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The EMEA ISG Index™, which measures commercial outsourcing contracts with annual contract value (ACV) of €4.5 million (₤3.9 million) or more, found the ACV of the region’s managed services contracts in the third quarter declined 31 percent, or €910 million (₤792 million), quarter over quarter, to €2 billion (₤1.8 billion). Compared with the 2018 third quarter, managed services ACV was down 17 percent.
At the same time, demand for cloud-based as-a-service solutions rose 10 percent year over year, to a record €1.6 billion (₤1.4 billion), but the increase was not enough to offset the slowdown in managed services spending. Overall, the combined EMEA market was down 7 percent, to €3.7 billion (₤3.2 billion).
The ISG Index noted that while global spending on technology and business services is increasing (combined market ACV in the third quarter rose 13 percent on record demand for as-as-service solutions, particularly in the Infrastructure-as-a-Service space), concerns in Europe about recession, Brexit and trade wars mean companies remain extremely cautious about spending. ACV in each of the region’s three largest markets – UK, DACH and France – was down by double digits in the third quarter compared with the prior year. The number of contracts awarded in EMEA during the quarter was down 11 percent, to its lowest level in more than two years.
Companies, however, continue to invest in cloud-based services and digital transformation projects, particularly in the retail sector, where 62 percent of overall spend is for as-a-service solutions. For the sixth consecutive quarter, the ACV of as-a-service contracts in EMEA exceeded €1.3 billion (₤1.1 billion). Year to date, as-a-service accounted for 39 percent of combined ACV, compared with just 20 percent three years ago. But at 10 percent this quarter, growth still lags behind the Americas and Asia Pacific, which saw as-a-service gains of 26 percent and 14 percent, respectively, this quarter.
Market Performance
Year to date, managed services ACV in the UK and Ireland decreased 4 percent, from €2.2 billion (₤1.9 billion) to €2.1 billion (₤1.8 billion), a relatively modest decline as companies appear to have shrugged off much of the ongoing uncertainty around Brexit. However, as the Brexit deadline neared, ACV in the third quarter was down 11 percent compared with the prior year, and down 27 percent compared to this year’s second quarter. The biggest impact on the UK outsourcing market was that of Brexit-related uncertainty on the performance of the pound sterling, which means UK businesses may wait for the market to settle before deciding on a strategic direction.
DACH was the worst hit overall, with ACV down 24.5 percent, from €2.5 billion (₤2.2 billion) to €1.9 billion (₤1.6 billion) year to date compared with the same period last year. ACV in the third quarter was down 36 percent compared with the prior year, but up 31 percent quarter on quarter this year. The lack of growth is largely associated with the manufacturing industry, which was impacted by fines and legal action resulting from the VW emissions issue, and trade wars impacting German exports, which affects overall GDP.
However, the ISG Index notes real opportunity in the DACH market as German multinationals embrace the cloud (Germany was relatively late compared to other markets here, because of questions of security and privacy) and begin to adopt as-a-service solutions in greater numbers.
France, while down 23 percent in the third quarter compared with last year, has seen overall growth for the year-to-date period compared with the same period last year, with ACV up 29.3 percent, from €540 million (₤467 million) to €698 million (₤603 million).
Steve Hall, partner and president, EMEA, ISG, said: “Political and trade issues are contributing to a mixed stance on technology spending, with enterprises largely split on investing for growth or leveraging technology for cost reduction through 2020. Many technology providers remain cautiously optimistic regarding their pipelines and the demand environment. In the near term, providers will be watchful of external factors that could impact customers and their decision to spend.”
Global Forecast
ISG is projecting 22 percent year-on-year ACV growth for the remainder of 2019 in the as-a-service market. “We are casting a watchful eye on continued U.S. trade talks with China and how technology firms look to cope with demand issues if China becomes more restrictive in its approach with U.S. firms,” Hall said.
“In the overall IT and business services market, we are also taking a more conservative perspective by lowering our forecast more than 50 basis points to 2.6 percent for the remainder of 2019. This takes into account FX headwinds due to the strong U.S. dollar and possible top-line softness by a few of the largest providers in the sector.”
