Managed Services Down 2%, XaaS Drops 8% Compared to the Previous Year
London, October 16, 2023 — The third quarter witnessed a single-digit decline in the demand for IT and business services in Europe. Information Services Group (ISG), a leading global technology research and advisory firm, revealed this trend in its latest state-of-the-industry report. The decline comes after the managed services segment achieved an all-time high in the previous quarter.
According to the EMEA ISG Index™, which assesses commercial outsourcing contracts with an annual contract value (ACV) of US $5 million or more, the ACV for the combined market—comprising managed services and cloud-based services (XaaS)—stood at US $6.9 billion in Q3. This marked a 5% decrease from the previous year and a 10% drop compared to Q2 2023.
Managed services ACV experienced a 2% decline from the previous year, settling at US $3.7 billion. Sequentially, it witnessed a notable 17% drop after reaching a record US $4.5 billion in Q2. The third quarter saw 242 managed services contracts awarded, a 16% year-on-year decrease and the lowest volume for the region since the end of 2021. Among these were four megadeals (contracts with an annual value exceeding US $100 million). New-scope contracts, however, increased by 9% during the quarter, totaling 171 deals with a combined annual value of US $2.5 billion.
Steve Hall, President, EMEA, for ISG, commented on this development, stating, “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.” He sees this as a temporary pause in a market shaped by enterprises aiming for cost optimization amid concerns about weak economic conditions.
Within managed services, IT outsourcing (ITO) witnessed a 7% decline, amounting to US $2.9 billion. Notable segments like application development and maintenance (ADM) also saw a 6% decrease. On the other hand, business process outsourcing (BPO) experienced a 19% rise, reaching US $824 million, fueled by robust growth in finance and accounting, facilities management, and HR services.
The demand for cloud services in Europe saw an 8% decline from the previous year, totaling US $3.2 billion. Infrastructure-as-a-service (IaaS) recorded an 18% drop to US $2.1 billion, while software-as-a-service (SaaS) witnessed a 23% rise, reaching US $1.1 billion.
Steve Hall pointed out a general slowdown in IaaS spending globally, emphasizing that enterprises are focusing on maximizing their investments in hyperscaler platforms rather than making new purchases. However, the shift to the cloud continues in Europe, particularly in the SaaS arena, where collaboration, human capital management (HCM), and enterprise resource planning (ERP) solutions are witnessing growing demand.
On a year-to-date basis, EMEA’s combined market saw a 4% decline versus the prior year, totaling US $21.7 billion. Managed services rose by 2%, reaching US $11.9 billion, and included 818 contract awards, a 2% decrease. Notably, there were ten megadeals with a combined ACV that was 55% higher than those signed in the first nine months of 2022. In managed services, both ITO and BPO witnessed a 2% increase, amounting to US $9.1 billion and US $2.8 billion, respectively.
XaaS spending year to date fell by 10%, reaching US $9.7 billion. IaaS recorded a 15% decline, totaling US $6.6 billion, while SaaS showed a 2% increase, reaching US $3.1 billion.
The U.K., as Europe’s largest sourcing market, reported over US $1 billion in managed services ACV for the third consecutive quarter, reaching US $1.7 billion, marking a 143% year-on-year increase. It was the U.K.’s largest ACV quarter since Q1 2017. Year to date, the U.K. generated US $4.4 billion in ACV, up by 49%.
In contrast, the next two largest markets, DACH and France, saw declines in managed services during Q3 compared to the previous year. DACH fell by 54% to US $529 million, while France dropped by 60% to US $309 million. On a year-to-date basis, both markets were down, with DACH off by 25% to US $2.2 billion and France down by 25% to US $1.3 billion.
Other markets reported mixed results, with Benelux advancing by 42% to US $203 million and the Nordics rising by 7% to US $486 million in Q3 compared to the previous year. On a year-to-date basis, Benelux is up by 30% to US $880 million, and the Nordics are up by 8% to US $1.2 billion.
2023 Global Forecast
ISG revised its forecast for managed services growth to 5.4% for the year, up by 40 basis points, and maintained its forecast for XaaS revenue growth in 2023 at 11.5%.
Steve Hall concluded, “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. Clients continue to restructure their IT landscape to adopt 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.