Europe’s technology and business services market reached a record high in the third quarter, paced by surging demand for cloud-based services, even as spending on managed services slowed for the third straight quarter, according to an ISG report.
ISG is forecasting the market for cloud-based services (IaaS and SaaS) will grow 25 percent globally in 2021, up from its 21 percent growth forecast last quarter. The firm also is raising its forecast for managed services growth to 10.1 percent, up from its prior forecast of nine percent.
The EMEA ISG Index measures commercial outsourcing contracts with annual contract value (ACV) of £3.6 million or more and shows ACV for the combined market, which includes both as-a-service and managed services, reached a record £4.7 billion, up 36 per cent against a soft quarter last year, and up to four per cent against the second quarter of 2021. It was the fourth consecutive quarter the combined market exceeded the £4.4 billion mark, with the region adding more than £1.1 billion of spending in that time.
Cloud-based as-a-service spending soared 59 percent, to a record £2.4 billion, with infrastructure-as-a-service (IaaS) and software-as-a-service (SaaS) each also up 59 percent, to quarterly records of US £1.75 billion and £677 million, respectively.
Managed Services, at £2.3 billion, rose 19 percent versus the prior year, but has declined for three consecutive quarters after posting strong results in the fourth quarter last year. Year-over-year growth was widespread across the region, although its two largest markets—DACH and the UK—delivered weaker than expected results in the third quarter.
ISG EMEA partner Steve Hall said: “Demand for IaaS and SaaS solutions remains robust as European companies pick up the pace in their adoption of cloud-based technologies and services. The region has been slower than others to move to the cloud due to privacy and security concerns, but that appears to be abating as companies accelerate their digital transformations.”
“Deal flow remains active, but we saw a number of deals shift to the right [move to later stages] in financial services, and we continue to see weakness in the manufacturing sector, as the economic recovery in Europe remains choppy.”
For the first nine months of 2021, the EMEA combined market generated a record £13.9 billion of ACV, up 27 percent, its best growth rate ever for the period.
As-a-service, at a record £6.5 billion, was up 34 percent, its best growth rate since 2018. Within the segment, IaaS reached a record £4.7 billion, up 37 percent, and SaaS hit a record £1.75 billion, up 26 percent.
Managed services, at a record £7.4 billion, was up 22 percent, its fastest growth rate in 11 years. A record 673 managed services contracts were signed through the first nine months, up 23 percent over the prior year—including a record 533 ITO deals, up 18 percent, and 140 BPO deals, up 46 percent.
ITO ACV reached a record £6.0 billion, up 15 percent, its highest growth rate since 2018. The ITO sector was driven by application development and maintenance (ADM) services, which generated ACV of £3.1 billion, an all-time high for the first three quarters, and up 36 percent over the 2020 period. Infrastructure services, at £2.8 billion, was down 1.3 per cent.
BPO ACV reached £1.5 billion, up 58 percent, its fastest-growing nine-month period since 2012, driven by triple-digit growth in engineering and R&D services. Contact centre and facilities management services rebounded, but still have not regained their pre-pandemic highs.
Among the significant ITO awards in the third quarter, HCL, TCS, IBM and Accenture split a £146 million, five-year applications deal with an international food and beverage company. HCL also signed a contract with Munich Re to modernise and standardise workplace services for more than 16,000 employees in 40 countries.
Managed services ACV grew across most EMEA markets in the third quarter, with France, the Middle East, and Eastern Europe producing record-setting results, even as the region’s two largest markets—DACH and the UK—registered declines.
DACH had its weakest quarter since the first quarter of 2019. Managed services ACV was down eight percent, to £379 million, with ITO down 14 percent on ADM weakness offset by growth in infrastructure. BPO, meanwhile, rose 27 percent, led by significant growth in Engineering Services. Traditional BPO services were down in the region.
Hall said: “Q3 is traditionally a slow quarter due to the holiday season and its impact on deal flow. Volume is in-line when normalised for seasonality, so we don’t see a long-term trend or broader concern with the DACH market.”
In the UK, the drop was even steeper, with managed services ACV down 61 percent, to £296 million, its weakest quarterly result since the third quarter of 2002. ITO was down 67 percent year over year and BPO was down 40 percent. All industry verticals saw lower spending for the quarter, led by declines in banking, financial services and insurance; retail, travel and transport, and manufacturing.
“Despite a weak Q3, the first half of the year was robust in the U.K., and overall ACV for the year should be in line with 2019 and 2020. Activity remains robust, though deals did shift, so we anticipate a strong Q4”, Hall said.
France, meanwhile, delivered a record ACV of £552 million, up 201 percent over the prior year, with the market propelled by triple-digit growth in ITO, including ADM and infrastructure, and BPO. ADM deals in the region have already surpassed £1.5 billion of ACV year to date, almost doubling the average ACV over the last five years. All industry sectors showed growth over a soft year-ago quarter, most notably the banking, financial services and insurance sector and manufacturing.
“France is on pace to deliver record-setting ACV numbers this year. Financial services, manufacturing, and media and telecom are the primary drivers of growth in the region”, he said.
