ISG Index™: EMEA Sourcing Market Powered by ITO in Q3

Managed Services up 10% over prior year, on 36% growth in ITO

IaaS up 16%, as enterprises continue to shift work to the cloud

Combined market up 9% on soft compare with 2019, flat sequentially with Q2

UK produces stand-out quarter, with managed services ACV of €877 million (£794 million)

LONDON, Oct. 21, 2020 (GLOBE NEWSWIRE) -- The Europe, Middle East and Africa (EMEA) sourcing market was powered by strong demand for IT outsourcing (ITO) in the third quarter, with the U.K. producing particularly strong results, 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 €5 million (£4 million) or more, shows ACV for traditional managed services rose 10 percent year on year, to €2.2 billion (£2.0 billion), with ITO up 36 percent, to €1.8 billion (£1.6 billion). The U.K. alone contributed €877 million (£794 million) of managed services ACV in the quarter, up 60 percent over the prior year, with ITO doubling and business process outsourcing (BPO) up by double-digits.

The region’s double-digit growth in managed services ACV came despite a 40 percent slump in BPO, to €420 million (£381million), from the prior year, although quarter over quarter, BPO was up 25 percent.

Cloud-based services (as-a-service), meanwhile, advanced 9 percent year over year, to €1.7 billion (£1.5 billion), on the strength of infrastructure-as-a-service (IaaS), which rose 16 percent, to €1.2 billion (£1.1 billion). The software-as-a-service (SaaS) sector, however, declined 7 percent, to €431 million (£391 million) – its lowest quarterly ACV total in almost three years.

EMEA’s combined market ACV (including both as-a-service and managed services) climbed 9 percent year on year, to €3.9 billion (£3.5 billion), albeit in comparison with a weak third quarter last year. Sequentially, EMEA’s combined market ACV was down marginally from the second quarter.

“The EMEA managed services market was supported by robust deal activity this quarter, with the number of contracts up more than 20 percent over last year and the prior quarter,” said Steve Hall, partner and president, ISG EMEA. “However, following a general pattern we’ve seen in other regions, 85 percent of the deals were under €17 million (£15 million), with only 10 contracts in the entire region valued at over €34 million (£31 million).

“We also noted a sharp rise in contract restructurings, up nearly 40 percent from last year and 85 percent quarter over quarter,” Hall said. “With enterprises pushing for cost savings and reluctant to switch to or add new vendors amid the pandemic, these results are not surprising.”

Year-to-Date Performance

For the first nine months of 2020, the combined market in EMEA grew 2.6 percent, to €12.1 billion (£11.0 billion). As-a-service climbed 12 percent, to €5.2 billion (£4.7 billion), powered by 20 percent growth in IaaS, to €3.8 billion (£3.5 billion), even as SaaS declined 5 percent, to €1.4 billion (£1.3 billion). On the managed services side, ITO rose 8.5 percent, to €5.9 billion (£5.3 billion), while BPO was off more than 40 percent, to €1.0 billion (£927 million). Managed services, in total, was down 3.6 percent, to €6.9 billion (£6.3 billion).

“Sluggish regional results, particularly in the Nordics, weighed down managed services year to date,” Hall noted. “The region’s two largest markets — the U.K. and DACH — rose moderately. As-a-service ACV grew at a faster pace this year than last and now makes up a greater percentage of the region’s combined market.”

The ITO market was boosted by a surge in ADM demand, even as infrastructure values grew more modestly, despite brisk deal making. Among the notable contracts, Ericsson (advised by ISG) inked a five-year contract with HCL, and British department store John Lewis engaged Wipro to transform its infrastructure. The BPO market, meanwhile, continues to feel the effects of the pandemic, with nearly every service line down, particularly facilities management and contact centers.

Year-to-date growth in IaaS reflects the region’s continuing embrace of cloud computing. Cloud hyperscalers—particularly AWS, Google Cloud and Microsoft Azure—are the beneficiaries of this growing demand, albeit amid fierce competition. Among notable assignments, HSBC is working with AWS to drive its digital transformation, Standard Chartered Bank chose Azure, and Renault is partnering with Google Cloud to accelerate its Industry 4.0 transformation.

Although SaaS is down year to date, ISG noted several large deals in the market, including SAP S4/HANA at Carrefour, Telefonica, Aon, BNP Paribas and Deutsche Börse, and Workday at Air Liquide and ThyssenKrupp.

Market Insights

Among individual markets, the U.K. and Ireland produced the region’s highest managed services ACV year to date—€2.2 billion (£2.0 billion), up 8 percent over the prior year, thanks to a €877 million (£794 million) third quarter. The pharmaceuticals, technology and the utilities industries are continuing to invest in digital capabilities and core technology operations (cloud, network and data), laying the groundwork for AI and machine learning. Meanwhile, the travel and retail sectors, battered by the pandemic, are engaging in significant cost takeout programs, triggering new sourcing partnerships as well as a refresh and renewal of existing deals.

In DACH, managed services ACV increased by 5 percent year to date, to €1.9 billion (£1.7 billion), driven by contract extensions and restructurings, as well as transfer of people and assets, as enterprises, particularly in the manufacturing sector, worked to align current supplier costs with pandemic-impacted revenues. COVID-19 has increased customer demand for cloud services, especially IaaS, even for less tech-savvy organizations as they seek to further digitize their businesses. Hyperscalers, with proven capability for rapid upscaling and high flexibility, are accelerating demand for cloud technologies.

In France, year-to-date managed services ACV was down 7 percent, to €612 million (£554 million), with many larger engagements delayed due to the pandemic and enterprises seeking immediate cost reductions in negotiations with their suppliers. Demand for IaaS remained strong, to support digital transformation initiatives, while SaaS demand declined.

Global Forecast

ISG is forecasting the managed services market will be down 6 percent for the full year, 150 basis points better than its July forecast. The firm is projecting the as-a-service market will grow by 15.5 percent in 2020, up from its 11 percent forecast in July.

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 72 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. In 2016, the ISG Index was expanded to include coverage of the fast-growing as-a-service market, measuring the significant impact cloud-based services are having on digital business transformation. ISG also provides ongoing analysis of automation and other digital technologies in its quarterly ISG Index presentations.

For more information about the ISG Index, 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 700 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 1,300 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. 

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