SYDNEY--(BUSINESS WIRE)-- Asia Pacific’s demand for IT and business services in the first quarter bounced back from a weak fourth quarter but was still down significantly from the prior year, 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 Asia Pacific ISG Index™, which measures commercial outsourcing contracts with annual contract value (ACV) of US $5 million or more, shows first-quarter ACV for the combined market (cloud-based XaaS and managed services) rose 4 percent sequentially from the fourth quarter, to US $4.1 billion, but was down 14 percent versus the prior year.

“Asia Pacific had quite a run in 2021 and 2022, with six straight quarters of ACV over US $4 billion, including one US $5 billion-plus quarter in Q4 2021, before dropping below the US $4 billion level last quarter,” said Scott Bertsch, partner and regional leader, ISG Asia Pacific “It’s good to see the market above $4 billion again, and to see the return of sequential growth after four straight quarters of declining results.”

The cloud-based XaaS market grew 24 percent sequentially versus the fourth quarter, to US $3.3 billion, but was down 23 percent from a year ago. The reverse was true for managed services, with ACV of $825 million up 62 percent versus the prior year, but down 37 percent from the fourth quarter.

In the XaaS space, infrastructure-as-a-service declined 24 percent versus the prior year, to US $2.9 billion, although it was up 32 percent sequentially from the fourth quarter. Software-as-a-service, meanwhile, declined 14 percent year on year, to US $380 million, and was down 12 percent sequentially.

“The last three quarters have seen year-over-year declines in cloud services ACV, with the last two dropping more 20 percent, putting us in the middle of the biggest sustained decline the XaaS segment has ever experienced in this region,” Bertsch said. “The market appears to have bottomed out in Q4, so we expect to see positive comps return soon.”

Bertsch said softening cloud demand in Asia Pacific can be attributed, in part, to the Covid lockdown in China, which impacted big providers like Alibaba, Tencent and Baidu. “These providers have ceded market share to such players as China Telecom, China Unicom and Huawei,” he noted.

Within managed services, IT outsourcing in the first quarter soared 74 percent, to US $643 million, and business process outsourcing climbed 32 percent, to US $182 million, both versus the prior year. While the managed services market remains uneven quarter to quarter, five of the last eight quarters have topped US $800 million of ACV.

During the first quarter, 57 managed services contracts were awarded, up 21 percent versus the prior year, but down sharply off the record 97 awards made in the fourth quarter last year.

Geographic Performance

Australia and New Zealand (ANZ) generated US $483 million of managed services ACV in the first quarter, its best quarterly performance since the fourth quarter of 2021 and up triple digits versus the prior year. India and South Asia was up 32 percent year on year, posting its fourth straight quarter of managed services ACV over $100 million, the first such streak since 2012. Meanwhile, both Southeast Asia and Japan began the year with managed services ACV down more than 25 percent each from the prior year.

2023 Global Forecast

ISG lowered its forecast for global XaaS growth in 2023 to 15 percent, down 200 basis points from its January forecast, and maintained its global growth forecast for managed services at 5 percent.

“Globally, the macro environment remains uncertain, with interest rates, inflation and trouble in the banking sector topping concerns for enterprise clients,” said Bertsch. “There continues to be more scrutiny on deal signings, especially in discretionary spending areas. Enterprises are revisiting cost optimization, efficiency gains and vendor consolidation deals.”

ISG said industry attrition has stabilized and the firm expects hiring to improve in the back half of the year. The decline in global XaaS bookings is expected to last through the second quarter, with demand picking up again in the second half, ISG said.

About the ISG Index™

The ISG Index™ is recognized as the authoritative source for marketplace intelligence on the global technology and business services industry. For 82 consecutive quarters, it has detailed the latest industry data and trends for financial analysts, enterprise buyers, software and service providers, law firms, universities and the media. For more information about the ISG Index, visit this webpage.

About ISG

ISG (Information Services Group) (Nasdaq: III) is a leading global technology research and advisory firm. A trusted business partner to more than 900 clients, including more than 75 of the world’s top 100 enterprises, 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 1,600 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.