Impact of COVID-19 felt as managed services demand shrank in March
Infrastructure-as-a-Service exceeded €1 billion (£872 million) for eighth straight quarter
ISG forecasts increased spending on security, cloud migration and collaboration tools
LONDON, April 30, 2020)), 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 combined market ACV (including both as-a-service and managed services) in EMEA increased by 3.8 percent year on year, to €4.5 billion (£3.9 billion). EMEA was on track to deliver 7-9 percent growth, but demand was curtailed by the coronavirus pandemic, which first hit the region in early March. Sequentially, EMEA was down 6 percent in the first quarter compared with its record fourth-quarter ACV in 2019.
In the first quarter, managed services ACV was up 6 percent year on year, to €2.7 billion (£2.3 billion), fueled by strong demand for information technology outsourcing (ITO), up 23 percent, to €2.4 billion (£2.1 billion). Strength in DACH and Benelux countered a sluggish ACV performance in the Nordics and in the U.K., which continues to grapple with Brexit anxiety. Business process outsourcing (BPO), meanwhile, fell back 51 percent, to €290 million (£253 million), against a robust first quarter last year.
As-a-service ACV, at €1.8 billion (£1.6 billion), established a new quarterly record, albeit on only 1 percent growth year over year. Infrastructure-as-a-Service (IaaS) rose 7 percent, to €1.4 billion (£1.2 billion)-the eighth consecutive quarter it has exceeded €1 billion (£872 million)-while Software-as-a-Service (SaaS) slid 13 percent, to €478 million (£417 million).
"Cloud is gaining more relevance every quarter as customers move from on-premises, capex-driven deals to an on-demand operating model," said Steve Hall, president, ISG EMEA. "This will only increase as COVID-19 highlights the importance of cloud-based infrastructure."
The Impact of COVID-19
Globally, 85 percent of the first quarter's managed services deals were awarded in January and February. The ISG Index shows a pandemic-related drop-off in activity beginning in early March across Europe (earlier than in the Americas, where this drop-off began toward the end of March).
ISG predicts global ACV for managed services deals will drop 17 percent sequentially in the second quarter, as a result of the pandemic. This will be driven, in particular, by weakness in key industries such as travel, transportation and hospitality; CPG and retail; and financial services.
The as-a-service market suffered minimal impact from the pandemic in the first quarter. In fact, IaaS experienced a brief surge, as businesses pivoted to a work-from-home environment and saw an increased reliance on e-commerce. IaaS providers may get a boost from firms moving additional workloads to the public cloud.
SaaS providers will be hit by companies shedding costs and user licenses as businesses around the world continue to furlough corporate employees. Firms with multiyear agreements should be better insulated. However, SaaS budgets will be diverted to increased spending on cybersecurity, cloud migration and collaboration tools.
"Firms that took their digital transformation seriously in the past couple of years will likely weather the COVID storm better," said Hall. "They have better visibility into their supply chains. They've converted their stores to mini-distribution systems and are using strong B2C and analytics to maintain customer loyalty. Their mobile solutions mitigate the need for humans to seek service via contact centers, and their intelligent automation solutions minimize the number of employees required to transact. Those that didn't make significant progress on their digital transformations will need to accelerate their digital investments now.
"By the second half of the year, managed services should rebound. Overall, 2020 managed services ACV likely will be off 7 percent. In the as-a-service space, we see ACV being up 5 percent sequentially in the second quarter and up 12 percent for the full year."
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 70 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) is a leading global technology research and advisory firm. A trusted business partner to more than 700 clients, including more than 75 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.
