Combined market up 23%, to record $9.1 billion, fueled by double-digit growth in managed services and XaaS
In the face of tariffs, market likely headed into period of increased volatility, ISG says
Europe's demand for IT and business services reaccelerated in the first quarter after pulling back at the end of last year amid economic uncertainty, 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) reached a record US $9.1 billion in the first quarter, up 23 percent versus the prior year, and up 9 percent sequentially from the fourth quarter. The rebound came after the combined market dipped to $8.4 billion in Q4 after generating more than US $9 billion in the previous quarter.
"European demand bounced back in the first quarter-the third consecutive quarter the region has generated double-digit ACV growth versus the prior year," said Steve Hall, president of ISG's EMEA region. "Europe continues to focus on digital transformation, embracing the cloud and AI to achieve cost efficiencies, faster speed to market and greater innovation."
Despite the strong performance on Q1, Hall noted that the market is likely headed into a period of increased volatility. "The introduction of sweeping U.S. tariffs and potential retaliatory measures has raised short-term uncertainty. We expect enterprises to have longer decision cycles, hold the line on discretionary spending and re-evaluate capital-intensive projects-particularly in industries like manufacturing, retail, automotive and financial services," he said.
Q1 Results by Segment
Managed services ACV in the first quarter rose 13 percent, to US $4.4 billion, its second-best quarter ever, trailing only last year's third quarter. There were 279 managed services contracts signed in the quarter, one more than in the same period last year, but down 4 percent from the fourth quarter. Among those contracts were three mega deals (ACV of US $100 million or more), versus two in the prior-year quarter. New scope ACV was up 27 percent in Q1, to $2.9 billion.
Within managed services, IT outsourcing (ITO) was up 26 percent, to US $3.5 billion, with strong growth in application development and maintenance (ADM) and data center services. Business process outsourcing (BPO), meanwhile, slid 40 percent, to US $530 million, against a strong first quarter last year. Engineering, research and development (ER&D) services, previously part of BPO but now broken out separately, advanced 52 percent, to a record $377 million of ACV, versus the prior year, and soared 75 percent sequentially from the fourth quarter.
By industry, managed services ACV was sharply higher in the energy (up 64 percent) and travel, transport and leisure (up 63 percent) sectors, while manufacturing was up by double digits. On the downside, the financial services and media/telecom sectors pulled back by double digits.
ACV in the as-a-service (XaaS) segment climbed 34 percent year on year, and 3 percent from the prior quarter, to a record US $4.7 billion. It was the fourth consecutive quarter of year-on-year growth for XaaS, though growth decelerated by more than 700 basis points from the fourth quarter. Within this segment, infrastructure-as-a-service (IaaS) advanced 36 percent, to US $3.4 billion, and software-as-a-service (SaaS) rose 30 percent, to US $1.3 billion.
Geographic Performance
The region's largest market, the U.K., generated US $1.1 billion of managed services ACV, down 3.5 percent year on year. After seeing its string of seven straight $1 billion-plus quarters snapped in the fourth quarter, the market climbed back to a more typical level of spending in the first quarter, rising 19 percent from Q4.
In terms of year-on-year growth, France led the way, soaring 86 percent, to US $866 million of ACV, followed by DACH, up 35.5 percent, to US $884 million. The Nordics, meanwhile, dropped 15 percent, to US $516 million.
2025 Global Forecast
Despite Europe's strong first quarter, heightened uncertainty from trade policy, geopolitical tensions and evolving regulations are beginning to weigh on second-quarter forecasts, Hall said.
Hall noted that ISG's forecasts for market growth in 2025 are based on two scenarios. In the first scenario, the tariff environment stabilizes by midyear, and the market sees faster decision-making in the second half. Under that scenario, ISG forecasts XaaS growth of 18 percent for 2025, unchanged from its January forecast. ISG's forecast for managed services growth would be 1.3 percent, down from its January forecast of 4.5 percent.
In the second scenario, tariffs would extend through the third quarter or beyond, compounded by immigration enforcement, prevailing wage issues or retaliatory digital services taxes in the EU. "Under this scenario, we would anticipate a longer pullback in discretionary demand and longer delays in award conversion," Hall said. "In this more bearish case, XaaS growth for the year would moderate to 15 percent, while managed services spending would be negative 2.4 percent, a nearly 700 basis-point swing from our January forecast."
Said Hall: "We remain cautious in our base case, but not pessimistic. The signals from Q1 are fundamentally strong. The shift we're seeing is not one of declining demand, but one of delayed commitment."
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 90 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.
The 1Q25 Global ISG Index results were presented during a webcast on April 10. To view a replay of the webcast and download presentation slides, visit this webpage.
About ISG
ISG (Nasdaq: III) is a global AI-centered technology research and advisory firm. A trusted partner to more than 900 clients, including 75 of the world's top 100 enterprises, ISG is a long-time leader in technology and business services that is now at the forefront of leveraging AI to help organizations achieve operational excellence and faster growth. The firm, founded in 2006, is known for its proprietary market data, in-depth knowledge of provider ecosystems, and the expertise of its 1,600 professionals worldwide working together to help clients maximize the value of their technology investments.
View source version on businesswire.com: https://www.businesswire.com/news/home/20250414603024/en/
Contacts:
Press Contacts:
Philipp Jaensch, ISG
+49 151 730 365 76
philipp.jaensch@isg-one.com
Will Thoretz, ISG
+1 203 517 3119
will.thoretz@isg-one.com
