Asia Pacific Cloud Spend Rebounds in Q4, ISG Index™ Finds

Rhea-AI Summary

XaaS spending in Q4 increased by 10% compared to the prior year, while managed services fell by 34%. ISG forecasts a 15% XaaS revenue growth and 4.25% managed services growth globally in 2024. The Asia Pacific ISG Index™ reported a 10% year-on-year increase in XaaS spending, with infrastructure-as-a-service (IaaS) ACV advancing by 9% and software-as-a-service (SaaS) climbing by 18%. However, managed services ACV dropped by 34% year on year. The full-year results for Asia Pacific's combined market showed a 9% decline in ACV, with managed services ACV up by 1.5% and XaaS segment declining by 11%. ISG is forecasting a 15% revenue growth for XaaS and 4.25% growth for managed services in 2024.

Insights

Market Research Analyst

The reported increase in XaaS spending in the Asia Pacific region, particularly the 10% year-on-year growth, indicates a significant shift in enterprise IT expenditure towards cloud services. This shift is reflective of a broader global trend towards digital transformation and the adoption of scalable, flexible IT solutions. The rise in IaaS and SaaS spending suggests that companies are increasingly relying on external infrastructure and software to drive their business operations, which could signal a long-term change in IT investment strategies.

However, the steep decline in managed services, especially in IT outsourcing and business process outsourcing, highlights a possible reevaluation of long-term contracts and a preference for the variable cost models offered by XaaS providers. This trend could have implications for traditional IT service providers, potentially leading to industry consolidation or a pivot towards offering more cloud-based services.

Financial Analyst

The financial implications of the shift towards XaaS are multifaceted. On one hand, the rise in cloud services spending could lead to higher margins for providers due to the scalability of services and reduced need for physical infrastructure. On the other hand, the decline in managed services revenue could pressure companies in that sector to adapt their business models to remain competitive.

The forecasted growth rates for 2024, with XaaS revenue expected to grow by 15% and managed services by 4.25%, suggest a cautiously optimistic outlook for the IT services industry. Investors may view these projections as indicators of where to allocate capital within the sector, potentially favoring companies that are well-positioned to capitalize on the growth in cloud services.

Economist

The observed increase in cloud spending, against the backdrop of cooling inflation and potential interest rate cuts, suggests a more favorable economic environment for IT investment in the coming year. The focus on application modernization and business transformation projects is indicative of a broader economic trend towards increased productivity and efficiency through technology.

Moreover, the mention of AI's projected impact on IT and business services underscores the potential for significant economic shifts as AI technologies mature. The anticipated acceleration in public cloud spending and recovery in small discretionary deals could be early signs of a rebound in economic activity within the IT sector, with potential ripple effects across various industries reliant on these services.

XaaS spending in Q4 up 10% vs. prior year, while managed services fell 34%

ISG forecasts 15% XaaS revenue growth and 4.25% managed services growth globally in 2024

SYDNEY--(BUSINESS WIRE)-- Spending on cloud services in Asia Pacific rose in the fourth quarter, making it the only region to see both year-on-year and sequential quarterly growth in this segment, 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 Asia Pacific ISG Index™, which measures commercial outsourcing contracts with annual contract value (ACV) of US $5 million or more, shows total as-a-service (XaaS) spending rose 10 percent year on year and 2 percent sequentially, to US $3.6 billion. Within this segment, infrastructure-as-a-service (IaaS) ACV advanced 9 percent versus the prior year, to US $3.2 billion, while software-as-a-service (SaaS) climbed 18 percent, to $443 million.

The picture for managed services was not as rosy. Fourth-quarter ACV for managed services dropped 34 percent year on year, to US $885 million, against a difficult comparison with a strong prior-year quarter. IT outsourcing (ITO) was down 24 percent, to US $684 million, while business process outsourcing (BPO) was off 53 percent, to US $202 million.

As a result, Asia Pacific’s combined market (both XaaS and managed services) was down 3 percent, to $4.5 billion, in the fourth quarter versus the prior year – the sixth straight quarter of declining year-on-year results.

“The rebound in cloud spending is a welcome sign for the Asia Pacific market,” said Michael Gale, partner and regional leader, ISG Asia Pacific. “Combined market spending was up more than 7 percent sequentially from the third quarter, the best quarter-over-quarter growth rate in the last two years, led by 36 percent sequential growth in managed services. This could be an early sign that the Asia Pacific market has bottomed out and is poised for a rebound in 2024.”

From a global perspective, Gale noted that inflation is cooling rapidly and central banks are planning interest rate cuts. “That should create a more friendly environment for enterprise spending and capital deployment in 2024,” he said. Gale also pointed to the positive impact AI will have on the market in the coming years. “As AI technology matures and new use cases are identified, it will have a massive impact on the IT and business services and software industries.”

Full-Year Results

For the full year, Asia Pacific’s combined market generated ACV of US $17.7 billion, down 9 percent versus the prior year, the first time since 2015 the combined market fell into negative territory.

Managed services ACV, at US $3.5 billion, was up 1.5 percent, its highest full-year ACV since 2012. The segment was led by 13 percent growth in ITO, to US $2.8 billion, fueled by strong demand for application services, even as BPO slid 27 percent, to US $755 million. Spending declined in most industry verticals, with the exception of manufacturing (up 85 percent) and telco (up 13 percent). Financial services spending was down 26 percent. A total of 222 managed services contracts were signed in 2023, down 20 percent from the prior year.

The XaaS segment declined 11 percent, to US $14.2 billion of ACV, the first time this market declined for a full year. IaaS was down 12 percent, to US $12.6 billion, while SaaS dropped 10 percent, to US $1.6 billion. The XaaS segment accounted for 80 percent of the combined market in 2023, down from 82 percent in the prior year.

Geographic Performance

For the full year, Australia/New Zealand (ANZ) generated US $1.2 billion of managed services ACV, up 5 percent versus the prior year. India also generated US $1.2 billion of ACV, up 87 percent, to eclipse ANZ as the region’s largest geographic market for ACV in 2023. Among other notable markets, Japan was down 29 percent and Southeast Asia was down 51 percent.

2024 Forecast

ISG is forecasting 4.25 percent growth for managed services and 15 percent revenue growth for XaaS in 2024.

“We expect spending for application modernization and business transformation projects to continue at high levels in 2024, and for GenAI to be a strong contributor to growth. Public cloud spending also should accelerate as optimizations phase out. We also expect small discretionary deals to recover, as well as financial services industry spending to rebound,” Gale said.

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 85 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 4Q23 Global ISG Index results were presented during a webcast on January 18. 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 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 1,600 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.

View source version on businesswire.com: https://www.businesswire.com/news/home/20240123913448/en/

Press Contacts:



Will Thoretz, ISG

+1 203 517 3119

will.thoretz@isg-one.com



Julianna Sheridan, Matter Communications for ISG

+1 978-518-4520

isg@matternow.com

Source: Information Services Group, Inc.

FAQ

What was the year-on-year increase in XaaS spending in Q4?

XaaS spending in Q4 increased by 10% compared to the prior year.

What was the year-on-year change in managed services ACV in Q4?

Managed services ACV dropped by 34% year on year in the fourth quarter.

What is the ticker symbol for Information Services Group?

The ticker symbol for Information Services Group is 'III'.

What is the 2024 revenue growth forecast for XaaS?

ISG is forecasting a 15% revenue growth for XaaS in 2024.

What is the 2024 growth forecast for managed services?

ISG is forecasting a 4.25% growth for managed services in 2024.