Europe Sees AI-Driven Cloud Growth in Q4 as Managed Services Demand Slows: ISG Index™

Combined market ACV up 17% from prior year, but down 7% from Q3Managed services ACV off 5%, while XaaS soars 42%

AI-driven demand for cloud services fueled overall growth in Europe’s IT and business services market in the fourth quarter, even as demand for managed services slowed, 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) advanced 17 percent, to US $8.3 billion, in the fourth quarter, but slowed by 7 percent sequentially from a record third quarter.

“Europe came off a record high demand for managed services in the third quarter, as continued economic uncertainty and geopolitical tensions weighed on the market during the fourth quarter,” said Steve Hall, president, ISG EMEA. “On the plus side, demand for cloud services surged to an all-time quarterly high, as enterprises reaccelerated their move to the cloud, seeking overall cost savings and greater efficiency and innovation through AI.”

Q4 Results by Segment

Managed services ACV for the fourth quarter declined 5 percent year on year, to US $3.7 billion, and was down 25 percent sequentially from a record third quarter. There were 283 managed services contracts awarded in the quarter, up 10 percent versus the prior year, but down 8 percent quarter on quarter. During the fourth quarter, only one mega-deal (contract with an annual value of $100 million or more) was awarded, down sharply from the six mega deals awarded in Q3. At the other end of the spectrum, deals in the US $5 million to US $9 million category, the smallest measured by the ISG Index, rose 12 percent versus the prior year.

Within managed services, IT outsourcing (ITO) slumped 7 percent year on year, to US $2.7 billion, driven lower by an 18 percent decline in application and development services, the largest ITO segment. Business process outsourcing (BPO), meanwhile, rose 2 percent, to US $992 million, boosted by facilities management and HR services.

ACV in the cloud-based as-a-service (XaaS) segment soared 42 percent versus the prior year, to US $4.6 billion, and was up 14 percent against the prior quarter. The market’s percentage growth year on year was the most in a quarter since the second quarter of 2022. Over the last four quarters, Europe’s demand for cloud services has grown an average of 23.5 percent a quarter.

Both the infrastructure-as-a-service (IaaS) and software-as-a-service (SaaS) segments turned in strong performances in Q4. IaaS climbed 52 percent year on year, to US $3.4 billion, while SaaS rose 21 percent, to $1.2 billion.

Full-Year Results

Combined market ACV was up 14 percent for the full year, to a record US $32.6 billion, surpassing the previous annual record in 2022 by 8 percent. In 2023, the combined market was down 5 percent.

Managed services had a record year, with ACV of US $16.6 billion, up 5.6 percent, although the entire upside for the year was driven by strong growth in Q3. ITO, at US $12.4 billion, was up 6 percent, while BPO, at US $4.1 billion, was up 4 percent. A total of 1,164 managed services contracts were awarded in 2024, up 11 percent from the prior year. Thirteen of those were mega deals, up from 12 in the prior year, even as the combined annual value of the mega deals was down 12 percent.

New scope ACV advanced 10 percent, to a record $10.7 billion. By industry, travel and transportation ACV soared 84 percent versus the prior year, on the strength of large awards in Germany. Energy, retail and manufacturing were each up slightly, while the region’s largest sourcing sector, banking, financial services and insurance (BFSI), slumped 22 percent.

The XaaS market generated ACV of US $16.0 billion, up 23 percent, surpassing its previous annual high in 2022 by 9 percent, after slumping 11.5 percent in 2023. IaaS jumped 30 percent, to US $11.6 billion, while SaaS rose 8 percent, to US $4.4 billion. XaaS accounted for 49 percent of the combined market in 2024, up from 45 percent in 2023.

Geographic Performance

In the fourth quarter, the region’s largest market, the U.K., declined 33 percent from the prior year, to US $935 million of managed services ACV, its weakest quarter in two years after producing seven straight quarters with ACV of more than US $1 billion. Meanwhile, DACH, the region’s second-largest market, saw its ACV rise by 4 percent, to US $719 million, while number-three market France declined 11.5 percent, to US $708 million.

For the full year, the U.K. generated US $4.4 billion of managed services ACV, off 23 percent. DACH came in at $4.3 billion, up 64 percent, buoyed by several large contracts. The Nordics advanced 12 percent, to US $1.6 billion, and the Benelux market finished up 16 percent, to US $1.4 billion. France, meanwhile, was off 5 percent, to US $2.1 billion.

2025 Global Forecast

For the full year, ISG is forecasting 4.5 percent revenue growth for managed services, up from 1.8 percent growth in 2024, and 18 percent revenue growth for XaaS, in line with the prior year.

“We expect a gradual recovery in enterprise demand for IT and business services,” Hall said. “Companies are still cautious amid continuing economic and geopolitical uncertainty. In Europe, we are likely to see subdued growth, with the upcoming elections in Germany creating uncertainty in the market until the second half.

“At the same time, we see some tailwinds at play that should boost the global market,” Hall said. “AI spending continues to gain momentum, with hundreds of billions being spent on infrastructure, setting the stage for widespread adoption. In managed services, we're seeing early signs of improvement in the BFSI sector as discretionary spending begins to pick up.”

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 89 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 4Q24 Global ISG Index results were presented during a webcast January 16. 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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