EMEA Outsourcing Returning to Pre-2015 Levels: ISG Index™

Company Release - 7/18/2019 5:00 AM ET

Region's managed services ACV exceeds €2.7 billion for second straight quarter, three of last five, signaling return to pre-2015 spending levels;

As-a-service ACV up 17% in half, now accounts for record share of region's combined market;

'Uncertainty becomes the new normal,' as U.K. and DACH remain flat; first-half growth spurred by Nordics, Benelux and Southern Europe

LONDON, July 18, 2019 /PRNewswire/ -- The value of Europe's managed services contracts in the second quarter exceeded €2.7 billion (£2.4 billion) for the second quarter running, indicating a potential return to pre-2015 spending levels, according to the latest state-of-the-industry report from Information Services Group (ISG) (Nasdaq: III), a leading global technology research and advisory firm.

The EMEA ISG Index™, which measures commercial outsourcing contracts with annual contract value (ACV) of €4 million or more, shows the region's combined first-half ACV, including both managed services and as-a-service contracts, was up 12 percent, to €8.9 billion.

Managed services, with two straight quarters exceeding €2.7 billion in ACV, reached €5.7 billion in the first half, up 10 percent against the softer 2018 period. Within managed services, IT outsourcing (ITO) rose 12 percent, to €4.7 billion, while business process outsourcing (BPO) was up 1 percent, to €1.0 billion. The second quarter was the third quarter in the last five that managed services ACV exceeded €2.7 billion.

With continuing strong demand for cloud-based solutions, as-a-service ACV climbed 17 percent, to €3.2 billion, in the half. Infrastructure-as-a-Service (IaaS) surged 19 percent, to €2.4 billion, while Software-as-a-Service (SaaS) rose 9 percent, to €846 million.

Growing demand for as-a-service solutions shows no signs of abating, with these solutions now accounting for 36 percent of combined market spending. In the second quarter, as-a-service reached €1.6 billion, up 9 percent. IaaS, which is becoming the digital foundation for businesses (and has tripled in growth since 2016), reached €1.1 billion in the quarter, up 7 percent. Software-as-a-Service, up 16 percent, reached a quarterly record of €437 million.

Managed services ACV, meanwhile, dropped 1 percent in the second quarter, to €2.9 billion, but the number of contract awards reached 204, up 10 percent over the prior year, only the third time in the history of the ISG Index the region surpassed the 200-award level in a quarter. ITO was up 2 percent, but BPO slumped 14 percent.

Steve Hall, partner and president of ISG, said: "For the past couple of quarters, we've been bracing for the impact of some of the macro risks that could affect the global economy — Brexit, tariffs and trade wars. But the talk about overall market growth has turned surprisingly positive. There continue to be recession concerns in European markets, especially the U.K. and Germany, but overall technology spend remains robust. With the Brexit deadline pushed farther out once again, uncertainty has become the new normal for many businesses in the U.K., and companies seem to be making strategic adjustments."

Globally, managed services ACV was down 3 percent in the second quarter against a very strong 2018 period, but combined market ACV was up 5 percent, driven by 14 percent growth in as-a-service contracting.

Market Insights

Growth in managed services was primarily driven by the Nordics, Benelux and Southern Europe. Managed services ACV in Benelux more than doubled to €384 million (£346 million) in the first half; in Southern Europe by 96 percent, to €545 million (£492 million); and in the Nordics by just over 24 percent, to €972 million (£876 million).

In Europe's larger markets, France's first-half ACV grew 29 percent, to €472 million (£426 million). Overall, the outlook is strong: a total of 43 deals were signed in the first half, which compares favorably with the 27 deals signed in the first half of 2018.

DACH generated €1.4 billion (£1.3 billion) of managed services ACV in the first half, up 3 percent over the prior year on the strength of a robust first quarter. Second-quarter ACV declined 20 percent against a strong 2018 period. The number of deals signed in the first half was up slightly (82 compared with 77 in the first half of 2018).

In the U.K. and Ireland, half-year ACV was down marginally (0.4 percent), at €1.6 billion (£1.4 billion), as the U.K. still feels the impact of Brexit uncertainty. The number of outsourcing deals also was down, from 111 in the first half of 2018 to 97 this year. ISG finds U.K. companies are continuing to exercise caution in their managed services investments, instead focusing spending on new technologies that will increase their agility and efficiency.

Sector Breakdown

Telecoms and media saw the greatest growth in combined market ACV, up 40 percent compared with the first half of 2018. The banking, financial services and insurance sector increased investment by 29 percent, driven by strong growth in digital banking, cybersecurity asset management, FinTech and card payment and processing.

The sectors that saw the biggest decreases in combined market ACV were the troubled retail/CPG sector, down 11 percent, and the energy sector, down 28 percent.

Global Forecast

"Technology spending remains robust, and technology providers remain positive about tech spend in the near term," said Hall. "We are projecting 22 percent year-on-year revenue growth for the remainder of 2019 in the global as-a-service market. This takes into account a slightly more optimistic view of the SaaS segment and factors in some uncertainty in IaaS, particularly in China and elsewhere in Asia Pacific. In the managed services market, we also have an optimistic perspective and are raising our growth forecast to 3.5 percent through the end of the year. We continue to closely watch the macro-trends, though, and will adjust if the larger market makers are more severely impacted."

About the ISG Index™

Now in its 67th consecutive quarter, the ISG Index™ provides a quarterly review of the latest sourcing industry data and trends for financial analysts, enterprise buyers, software and service providers, law firms, academia and the media. For nearly 17 years, it has been the authoritative source for marketplace intelligence related to outsourcing transaction structures and terms, industry adoption, geographic prevalence and service provider performance. In 2016, the ISG Index™ was expanded to include coverage of the fast-growing as-as-service market, measuring the significant impact cloud-based services are having on digital business transformation. ISG also provides ongoing analysis of automation and other digital technologies in its quarterly ISG Index™ presentations.

About ISG

ISG (Information Services Group) (Nasdaq: III) is a leading global technology research and advisory firm. A trusted business partner to more than 700 clients, including more than 70 of the top 100 enterprises in the world, ISG is committed to helping corporations, public sector organizations, and service and technology providers achieve operational excellence and faster growth. The firm specializes in digital transformation services, including automation, cloud and data analytics; sourcing advisory; managed governance and risk services; network carrier services; strategy and operations design; change management; market intelligence and technology research and analysis. Founded in 2006, and based in Stamford, Conn., ISG employs more than 1,300 digital-ready professionals operating in more than 20 countries—a global team known for its innovative thinking, market influence, deep industry and technology expertise, and world-class research and analytical capabilities based on the industry's most comprehensive marketplace data. For more information, visit www.isg-one.com.

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