Europe’s IT, Business Services Sector on the Rebound in Q1: ISG Index

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Europe’s demand for IT and business services in the first quarter rose for the first time in a year, powered by growth from the banking, financial services and insurance (BFSI) sector, according to the latest state-of-the-industry report from Information Services Group (ISG), a leading global technology research and advisory firm.

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 as-a-service) rose 2.5 percent, to US $7.5 billion, in the first quarter. The market’s year-on-year growth in Q1 broke a string of four consecutive quarters the region was down versus the prior year.

“The European market is on the rebound,” said Steve Hall, president, ISG EMEA. “Both managed services and cloud services were higher in Q1, and managed services was up nearly 5 percent year on year for BFSI, the region’s largest business sector. Business process outsourcing was strong, and we also saw a surge in bundled ADM and infrastructure activity across the region.”

Q1 Results by Segment

Managed services ACV in the first quarter rose 3 percent, to US $3.9 billion. There were 277 managed services contracts signed in the quarter, down 8 percent from the prior year, but up 9.5 percent sequentially from the fourth quarter. Among those contracts were two mega deals (ACV of US $100 million or more). The volume of smaller deals (under US $30 million) was down 10 percent year on year as economic uncertainty weighed on discretionary spending. With companies still focusing on cost reduction, the ACV of restructured contracts climbed 12 percent.

Within managed services, IT outsourcing (ITO) was down 7 percent, to US $2.8 billion, driven by declines in data center and standalone application development and maintenance (ADM) services. Meanwhile, the ACV of bundled infrastructure and ADM services was up more than 80 percent.

Business process outsourcing (BPO) soared 40 percent, to US $1.1 billion, fueled by rising demand for industry-specific services.

By industry, managed services ACV was sharply higher (up 80 percent) in the travel, transportation and leisure sector. BFSI, Europe’s largest industry for outsourcing, saw its ACV climb nearly 5 percent, offsetting weakness in the next two largest sectors – manufacturing (down 5 percent) and telecommunications (down 10 percent).

ACV in the as-a-service (XaaS) segment rose 2 percent year on year, and 9 percent from the prior quarter, to US $3.6 billion – its best quarterly result since the fourth quarter of 2022. This segment’s first-quarter growth ended a streak of four consecutive quarters of year-on-year declines.

Within this segment, infrastructure-as-a-service (IaaS) advanced 7 percent, to US $2.5 billion, fueled in part by growing interest in the data services required to feed generative AI models, while software-as-a-service (SaaS) declined 8 percent, to US $1.0 billion.

Geographic Performance

The region’s largest market, the U.K., generated US $1.2 billion of managed services ACV, its fifth consecutive quarter with ACV of more than US $1 billion, although it was down 4 percent versus the prior year. DACH (Germany, Austria and Switzerland), the region’s second-largest market, saw its ACV decline 6 percent, to US $647 million, while France slipped out of its usual number-three spot as its ACV fell 27 percent, to US $471 million. The Nordics eclipsed France to become Europe’s third-largest ACV market in the first quarter, with ACV of US $600 million, up 45 percent year on year.

2024 Global Forecast

ISG is forecasting 3 percent growth for managed services, down 125 basis points from its January forecast, and maintaining its forecast of 15 percent revenue growth for XaaS in 2024.

“Looking ahead to the rest of the year, economic conditions are forecasted to be less volatile than in 2023, but challenges persist,” Hall said. “The global economy is expected to slow down, impacted by monetary policies to combat inflation, which is expected to decline.

“In this environment, outsourcing could see a boost as companies seek to balance cost management and service quality. GenAI, meanwhile, is poised to be a growth catalyst, with large hyperscalers expected to manage increasing workloads. The data layer, integral for training AI models, presents a prime opportunity for service providers.”