London-(Business Wire) – Europe’s IT and business services market declined slightly in the fourth quarter, marking the first time in the past 13 quarters that the region failed to post year-over-year growth, according to information from Information Services Group (ISG) (NASDAQ : III), a leading global technology research and consulting company.
The EMEA ISG Index™, which measures business outsourcing contracts with an annual contract value (ACV) of US$5 million or more, shows that the combined market (managed services and cloud-based as a service) had an ACV of US$7.2 billion in Q4, down 1% from the previous year %. This is the first time since the third quarter of 2019 that the region has not registered year-over-year growth.
Managed Services ACV for the quarter was $3.4 billion, down 3%. Contract awards rose 12% to 234 contracts, but this was the lowest quarterly number for the region this year after a record third quarter. IT outsourcing (ITO) slipped 15 percent to $2.5 billion, while business process outsourcing (BPO) surged 73 percent to $873 million, driven primarily by growth in engineering services and facilities management.
ACV in the as-a-service (XaaS) segment was $3.8 billion, up 0.5% from the prior year and the slowest growth rate since Q1 2015. Infrastructure as a service (IaaS) rose 4% to $2.8 billion, while software as a service (SaaS) fell 7% to $1.0 billion.
“After strong growth in the previous three quarters, Europe has declined slightly this year,” said Steve Hall, president of ISG Europe, the Middle East and Africa. “Economic and energy issues may have a dampening effect on spending. The record full-year performance paints a brighter picture of overall demand, with early market indicators pointing to growth into 2023.”
The combined market ACV in EMEA reached a record $30.1 billion for the year, an 11% increase over the previous year.
Managed services hit a record high with ACV of $14.9 billion, up 6%, the region’s best performance since 2011. While ITOs fell 1 percent to $11.3 billion, BPOs rose 37 percent to $3.6 billion. A record 1,031 managed services contracts were awarded in 2022, an increase of 14% over the previous year.
The XaaS segment generated record ACV at $15.3 billion, up 17% and accounting for 51% of the combined market, compared to 48% in 2021. IaaS grew 23% to $11.3 billion, while SaaS grew 2% to $3.9 billion in the US.
DACH (Germany, Austria and Switzerland), the region’s second-largest market, generated $772 million in managed services ACV in Q4, up 19% year-over-year, driven by infrastructure services and banking, financial services and insurance (BFSI) Serve. Conversely, managed services in the UK, the region’s largest market, fell 28% to $843 million as demand for BFSI and application development and maintenance services slowed. France also saw a decline, with Managed Services ACV down 16% to $430m as demand for BFSI and data center services slowed.
For the year, DACH generated $3.5 billion in managed services ACV, up 14%, while the UK grew 1% to $3.7 billion in ACV. Likewise, France rose 1 percent to $2.2 billion.
2023 global forecast
ISG sees several potential positive developments for markets heading into 2023, including the end of rate hikes, falling inflation, China reopening, supply chains beginning to normalize, and the U.S. dollar off recent highs.
Hall said XaaS providers are still dealing with “tech glut” and are compensating for weak demand by downsizing their workforces after a surge in hiring over the past few years. With this in mind, ISG forecasts an annual ACV growth rate of 17% for the XaaS market in 2023, which is lower than in previous years.
As for managed services, the shift toward cost optimization “should provide a favorable tailwind for this market,” Hall said. ISG predicts 5% ACV growth for managed services in 2023.
About the ISG Index™
The ISG Index™ is recognized as the authoritative source of market intelligence for the global technology and business services industries. For 81 consecutive quarters, it has detailed the latest industry data and trends for financial analysts, corporate buyers, software and service providers, law firms, universities and the media. For more information on the ISG Index, please visit this webpage.
ISG (Information Services Group) (Nasdaq: III) is a leading global technology research and consulting company. A trusted business partner to more than 800 clients, including more than 75 of the Fortune 100, ISG helps businesses, public sector organizations, and service and technology providers achieve operational excellence and faster growth. The company focuses on digital transformation services, including automation, cloud and data analytics; procurement consulting; management governance and risk services; network carrier services; strategy and operations design; management change; market intelligence and technology research and analysis. Founded in 2006 and headquartered in Stamford, Connecticut, ISG has more than 1,300 digital professionals in more than 20 countries—a team with innovative thinking, market reach, deep industry and technology expertise, and world-class Technology renowned global team for research and analysis capabilities based on the industry’s most comprehensive market data. For more information, please visit www.isg-one.com.