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Asia Pacific’s Spending on Cloud Services Down Sharply in Q3, ISG Index Finds

Managed services growth not enough to offset pullback in XaaS spending

Spending on cloud services in Asia Pacific was down sharply in the third quarter, as the market was weighed down by economic concerns and continuing business disruptions in China, the latest state-of-the-industry report from Information Services Group, a leading global technology research and advisory firm, finds.

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“Much of the slump in IaaS can be attributed to lower demand for cloud services provided by China’s big four hyperscalers”

The Asia Pacific ISG Index, which measures commercial outsourcing contracts with annual contract value (ACV) of US $5 million or more, shows third-quarter ACV for the combined market (managed services and cloud-based XaaS) dropped 29 percent, to US $3.1 billion. Although the combined market rose 3 percent sequentially from a weak second quarter, it was down sharply from its peak of US $5 billion in the fourth quarter of 2021.

Cloud-based XaaS continues to dominate this market, accounting for 80 percent of combined market ACV year to date. But that was down from an 83 percent share last year, as spending on cloud services has rapidly decelerated the last two quarters.

In the third quarter, XaaS ACV slumped 37 percent versus the prior year, to US $2.4 billion, but was up 9 percent against a weak second quarter. Within this segment, infrastructure as-a-service (IaaS) fell 40 percent versus the prior year, to US $2.0 billion, while software-as-a-service (SaaS) fared a bit better, down 15 percent, to US $390 million.

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“Much of the slump in IaaS can be attributed to lower demand for cloud services provided by China’s big four hyperscalers,” said Scott Bertch, partner and regional leader, ISG Asia Pacific. “The country’s crackdown on tech companies, combined with its zero-Covid policy, makes it difficult for enterprises to do business with China’s hyperscalers. In general, enterprises are slowing their spending on cloud services in response to weak economic conditions.”

On the managed services side, ACV advanced 17 percent year on year, to US $745 million. Spending on IT outsourcing (ITO) rose 23 percent, to US $545 million, while business process outsourcing (BPO) rose 1 percent, to US $199 million. The ITO market was buoyed by strong demand for application development and maintenance services, while the BPO market saw strong demand for contact center services.

There were 53 managed services contracts signed during the third quarter, down 12 percent.

From a geographic standpoint, the India and Southeast Asia markets were up substantially from last year, while enterprises pulled back on spending in Japan and China. The region’s largest geographic market by ACV, Australia-New Zealand (ANZ), posted a second straight quarter with ACV greater than US $250 million. Spending in ANZ was up 4 percent versus the prior year.

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