidly and central banks are planning interest rate cuts. “That should create a more friendly environment for enterprise spending and capital deployment in 2024,” added Gale. He also pointed to the positive impact AI will have on the market in the coming years. “As AI technology matures and new use cases are identified, it will have a massive impact on the IT and business services and software industries.”
Full-Year Results
For the whole year, the combined market for Asia Pacific produced an ACV of US $17.7 billion, a 9 percent decrease from the previous year and the first time the combined market has fallen below zero since 2015.
With a 1.5 percent increase to US $3.5 billion, managed services ACV reached its highest level since 2012. Strong demand for application services drove the segment's 13% rise in ITO to US $2.8 billion, while BPO fell 27% to US $755 million. With the exception of manufacturing (up 85%) and telecom (up 13%), spending decreased across the board in most industrial verticals. The expenditure on financial services fell by 26%. In 2023, 222 contracts for managed services were signed, a 20 percent decrease from the previous year.
For the first time, this market had a fall for a whole year when the XaaS category saw an 11% decline to US $14.2 billion in ACV. In terms of value, SaaS fell 10% to US $1.6 billion, while IaaS fell 12% to US $12.6 billion. 80 percent of the total market in 2023 was made up of the XaaS category, down from 82 percent the year before.
Geographic Performance and 2024 Forecast
Over the course of the year, Australia and New Zealand (ANZ) generated US $1.2 billion in managed services ACV, which represents a 5% increase from the previous year. In 2023, India became the biggest regional market for ACV in the area, surpassing ANZ with a revenue of US $1.2 billion, an increase of 87%. Among other noteworthy markets, Southeast Asia had a 51 percent decline while Japan saw a 29 percent decline.
In 2024, ISG projects revenue growth of 15% for XaaS and 4.25 percent for managed services.
“We expect spending for application modernization and business transformation projects to continue at high levels in 2024, and for GenAI to be a strong contributor to growth,” added Michael Gale. “Public cloud spending also should accelerate as optimizations phase out. We also expect small discretionary deals to recover, as well as financial services industry spending to rebound.”
