Sequential Growth in Q4 Could Signal Start of Rebound for Europe’s IT, Business Services Sector: ISG Index™

Rhea-AI Summary

The latest state-of-the-industry report from Information Services Group (ISG) indicates a potential market rebound in Europe, with the combined market up 4% from Q3, but down 1% year on year. Managed services generated a record full-year ACV, up 4%. The report forecasts a 4.25% growth for managed services and 15% revenue growth for XaaS in 2024.

Insights

Market Research Analyst

The sequential growth in the European IT and business services market from Q3 to Q4 suggests a potential rebound, which is critical for stakeholders making strategic decisions. The increase in new-scope awards and the decrease in contract restructurings point to a shift from cost optimization to investment, indicating market confidence. It is essential to monitor these trends as they can signal shifts in business strategies and potential areas of growth or concern for investors.

Geographically, the UK's consistent performance and the significant growth in France contrast sharply with the decline in the DACH region. This disparity may influence regional investment decisions and resource allocation. Stakeholders should consider these regional performances when planning market entry or expansion strategies.

The forecasted growth for managed services and XaaS in 2024, particularly in application modernization and public cloud spending, suggests that companies in these sectors could be poised for growth. Investors may look to these areas for opportunities but should remain cautious of market volatility and the impact of external economic factors such as inflation and interest rates.

Financial Analyst

The record full-year ACV for managed services, despite a year-on-year decline in the combined market ACV, highlights the resilience and growth potential of the managed services sector. This divergence merits attention from investors as it may reflect underlying strength in certain service areas, particularly in IT outsourcing. The 4% increase in managed services ACV, coupled with the 13% increase in new scope awards, suggests a healthy pipeline for future revenue growth.

Notably, the mega deals maintain their significance in the market, with an increase in ACV despite the number of deals remaining constant. This could indicate a trend towards larger, more transformative contracts which could have significant impacts on the market and the companies involved.

Investors should take note of the 15% projected revenue growth for XaaS, which may represent a significant opportunity, especially as it contrasts with the decline seen in 2023. The forecasted growth in public cloud spending and financial services industry spending could be key drivers for this segment's recovery.

Economist

The report's mention of cooling inflation and potential interest rate cuts can have widespread implications for the IT and business services market. A more favorable economic environment can spur enterprise spending and capital deployment, which in turn can lead to increased demand for IT services. The economic outlook for 2024, therefore, is a critical factor in assessing the potential for market growth.

However, the year-on-year decrease in the combined market ACV and the decline in the XaaS segment indicate that the market is not uniformly recovering, which could signal underlying challenges or a shift in the types of services being demanded. This warrants a closer examination of economic policies, enterprise spending habits and their impact on service demand.

The anticipated recovery in small discretionary deals and specific industry spending, such as in financial services, could be a response to a more stable economic environment. Investors should consider the broader economic trends when evaluating potential risks and opportunities within the IT and business services market.

Combined market up 4% from Q3, but down 1% year on year

Managed services generates record full-year ACV, up 4%

LONDON--(BUSINESS WIRE)-- Demand for IT and business services in Europe dipped slightly in the fourth quarter, but was up sequentially from the third quarter, indicating the start of a potential market rebound, 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, but up 4 percent from the third quarter.

“The European market appears poised for a rebound,” said Steve Hall, president, ISG EMEA. “Although down year on year against some tough comps, most segments showed positive sequential growth in the fourth quarter. We also saw growth in new-scope awards and a drop in contract restructurings year on year. This could indicate a bottoming-out of the market, as we begin to move past aggressive cost optimization and start to see new shoots of investment.”

Hall said several signs point to a better 2024. “Conditions are right for a turnaround. 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.”

Q4 Results by Segment

Managed services ACV for the fourth quarter came in at US $3.9 billion, up 7 percent versus the prior year. There were 268 managed services contracts signed in the quarter, up 3.5 percent, including three mega deals (contracts with ACV of US $100 million or more). Although the number of such deals was even with a year ago, the ACV of this year’s mega deals was 7 percent higher. The ACV of new scope awards was US $2.7 billion, up 13 percent year on year, while that of restructured contracts fell 4.5 percent, to US $1.2 billion.

Within managed services, IT outsourcing (ITO) advanced 10 percent, to US $3.0 billion, driven by strength in applications development and data center services, while business process outsourcing (BPO) dipped 2 percent, to US $929 million.

ACV in the as-a-service (XaaS) segment fell 8 percent versus the prior year, to US $3.3 billion, but was up 1 percent from the prior quarter, the second straight quarter it rose sequentially. Within this segment, infrastructure-as-a-service (IaaS) fell 15 percent, to US $2.2 billion, while software-as-a-service (SaaS) rose 8 percent, to US $1.1 billion.

Full-Year Results

EMEA’s combined market ACV was US $29.0 billion, down 3 percent over the prior year. It was the first time since 2016 EMEA had a down market for the full year.

Managed services had a record year, with ACV of US $15.9 billion, up 4 percent. ITO, at US $12.0 billion, was up 4 percent, while BPO, at US $3.9 billion, was up 3 percent. A total of 1,093 managed services contracts were awarded in 2022, even with the prior year. Twelve of those were mega deals, down from 14 in the prior year but up 40 percent by total ACV. Among sectors, financial services, up 26 percent, and energy, up 30 percent, drove the market.

The XaaS segment generated ACV of US $13.1 billion, down 9 percent, the first time XaaS ACV fell in the EMEA region for the full year. IaaS fell 15 percent, to US $8.9 billion, while SaaS rose 4 percent, to US $4.2 billion. XaaS accounted for 45 percent of the combined market in 2023, down from 49 percent in 2022.

Geographic Performance

In the fourth quarter, the region’s largest market, the U.K., generated US $1.3 billion of managed services ACV, up 54 percent versus the prior year. It was the fourth consecutive quarter ACV in the U.K. topped US $1 billion – a first. France, the region’s third-largest market, produced ACV of US $801 million, up 67 percent, while DACH, the region’s second-largest market, saw its ACV decline 21 percent, to US $730 million

For the full year, the U.K. generated US $5.6 billion of managed services ACV, its second-best year ever, behind 2012. The Benelux market was the only other geographic market in positive territory for the year, up 16 percent, to US $1.2 billion. DACH was down 23 percent, to US $2.9 billion, while France dipped 4 percent, to US $2.2 billion.

2024 Global 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 led by GenAI to continue at high levels in 2024. Public cloud spending should accelerate as optimizations phase out. We also expect small discretionary deals to recover, as well as Financial Services industry spending to rebound,” Hall 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. For more information about the ISG Index, visit this webpage.

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/20240122943164/en/

Press:

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 is the latest state-of-the-industry report from Information Services Group (ISG) about?

The latest report from ISG indicates a potential market rebound in Europe.

What is the ticker symbol for Information Services Group?

The ticker symbol for Information Services Group is III.

What is the forecasted growth for managed services in 2024?

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

What is the forecasted revenue growth for XaaS in 2024?

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

What was the full-year ACV growth for managed services?

Managed services had a record full-year ACV, up 4%.