Asia Pacific IT, Business Services Market Boosted by Strong Demand for Managed Services, Q2 ISG Index™ Shows

Rhea-AI Summary

The Asia Pacific IT and business services market surpassed US $5 billion for the first time in two years, according to the latest ISG Index™. The combined market ACV rose 8% year-over-year to just over US $5.0 billion in Q2 2024. Managed services saw a significant boost, with ACV climbing 32% to US $1.4 billion, marking the region's best quarter in 12 years. Cloud-based services (XaaS) grew 1% to US $3.6 billion.

Key highlights include:

• 81 managed services contracts awarded, up 37% year-on-year
• IT outsourcing (ITO) ACV rose 8% to over US $1 billion
• Business process outsourcing (BPO) surged 237% to US $367 million
• Strong demand in South Korea, China, and Japan
• Manufacturing, telecommunication, and energy sectors showed growth

Positive

• Combined market ACV rose 8% year-over-year to US $5.0 billion in Q2 2024
• Managed services ACV climbed 32% to US $1.4 billion, best quarter in 12 years
• 81 managed services contracts awarded, up 37% year-on-year
• IT outsourcing (ITO) ACV rose 8% to over US $1 billion
• Business process outsourcing (BPO) surged 237% to US $367 million
• Strong demand in South Korea, China, and Japan, with latter two markets producing their best quarters ever
• Manufacturing, telecommunication, and energy sectors showed growth

Negative

• Cloud-based services (XaaS) growth slowed to 1% year-over-year
• XaaS ACV down 8% sequentially against Q1 2024
• Australia/New Zealand market down 30% in Q2
• Banking, financial services and insurance (BFSI) sector pulled back during the quarter
• ISG lowered its 2024 global forecast for managed services growth from 3% to 2%
• Uncertainty persists in the IT and business services market, with no clear catalyst for higher discretionary spending

Insights

Financial Analyst

The Asia Pacific IT and business services market saw significant growth, with managed services ACV up 32% and total spending crossing US $5 billion. This is the first time in two years the region has crossed this threshold, indicating a robust recovery in demand for managed services. The financial implications for companies involved in managed services are strong, with a notable increase in contract value and volume. This offers a positive outlook for companies like those in IT outsourcing (ITO) and business process outsourcing (BPO).

However, while managed services show substantial growth, the cloud-based services segment, specifically XaaS (Everything-as-a-Service), experienced minimal growth at 1% and a sequential decline of 8%. This contradiction reveals a mixed market sentiment where traditional and managed services are prioritized over cloud investments, likely due to ongoing economic uncertainties.

For retail investors, understanding the financial health of companies with significant exposure to managed services is crucial. The strong performance in the managed services segment reflects broad-based demand, evidenced by triple-digit growth in BPO and strong performances in South Korea, China and Japan. Conversely, cautiousness is advisable when considering companies heavily reliant on XaaS given its recent performance.

Market Research Analyst

The report suggests a resurgence in demand for managed services in the Asia Pacific region. Key drivers include a focus on cost optimization and infrastructure improvements. It's important to note that while US $1.4 billion was driven by ITO and BPO, the latter saw a remarkable 237% increase. This growth in BPO, especially in sectors like customer engagement and HR services, represents significant market shifts that investors should watch.

From an industry perspective, the manufacturing, telecom and energy sectors experienced growth, while BFSI and travel-related services pulled back. This divergence highlights the sectors' varying responses to economic conditions and strategic shifts. Investors might consider diversifying portfolios by including companies with strong performances in growing sectors.

The geographic insights indicate disparities within the region. For example, the contrasting movements in Australia/New Zealand (down 30%) versus India (up 4%) showcase regional economic differences affecting service demand. These factors are critical for investors assessing regional market risks.

Tech Expert

The moderate growth in cloud-based services (XaaS) at 1% indicates a cautious market approach. While there's an ongoing demand for data modernization to support Generative AI (GenAI) initiatives, investment in these areas remains tempered against broader economic uncertainties. Investors should recognize that while GenAI represents long-term potential, short-term growth may remain uneven.

The infrastructure specifics segment, primarily IaaS, stayed flat at US $3.2 billion. This stagnation contrasts with stronger growth seen in SaaS at 8%. It suggests that while companies may be cautious about large infrastructure investments, they're still investing in software solutions to drive efficiency and cost optimization.

For tech-oriented investors, the trend towards smaller managed service deals (US $5-20 million) might indicate a shift towards more agile and flexible service contracts. This trend can reflect in stock valuations and future earnings projections, especially for firms that cater to these niche, high-growth segments.

Managed services ACV up 32%, while XaaS spending rose 1% in second quarter

SYDNEY--(BUSINESS WIRE)-- Asia Pacific’s spending on IT and business services surged above US $5 billion for the first time in two years, led by a resurgence in managed services demand, 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 second-quarter ACV for the combined market (both cloud-based XaaS and managed services) rose 8 percent versus the prior year, to just over US $5.0 billion, the first time in seven quarters it eclipsed the US $5 billion mark and the third straight quarter the region delivered year-on-year growth.

Growth in the second quarter was powered by a resurgent market for managed services, which saw its ACV climb 32 percent over the prior year, to US $1.4 billion, the region’s best quarter in 12 years. Versus the first quarter of 2024, ACV was up 34 percent sequentially. Both the year-over-year and quarter-over-quarter comparisons came against strong US $1 billion-plus quarters.

During the quarter, 81 managed services contracts were awarded, up 37 percent year on year and 23 percent quarter over quarter. Deal volume was boosted by 44 percent growth in smaller deals valued between US $5 million and US $20 million per year. The value of restructured contracts, meanwhile, reached a record US $548 million of ACV, up 163 percent versus the prior year.

Demand for cloud-based services grew 1 percent, to US $3.6 billion, but ACV was down 8 percent sequentially against the first quarter of 2024. It was the third straight quarter XaaS has grown, averaging 18 percent year-on-year growth over that span, coming off a streak of five straight down quarters averaging 20 percent declines.

“Asia Pacific’s rising demand for traditional IT and business services reflects a continuing focus on cost optimization in a still uncertain economy,” said Michael Gale, partner and regional leader, ISG Asia Pacific. “Cloud-based services, which have been through a brutal downturn, are beginning to rise again, as enterprises focus on the data modernization that will enable GenAI adoption at scale.”

Within managed services, IT outsourcing (ITO) ACV rose 8 percent, to just over US $1 billion, driven by strong demand for bundled infrastructure and application development and maintenance (ADM) services and data center services. Business process outsourcing (BPO), meanwhile, surged 237 percent year on year, to US $367 million, led by triple-digit growth in customer engagement, facilities management, HR and engineering, research and development (ER&D) services.

From a geographic perspective, demand for managed services was up markedly in South Korea, China and Japan, the latter two markets producing their best quarters ever, up triple digits. The region’s two largest markets, Australia/New Zealand (ANZ) and India, meanwhile, moved in opposite directions, with ANZ down 30 percent in the quarter and India up 4 percent.

By industry, manufacturing, telecommunication and energy all moved to the upside, while banking, financial services and insurance (BFSI) and travel and transportation pulled back during the quarter.

Within the XaaS segment, infrastructure-as-a-service (IaaS) ACV was flat, at US $3.2 billion, while software-as-a-service (SaaS) ACV rose 8 percent, to US $430 million.

First-Half Results

Asia Pacific’s combined market ACV rose 19 percent versus the prior year, to US $9.9 billion, a dramatic turnaround from the first half of 2023, when the market was down 20 percent versus the same period in 2022, when Asia Pacific demand reached its zenith.

Managed services produced its best first half ever, with ACV of nearly US $2.5 billion, up 26 percent year on year. ITO ACV was up nearly 5 percent, to US $1.7 billion, while BPO ACV surged 126 percent, to US $773 million.

Among industries, managed services ACV in BFSI was up 43.5 percent year to date, with most other verticals up sizably in the half, with the exception of manufacturing, which pulled back 17 percent.

On the cloud side, XaaS ACV rose 17 percent, to US $7.5 billion. IaaS climbed 18 percent, to US $6.6 billion, and SaaS advanced 13 percent, to US $878 million.

2024 Global Forecast

For the full year, ISG is forecasting 2 percent revenue growth for managed services, down 100 basis points from its April forecast, and 14 percent revenue growth for XaaS, down from its 15 percent growth forecast in April.

“Uncertainty persists in the IT and business services market, with no clear catalyst at the moment to push discretionary spending higher,” said Steve Hall, president and chief AI officer of ISG, and global leader of the ISG Index. “Activity in the important BFSI sector remains dampened, due to the higher-for-longer interest rate environment, impacting the overall growth of the market. Enterprises in general continue to focus on cost optimization, and AI growth, while strong, is likely masking underlying weakness in the IT and business services industry.”

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 87 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, or to view a replay of the 2Q24 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 and 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/20240716214282/en/

Press:

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 total ACV for Asia Pacific IT and business services in Q2 2024?

The total ACV for Asia Pacific IT and business services in Q2 2024 was just over US $5.0 billion, marking an 8% increase year-over-year.

How did managed services perform in Asia Pacific during Q2 2024?

Managed services in Asia Pacific saw strong growth in Q2 2024, with ACV climbing 32% year-over-year to US $1.4 billion, marking the region's best quarter in 12 years.

What was the performance of XaaS (cloud-based services) in Asia Pacific for Q2 2024?

XaaS (cloud-based services) in Asia Pacific grew 1% year-over-year to US $3.6 billion in Q2 2024, but was down 8% sequentially compared to Q1 2024.

How many managed services contracts were awarded in Asia Pacific during Q2 2024?

81 managed services contracts were awarded in Asia Pacific during Q2 2024, representing a 37% increase year-on-year and a 23% increase quarter-over-quarter.

Which industries showed growth in managed services demand in Asia Pacific for Q2 2024?

Manufacturing, telecommunication, and energy industries showed growth in managed services demand in Asia Pacific for Q2 2024.