Europe’s IT and Business Services Market Sets New High in Q2, ISG Index Finds

Managed services up 15% to a new quarterly record, while XaaS drops 9% vs. prior year

Europe’s demand for IT and business services reached an all-time high in the second quarter after declining the previous two quarters, according to the latest state-of-the-industry report from Information Services Group (ISG) (Nasdaq: III), a leading global technology research and advisory firm.

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“Even though Europe’s drop in XaaS demand is not as steep as in other regions, it nevertheless indicates EMEA is not immune to the market malaise affecting the global XaaS sector”

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 – both managed services and cloud-based services (XaaS) – at a record US $7.8 billion in second quarter, up 3.5 percent from the prior year, and up 9 percent versus the first quarter of 2023.

“Europe rebounded in the second quarter, reversing a two-quarter losing streak on the strength of double-digit growth in the managed services sector,” said Steve Hall, president, EMEA, for ISG. “Growing demand for managed services reflects the role outsourcing plays as a lever for cost optimization, especially in the face of weak economic conditions.”

Managed services ACV reached a record US $4.5 billion, up 15 percent from a year ago. A total of 283 managed services contracts were awarded in the second quarter, the region’s third-highest quarterly deal volume ever. The awards including five mega-deals (contracts with annual value of more than US $100 million) worth more than a combined US $1 billion. The volume of restructured contracts jumped 76 percent over the prior year, reflecting the cost-control measures of buyers.

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Within managed services, IT outsourcing (ITO) rose 11 percent, to US $3.3 billion, driven by year-on-year growth in application development and maintenance (ADM) and data center services. Business process outsourcing (BPO), meanwhile, rose 25 percent, to US $1.3 billion, fueled by strong growth in contact center, facilities management, engineering and industry-specific services.

In line with the global trend, demand for cloud services in Europe declined 9 percent versus the prior year, to US $3.3 billion, with infrastructure-as-a-service (IaaS) off 13 percent, at US $2.2 billion, and software-as-a-service (SaaS) flat at US $1.1 billion.

“Even though Europe’s drop in XaaS demand is not as steep as in other regions, it nevertheless indicates EMEA is not immune to the market malaise affecting the global XaaS sector,” Hall noted. “The slowdown we’ve been seeing in China’s hyperscaler market is now spreading to the big three [AWS, Microsoft Azure and Google Cloud]. Enterprises that scaled up quickly during the pandemic are now rationalizing their cloud costs.”

Geographic Performance

The U.K., the largest geographic market in Europe for IT and business services, generated US $1.5 billion of managed services ACV in the second quarter, up 50 percent year on year. The UK saw strong demand for ITO services overall, and from the FMCG/retail, energy and telco sectors.

The next largest market, DACH (Germany, Austria and Switzerland), also posted double-digit growth, with managed services ACV of US $894 million, up 16 percent. 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 US $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 US $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 US $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 US $14.9 billion, the first time since 2016 the region had a down first half. Managed services rose 5 percent, to US $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 US $6.3 billion, while BPO retreated 3 percent, to US $2.0 billion.

XaaS spending in the first half fell 10 percent, to US $6.6 billion, as IaaS slumped 14 percent, to US $4.5 billion, and SaaS remained flat, at US $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 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. 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.”

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