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Europe’s IT, Business Services Market Slows in Q4, ISG Index™ Finds

Europe’s IT and business services market was down slightly in the fourth quarter, the first time in the last 13 quarters the region failed to produce year-over-year growth, 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) at US $7.2 billion for the fourth quarter, down 1 percent from the prior year. It was the first time since the third quarter of 2019 that the region did not register year-over-year growth.

Managed services ACV for the quarter came in at US $3.4 billion, down 3 percent. Contract awards were up 12 percent, to 234 contracts, but that was the region’s lowest quarterly volume this year after a record-setting third quarter. IT outsourcing (ITO) slumped 15 percent, to US $2.5 billion, while business process outsourcing (BPO) soared 73 percent, to US $873 million, driven by growth in engineering services and facilities management.

ACV in the as-a-service (XaaS) segment, at US $3.8 billion, was up 0.5 percent versus the prior year, the slowest growth since the first quarter of 2015. Infrastructure-as-a-service (IaaS) rose 4 percent, to US $2.8 billion, while software-as-a-service (SaaS) dipped 7 percent, to US $1.0 billion.

“Europe finished the year on a bit of a down note, after robust growth in the prior three quarters,” said Steve Hall, president, ISG EMEA. “Economic and energy concerns likely had a dampening effect on spending. However, the region’s record full-year results paint a much brighter picture of overall demand and early market indicators bode well for growth in 2023.”

Full-Year Results

EMEA’s combined market ACV reached a record US $30.1 billion for the year, up 11 percent over the prior year.

Managed services had a record year, with ACV of US $14.9 billion, up 6 percent, the region’s best performance since 2011. Even though ITO, at US $11.3 billion, was down 1 percent, BPO climbed 37 percent, to US $3.6 billion. A record 1,031 managed services contracts were awarded in 2022, up 14 percent versus the prior year.

The XaaS segment generated record ACV of US $15.3 billion, up 17 percent, and accounted for 51 percent of the combined market, versus 48 percent in 2021. IaaS rose 23 percent, to US $11.3 billion, while SaaS was up 2 percent, to US $3.9 billion.

Geographic Performance

In the fourth quarter, the region’s second-largest market, DACH (Germany, Austria and Switzerland), generated US $772 million of managed services ACV, up 19 percent versus the prior year, on the strength of infrastructure services and banking, financial services and insurance (BFSI) services. Conversely, managed services in the UK, the region’s largest market, was down 28 percent, to US $843 million, as demand for BFSI and application development and maintenance services slowed. France, likewise, was down, with managed services ACV declining 16 percent, to US $430 million, as demand slowed for BFSI and data center services.

For the full year, DACH generated US $3.5 billion of managed services ACV, up 14 percent, while the UK rose 1 percent, to US $3.7 billion of ACV. France, likewise, was up 1 percent, to US $2.2 billion.

2023 Global Forecast

ISG sees several potential positive developments for the market heading into 2023, including interest rate hikes coming to an end, inflation lessening, China reopening, supply chains beginning to normalize, and the U.S. dollar coming off recent highs.

Hall said XaaS providers are still dealing with “tech excess” and compensating for softening demand by reducing the size of their work forces after a period of significant hiring the last few years. Given this, ISG is forecasting annual ACV growth of 17 percent for the XaaS market in 2023, lower than in prior years.

As for managed services, the shift toward cost optimization “should provide favorable tailwinds for this market,” Hall said. ISG is forecasting 5 percent ACV growth for managed services in 2023.

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 81 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 800 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 1,300 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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