‘All-time high’ demand for IT Services in Europe, outshining cloud services

Demand for IT and business services in Europe has reached an all-time high in Q2 of 2023. This follows two quarters of decline, according to new research by Information Services Group (ISG). At the same time, demand for cloud services faced a decline.

The EMEA ISG Index found that managed and cloud-based services (XaaS) hit a record £6 billion ($7.8 billion) in the second quarter of 2023. This represented a 3.5% increase from the previous year, and a 9% increase when compared to Q1 of 2023.

“Growing demand for managed services reflects the role outsourcing plays as a lever for cost optimisation, especially in the face of weak economic conditions,” said Steve Hall, President of Europe, Middle East, and Africa for ISG.

A total of 283 managed services contracts were awarded in Q2 2023, which is Europe’s third-highest quarterly deal volume ever recorded. Of those contracts, five were mega-deals worth more than a combined £775 million ($1 billion).

As a result, the managed services Annual Contract Value (ACV) hit a £3.4 billion ($4.5 billion) – a 15% increase from last year.

Within managed services, IT outsourcing increased 11% to £2.5 billion ($3.3 billion). This is said to be driven by year-on-year growth in application development and maintenance and data centre services.

Meanwhile, business process outsourcing rose 25% to £1 billion ($1.3 billion), fueled by strong growth in contact center, facilities management, engineering and industry-specific services.

Demand for cloud services in Europe declined 9% to £2.5 billion ($3.3 billion), despite the public cloud revenue surging past £387 billion ($500 billion).

Infrastructure-as-a-service also dropped by 13% to £1.7 billion ($2.2 billion), and software-as-a-service remained steady at £853 million ($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.

“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 rationalising their cloud costs,” added Hall.

In contrast, Synergy Research Group recently found that hyperscale providers will account for more than half of worldwide data centre capacity by 2027.

The UK leads the way

The UK is Europe’s largest geographic market for IT and business services, generating £1.1 billion ($1.5 billion) of managed services ACV, representing a 50% increase year-on-year.

ISG witnessed strong demand for IT outsourcing services in the UK from the retail, energy and telco sectors.

Double-digit growth was also seen in Germany, Austria, and Switzerland, with managed services ACV up 16% to £693 million ($894 million).

France witnessed a 20% decline in managed services ACV to £304 million ($393 million). ISG said this was due to weakness in the IT outsourcing, business process outsourcing, and telco industries. However, they confirmed France remains a robust market.

What can we expect for the rest of 2023?

ISG lowered its forecast for XaaS revenue grown in 2023 to 11.5%. This is down 350 basis points from its March prediction. Managed services growth is expected to remain at 5%.

“In determining our forecast, we considered macro uncertainties that have delayed decision-making and tightened discretionary spending, thus slowing movement in the pipeline. Digital transformation is not discretionary spending, but enterprises are more cautious about investments,” said Hall.

With interest rates rising more in the past year compared to the last 30 years, big infrastructure investments could be dampened.

“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,” concluded Hall.

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