UK lags rest of Europe as economic uncertainty continues
Strong growth in DACH, France and Nordics boosts both traditional and as-a-service sourcing
Demand for digital services pushes as-a-service ACV past the €5 billion mark
LONDON, April 15, 2019 /PRNewswire/ -- Despite ongoing uncertainty over Brexit, the sourcing market in Europe, Middle East and Africa (EMEA) set a record with €3.9 billion of combined market value in the first quarter, an increase of 23 percent compared with the same period last year, 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 an annual contract value (ACV) of €4 million or more, shows growth across both traditional and as-a-service sourcing.
Traditional sourcing was up 24 percent, to €2.6 billion, with IT outsourcing (ITO) ACV climbing nearly 30 percent, driven by growth in application development and maintenance (ADM) services and some large infrastructure awards. Business process outsourcing (BPO) rose 10 percent, on the strength of industry-specific BPO and facilities management, as businesses explore co-working and utilization of flexible working space. Contract volume, although down 7 percent, was paced by 58 percent growth in larger awards (€32 million-plus).
As-a-service ACV advanced 21 percent, to €1.4 billion, as more work is moved to the cloud. Infrastructure-as-a-Service (IaaS), up 33 percent, to just over €1 billion, drove all the growth in the first quarter. Software-as-a-Service (SaaS), meanwhile, was down 4 percent, to €346 million.
Steve Hall, partner and president of ISG, said: "The drive for digital transformation shows no signs of slowing. European businesses are investing in their future, despite the continuing political and economic uncertainty in Europe and the six-month extension to the Brexit deadline. Much of EMEA's regional growth is being fueled by a robust IaaS market, with hybrid and multi-cloud emerging as the architecture of choice. On the traditional side, ITO is being paced by ADM, as enterprises continue to spend aggressively on application and architecture modernization."
Globally, first-quarter ACV grew 12 percent, to €10.8 billion. As-a-service ACV was up 26 percent, exceeding the €5 billion mark for the first time, while traditional sourcing inched up 2 percent.
Market Insights
The traditional sourcing market in the UK grew a modest 7 percent in the trailing 12 months, compared with the prior period, though the number of contract signings was flat. With an extended timeline and no clear conclusion in sight for the Brexit negotiations, UK companies are continuing to exercise caution in their traditional sourcing investments and are focusing their spending on new technologies that will increase their agility and efficiency.
DACH lifted the overall EMEA market over the trailing 12 months. Following several quarters of lackluster contracting, traditional sourcing in DACH rose 63 percent, to just over €3 billion, and deal activity rose 23 percent, helped by the signing of a backlog of previously delayed contracts due to Brexit uncertainty and fears of a slowing economy in Germany. Traditional sourcing also was helped by increased M&A activity in DACH, with ITO growth spurred by the need for increased data center capacity to support digital initiatives such as autonomous vehicles, big data analytics and Internet of Things (IoT) applications.
France, meanwhile, demonstrated steady growth in traditional sourcing, with ACV up 9 percent, to €780 million, over the trailing 12 months, despite a 24 percent drop in the number of contract signings. Growth was fueled by larger contract awards.
In the Nordics, traditional sourcing was up 26 percent in the trailing 12 months, to €1.2 billion, with the number of contracts up 11 percent. The smaller EMEA markets also showed strength, with gains in Southern Europe, Africa/Middle East and Russia/Eastern Europe.
Sector Breakdown
All industry sectors posted growth in both as-a-service contracting and traditional sourcing in the trailing 12 months.
The manufacturing and financial services sectors led the way, with ACV of €2.5 billion, up 47 percent and 37 percent, respectively. Both sectors saw as-a-service ACV increase by one-third compared with the prior period, as they focused on next-generation customer experience and improved speed to market.
The retail sector, despite modest growth, saw as-a-service ACV rise 33 percent versus the prior period. The difficulties experienced by many traditional retailers, most recently by Debenhams, are leading many to explore how digital technologies can improve their agility and reduce costs.
Forecast
"Growth has slowed in Europe and China, large enterprises appear to be preparing for a downturn in the U.S. during the second half of the year and concerns of a broader, global slow-down remain," said Hall.
"While the dark clouds of a looming economic downturn are on the horizon, the long-term forecast for sourcing remains sunny. We are maintaining our forecast of 25 percent annual growth for the global as-a-service sector in anticipation of continued strong demand for IaaS, as enterprises transition to digital. However, given the slower start in the Americas alongside global macro-economic concerns, we are lowering our annual growth forecast for traditional sourcing from 4.5 percent to 3.2 percent."
About the ISG Index
Now in its 66th consecutive quarter, the ISG Index provides a quarterly review of the latest sourcing industry data and trends for clients, service and technology providers, analysts and the media. For 16 years, it has been the authoritative source for marketplace intelligence related to outsourcing transaction structures and terms, industry adoption, geographic prevalence and service provider performance. In 2016, the ISG Index was expanded to include coverage of the fast-growing as-as-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.
The Q1 2019 EMEA ISG Index was presented during a conference call and webcast for media and analysts on April 12, 2019. To access a replay of the call, visit the ISG Index 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 70 of the top 100 enterprises in the world, 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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