Europe’s IT, Business Services Sector on the Rebound in Q1: ISG Index™

Rhea-AI Summary

Europe's IT and Business Services Sector Rebounds in Q1 with 2.5% Market Growth, Led by BFSI Sector: ISG Index™

Positive

• Europe's IT and business services demand rose in Q1, driven by BFSI sector growth.
• EMEA ISG Index™ reports a 2.5% rise in the combined market, reaching US $7.5 billion.
• Managed services ACV increased by 3%, with two mega deals signed in the quarter.
• BPO saw a significant 40% surge, reaching US $1.1 billion, fueled by industry-specific services.
• XaaS segment grew by 2% year on year, with IaaS advancing by 7% and SaaS declining by 8%.
• The U.K. remains the largest market with US $1.2 billion in managed services ACV.
• ISG forecasts 3% growth for managed services and 15% revenue growth for XaaS in 2024.

Negative

• None.

Insights

Market Research Analyst

The recent uptick in Europe's IT and business services sector reflects a nuanced recovery of a market that had previously seen a decline over four consecutive quarters. This growth, particularly in the banking, financial services and insurance (BFSI) sector, indicates a potential shift in the regional economic climate. Enterprises appear to be cautiously reopening their purses for managed services and cloud-based solutions, suggesting a strategic pivot towards digital transformation to navigate a post-pandemic economy.

The BFSI sector's nearly 5 percent year-on-year growth in managed services AcV suggests that financial institutions may be investing heavily in IT to not only reduce costs but also to enhance their digital offerings in a highly competitive sector. This could have a ripple effect on technology providers, possibly indicating an uptrend in their business and potentially their stock performance.

However, the overall decline in data center and standalone application development and maintenance (ADM) services reflects a shift towards bundled services, which may imply consolidation in the market. This could result in fewer but larger contracts, impacting small to mid-sized service providers. Investors should note these changing dynamics as they could influence the performance of companies within this sector.

Financial Analyst

The financial performance in Europe's IT and business services is a barometer for broader economic health and investor sentiment within the region. The increase in annual contract value (ACV) signifies a positive outlook from businesses willing to invest in technology, which is an essential driver of productivity and innovation.

From an investment perspective, the reported 3 percent and 15 percent growth forecasts for managed services and XaaS in 2024 respectively, while lower than previous estimates, still represent a robust opportunity for growth-oriented investors. The entry of generative AI into the market as a potential growth catalyst, particularly for data services, should be carefully monitored. As AI continues to evolve, it could open new revenue streams for tech companies and service providers adept at harnessing its capabilities.

Investors would be well-advised to track the performance of companies in the travel, transportation and leisure sectors, where managed services ACV saw significant growth. On the contrary, they should be cautious with sectors like manufacturing and telecommunications, where ACV has declined.

Technology Industry Consultant

The resurgence in business process outsourcing (BPO) and the substantial growth in bundled infrastructure and ADM services underscore a strategic shift in the outsourcing industry. Companies are increasingly seeking comprehensive, integrated solutions that offer both cost-efficiency and technological agility. This trend may indicate an opportunity for service providers who can offer end-to-end solutions to gain market share at the expense of those offering piecemeal services.

The geographic performance variations, such as the decline in France and growth in the Nordics, suggest that regional economic policies and market maturity could be influencing the distribution of IT and business services demand. Such insights are vital for service providers and investors looking to allocate resources or capital more effectively across European markets.

Lastly, the contrasting performance within the as-a-service segment, with infrastructure-as-a-service (IaaS) growing while software-as-a-service (SaaS) declined, could indicate market saturation or a pivot towards more infrastructure-centric IT investments. It would be prudent for investors to closely monitor the SaaS providers for signs of recovery or further decline, which could significantly impact their valuations and long-term investment viability.

Combined market up 2.5%, breaking string of 4 straight down quarters year-on-year

BFSI, region’s largest sector, is catalyst for growth

LONDON--(BUSINESS WIRE)-- Europe’s demand for IT and business services in the first quarter rose for the first time in a year, powered by growth from the banking, financial services and insurance (BFSI) sector, 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) rose 2.5 percent, to US $7.5 billion, in the first quarter. The market’s year-on-year growth in Q1 broke a string of four consecutive quarters the region was down versus the prior year.

“The European market is on the rebound,” said Steve Hall, president, ISG EMEA. “Both managed services and cloud services were higher in Q1, and managed services was up nearly 5 percent year on year for BFSI, the region’s largest business sector. Business process outsourcing was strong, and we also saw a surge in bundled ADM and infrastructure activity across the region.”

Q1 Results by Segment

Managed services ACV in the first quarter rose 3 percent, to US $3.9 billion. There were 277 managed services contracts signed in the quarter, down 8 percent from the prior year, but up 9.5 percent sequentially from the fourth quarter. Among those contracts were two mega deals (ACV of US $100 million or more). The volume of smaller deals (under US $30 million) was down 10 percent year on year as economic uncertainty weighed on discretionary spending. With companies still focusing on cost reduction, the ACV of restructured contracts climbed 12 percent.

Within managed services, IT outsourcing (ITO) was down 7 percent, to US $2.8 billion, driven by declines in data center and standalone application development and maintenance (ADM) services. Meanwhile, the ACV of bundled infrastructure and ADM services was up more than 80 percent.

Business process outsourcing (BPO) soared 40 percent, to US $1.1 billion, fueled by rising demand for industry-specific services.

By industry, managed services ACV was sharply higher (up 80 percent) in the travel, transportation and leisure sector. BFSI, Europe’s largest industry for outsourcing, saw its ACV climb nearly 5 percent, offsetting weakness in the next two largest sectors – manufacturing (down 5 percent) and telecommunications (down 10 percent).

ACV in the as-a-service (XaaS) segment rose 2 percent year on year, and 9 percent from the prior quarter, to US $3.6 billion – its best quarterly result since the fourth quarter of 2022. This segment’s first-quarter growth ended a streak of four consecutive quarters of year-on-year declines.

Within this segment, infrastructure-as-a-service (IaaS) advanced 7 percent, to US $2.5 billion, fueled in part by growing interest in the data services required to feed generative AI models, while software-as-a-service (SaaS) declined 8 percent, to US $1.0 billion.

Geographic Performance

The region’s largest market, the U.K., generated US $1.2 billion of managed services ACV, its fifth consecutive quarter with ACV of more than US $1 billion, although it was down 4 percent versus the prior year. DACH (Germany, Austria and Switzerland), the region’s second-largest market, saw its ACV decline 6 percent, to US $647 million, while France slipped out of its usual number-three spot as its ACV fell 27 percent, to US $471 million. The Nordics eclipsed France to become Europe’s third-largest ACV market in the first quarter, with ACV of US $600 million, up 45 percent year on year.

2024 Global Forecast

ISG is forecasting 3 percent growth for managed services, down 125 basis points from its January forecast, and maintaining its forecast of 15 percent revenue growth for XaaS in 2024.

“Looking ahead to the rest of the year, economic conditions are forecasted to be less volatile than in 2023, but challenges persist,” Hall said. “The global economy is expected to slow down, impacted by monetary policies to combat inflation, which is expected to decline.

“In this environment, outsourcing could see a boost as companies seek to balance cost management and service quality. GenAI, meanwhile, is poised to be a growth catalyst, with large hyperscalers expected to manage increasing workloads. The data layer, integral for training AI models, presents a prime opportunity for service providers.”

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 86 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.

The 1Q24 Global ISG Index results were presented during a webcast on April 11. 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 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/20240415403014/en/

Press Contacts:



Philipp Jaensch, ISG

+49 151 730 365 76

philipp.jaensch@isg-one.com



Will Thoretz, ISG

+1 203 517 3119

will.thoretz@isg-one.com

Source: Information Services Group, Inc.

FAQ

What was the percentage increase in the combined market in Q1 according to ISG Index™?

The combined market in Europe saw a 2.5% increase in Q1, reaching US $7.5 billion.

How much did the managed services ACV increase by in the first quarter?

Managed services ACV rose by 3% in Q1, totaling US $3.9 billion.

What was the growth percentage of the BPO sector in Q1?

The BPO sector experienced a significant 40% growth in Q1, reaching US $1.1 billion.

How did the XaaS segment perform in the first quarter of the year?

The XaaS segment grew by 2% year on year, with IaaS advancing by 7% and SaaS declining by 8%.

Which country remains the largest market for managed services according to the PR?

The U.K. continues to be the largest market with US $1.2 billion in managed services ACV.

What growth rates are forecasted by ISG for managed services and XaaS in 2024?

ISG forecasts 3% growth for managed services and 15% revenue growth for XaaS in 2024.