Cloud Services Surge Amid Managed Services Slowdown in Europe

Cloud Services Drive Growth in Europe’s IT Market

Recent trends indicate that European businesses are experiencing significant growth in AI-driven cloud services. This surge is occurring against a backdrop of declining demand for traditional managed services. According to the latest report from Information Services Group (ISG), the fourth quarter saw cloud-based services reaching impressive heights, showcasing how companies are pivoting to innovative technologies to enhance efficiency and performance.

Market Dynamics and Insights

The EMEA ISG Index™, which tracks commercial outsourcing contracts, revealed that total contract value (ACV) across the combined sectors—including both managed services and cloud services—hit an impressive US $8.3 billion in the fourth quarter. While this marks a 17 percent increase year-on-year, it's notable that this figure reflects a 7 percent decline from the record highs achieved in the previous quarter.

Shift in Demand Amid Economic Climate

Steve Hall, president of ISG EMEA, pointed out that Europe faced a notable decrease in demand for managed services, influenced by ongoing economic uncertainties and geopolitical challenges. However, the enthusiasm for cloud services has reached an all-time high, as enterprises strive to accelerate their shift to cloud environments. This transition is primarily motivated by the pursuit of cost savings and advancements in operational efficiency through artificial intelligence.

Detailed Q4 Performance

In terms of specific market segments, managed services saw a decrease in ACV for the fourth quarter, dropping 5 percent compared to the previous year, resulting in US $3.7 billion. Although the number of managed services contracts awarded rose by 10 percent year-on-year, the overall growth has decreased sequentially. It’s noteworthy that only one mega-deal was recorded during this period, a stark contrast to the six mega-deals in the prior quarter.

Cloud Services Explode in Popularity

The cloud-based as-a-service sector (XaaS) demonstrated remarkable growth, increasing 42 percent year-on-year to reach US $4.6 billion. The XaaS market’s growth rate represents the fastest recorded improvement since the second quarter of the previous year. Throughout the last four quarters, demand for cloud services has averaged a substantial 23.5 percent increase each period.

Performance Overview for the Year

When looking at the entire year, the combined market ACV recorded a rise of 14 percent, culminating at a record US $32.6 billion in total contracts. Notably, this surpassed the previous annual figures by a notable margin. It’s essential to highlight that the demand for managed services continued its upward trend, with ACV reaching US $16.6 billion in total for the year—signifying a growth of 5.6 percent.

Sub-sector Performance

The IT outsourcing segment noticed a 6 percent upswing, landing at US $12.4 billion, while business process outsourcing also grew, hitting US $4.1 billion. Overall, a total of 1,164 managed services contracts were granted throughout the year, marking an 11 percent increase compared to the prior year. Nevertheless, the combined annual value of mega deals saw a decrease, reflecting some volatility in the largest contract categories.

Geographic Trends and Their Impact

Examining the geographic performance, the U.K. market saw a substantial decline, dropping 33 percent, which translated to US $935 million in managed services ACV, making it the weakest quarter in two years. Conversely, the DACH region reported an impressive 4 percent rise, with an ACV of US $719 million. Although France faced a downturn of 11.5 percent, the total contracts awarded in other areas demonstrated growth.

Anticipating Future Trends

Looking ahead, ISG forecasts a positive trajectory for the market, predicting a 4.5 percent increase in revenues for managed services and an impressive 18 percent growth in XaaS. Although companies are expected to remain cautious amid the prevailing uncertainties, the foundation laid through emerging technologies such as AI is set to enhance operational capabilities and support future market growth.

Frequently Asked Questions

What drove the growth of cloud services in Europe?

The growth of cloud services is primarily driven by economic factors and the demand for enhanced efficiency, alongside companies seeking cost savings through AI technologies.

How did managed services perform in the fourth quarter?

Managed services experienced a decline in ACV of 5 percent compared to the prior year, dropping to US $3.7 billion.

What are the growth projections for 2025?

The forecast for 2025 anticipates a 4.5 percent revenue growth for managed services and an 18 percent growth in the XaaS market.

How did the regions perform geographically?

The U.K. saw a sharp decline in managed services, while the DACH region rose significantly, indicating varying market dynamics across Europe.

What is the significance of the ISG Index™?

The ISG Index™ is considered an essential source for insights on marketplace intelligence in the technology and business services sectors, providing valuable information for various stakeholders.

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