Combined market ACV up 32%, on strong demand for managed services and XaaS
ISG maintains full-year growth forecast and expects to see stronger results in 2025
Europe's IT and business services market showed signs of momentum in the third quarter, reaching new highs for annual contract value and deal volume, even as demand in the bellwether financial services sector remains weak, 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 US $5 million or more, shows ACV for the combined market (both managed services and cloud-based as-a-service) rose 32 percent, to a record US $8.9 billion in the third quarter. Since bottoming out in the third quarter of last year, the combined market has grown sequentially for four straight quarters including 14 percent quarter over quarter in Q3 to reach its highest ACV ever.
"The European market had a record third quarter, after several quarters of slow growth as the region climbed back from a prolonged downturn," said Steve Hall, president, ISG EMEA. "We see this as the start of a period of accelerated growth, although there are notes of caution, most notably continued weak spending in the BFSI (banking, financial services and insurance) sector. With interest rate cuts, we see the industry picture getting brighter in the coming year."
Third-Quarter Results by Segment
Managed services ACV climbed 35 percent year on year, to a record US $4.9 billion, and was up 22 percent compared with the second quarter, boosted by the unusually high ACV of three mega-deals (ACV of US $100 million or more) in the DACH region.
"Without those deals, which should be treated as a one-time outlier, managed services ACV in the third quarter would have been US $4.2 billion, up 15 percent," Hall said.
A record 305 managed services contracts were signed in Q3, up 30 percent from the prior year, including six mega deals, double the amount from the prior-year quarter and the most the region has produced in 11 years. The annual value of those deals, US $1.1 billion, was up 39 percent year on year, to reach its highest level in nearly four years.
Other deal segments also fared well: the volume of small deals, those in the US $5 million to $10 million range, was up 40 percent, while new-scope contract volume was up 26 percent, and the number of contract restructurings rose 39 percent.
Within managed services, IT outsourcing (ITO) rose 32 percent, to US $3.6 billion, driven by double-digit growth in nearly all service lines, including application development and maintenance (ADM), infrastructure and data center services. The only exception was bundled infrastructure and ADM services, which was down slightly for the quarter.
Business process outsourcing (BPO) soared 46 percent, to US $1.3 billion, fueled by strong growth in engineering, research and development, HR outsourcing, and customer engagement services.
By industry, managed services ACV was higher in the energy, retail and travel, transport and leisure sectors. Among notable industries that saw declines were financial services (BFSI), manufacturing and media and telecommunications.
ACV in the as-a-service (XaaS) segment climbed 27 percent year on year, to a record US $4.04 billion, the first time ever the region's cloud services spending exceeded US $4 billion in a quarter. It was the third straight quarter of year-on-year growth, and the second quarter in a row the segment grew by double-digits, as rising interest in GenAI fuels stronger cloud demand.
Within this segment, infrastructure-as-a-service (IaaS) rose 36 percent, to nearly US $3.0 billion, while software-as-a-service (SaaS) advanced 8 percent, to US $1.1 billion.
Geographic Performance
Although down 38 percent year on year, the region's largest managed services market, the U.K., posted its seventh straight US $1 billion-plus quarter, with ACV in Q3 of US $1.02 billion. The DACH market (Germany, Austria and Switzerland), meanwhile, generated US $2 billion of ACV, its second-best quarter ever and up 308 percent versus the prior, fueled by the three mega-deals of unusually high value. France (up 60 percent) and Benelux (up 161 percent) also delivered strong quarters.
Nine-Month Results
At the nine-month mark, combined market ACV reached a record US $24.2 billion, up 12 percent.
Managed services, at US $12.8 billion, was up 8 percent, on the strength of 12 mega-deals, among the record 876 managed services contracts awarded year to date. Excluding the three high-value mega-deals awarded in the DACH market in Q3, managed services ACV would have been up 2 percent year to date. Within managed services, ITO was up 10 percent, at US $9.7 billion, while BPO was up 4 percent, to US $3.1 billion.
XaaS, meanwhile, was up 17 percent, to US $11.4 billion. In this segment, the IaaS market rose 23 percent, to US $8.2 billion, while the SaaS market advanced 3.5 percent, to US $3.2 billion.
2024 Forecast
For the full year, ISG is maintaining its forecast for 2 percent revenue growth for managed services, and 14 percent revenue growth for XaaS. The firm sees stronger growth in 2025.
"Despite a strong third quarter, we are maintaining our full-year forecast due to continued mixed signals in the market, especially softness in the BFSI sector," said Hall. "Recent rate cuts by the Fed and European Central Bank are expected to boost IT spending in the coming year, and other factors, such as the growing interest in GenAI, increased server shipments and the reacceleration of hyperscaler revenues, all point to a more positive outlook in 2025."
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 88 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.
The 3Q24 Global ISG Index results were presented during a webcast today. To view a replay of the webcast and download presentation slides, 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 AI, 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.
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