According to the most recent state-of-the-industry study from Information Services Group (ISG), a global technology research and consultancy group, Europe’s demand for IT and business services hit an all-time high in the second quarter of 2023 after falling the previous two quarters.
In the second quarter, the combined market for managed services and cloud-based services (XaaS) had an annual contract value (ACV) of a record $7.8 billion, up 3.5 percent from the first quarter of 2022 and 9 percent from the first quarter of 2023, according to the EMEA ISG Index, which tracks commercial outsourcing contracts with an ACV of $5 million or more.
According to Steve Hall, president of EMEA for ISG, “Europe rebounded in the second quarter, reversing a two-quarter losing streak on the strength of double-digit growth in the managed services sector. Growing demand for managed services illustrates how outsourcing may be used to reduce costs, particularly in times of economic uncertainty.”
ACV for managed services hit a new high of $4.5 billion, up 15% from the previous year. The second quarter saw a total of 283 managed services contracts granted, making it the third-highest quarterly transaction volume in the region’s history. The wins include five mega-deals, or contracts worth more than $100 million annually, totaling more than $1 billion. As a result of purchasers’ cost-control initiatives, the volume of restructured contracts increased by 76 percent over the previous year.
Data Center and Cloud Services
Application development and maintenance (ADM) and data center services drove the 11% increase in IT outsourcing (ITO) to US $3.3 billion within managed services. Business process outsourcing (BPO), on the other hand, increased by 25% to $1.3 billion, driven by a surge in demand for services related to contact centers, facilities management, engineering, and certain industries.
According to the worldwide trend, demand for cloud services in Europe fell by 9% from the previous year to $3.3 billion, with Infrastructure-as-a-Service (IaaS) down by 13% to $2.2 billion and Software-as-a-Service (SaaS) remaining unchanged at $1.1 billion.
Even if the decline in XaaS demand in Europe is not as severe as it is in other countries, Mr. Hall said it still shows that EMEA is not immune to the market malaise plaguing the XaaS industry globally. “The top three – AWS, Microsoft Azure, and Google Cloud – are now seeing a slowdown similar to what we’ve been witnessing in China’s hyperscaler industry. During the epidemic, businesses swiftly expanded, and now they are rationalizing their cloud expenditures.
Managed Services: Regional Performance
The United Kingdom, Europe’s biggest geographical market for IT and business services, produced managed services ACV worth $1.5 billion in the second quarter, up 50% over the same period last year. ITO services were in high demand across the UK, particularly from the FMCG/retail, energy, and telecom industries.
DACH (Germany, Austria, and Switzerland), the second-largest market, also had double-digit growth, with managed services ACV rising by 16 percent to $894 million. Demand was up for ITO, with particularly strong growth in ADM services; in BPO, especially for contact center and engineering and R&D services, and in the banking, financial services, and insurance (BFSI) and manufacturing sectors.
France, on the other hand, saw a 20 percent decline in managed services ACV, to $393 million, due to weakness in both ITO and BPO and in the telco industry. Despite the decline, Hall said France remains a robust market, with more than $1 billion of ACV awarded in the first half – continuing a string of four consecutive half-year periods above that mark.
Elsewhere, Southern Europe (Spain, Portugal and Italy) rose 17 percent, to $717 million of ACV, with growth in contact center BPO and in the energy and telco/media industries.
First-Half Results
EMEA’s combined market fell 2 percent versus the prior year, to $14.9 billion, the first time since 2016 the region had a down first half. Managed services rose 5 percent, to $8.3 billion, on 576 contract awards, the most ever in the first half – including six mega-deals. Within managed services, ITO advanced 8 percent, to $6.3 billion, while BPO retreated 3 percent, to $2.0 billion.
XaaS spending in the first half fell 10 percent, to $6.6 billion, as IaaS slumped 14 percent, to $4.5 billion, and SaaS remained flat, at $2.1 billion.
2023 Global Forecast
ISG lowered its forecast for XaaS revenue growth in 2023 to 11.5 percent, down 350 basis points from its March forecast, and maintained its growth forecast for managed services at 5 percent.
“In determining our forecast, we considered macro uncertainties that have delayed decision-making and tightened discretionary spending, thus slowing movement in the pipeline,” said Steve Hall. “Digital transformation is not discretionary spending, but enterprises are more cautious about investments.”
“We also noted that interest rates have risen more in the past year than in the previous 30, which may dampen big infrastructure investments,” Mr. Hall added. “But the difficult comps will soon be behind us, and excitement is growing around generative AI. That could provide a much-needed tailwind for cloud services.”
