Managed services ACV increased 32% while XaaS spending increased 1% in Q2
Sydney, 17 July 2024Asia Pacific spending on IT and business services has surpassed US$5 billion for the first time in two years, driven by a resurgence in demand for managed services, according to the latest industry report from Information Services Group (ISG) (Nasdaq: III), a leading global technology research and advisory firm.
According to the Asia Pacific ISG Index™, which measures commercial outsourcing agreements with an annual contract value (ACV) of US$5 million or more, the ACV of the combined market (both cloud-based XaaS and managed services) grew 8% year-over-year to over US$5 billion in Q2, the first time it has exceeded the US$5 billion mark in seven quarters and the third consecutive quarter of year-over-year growth in the region.
Q2 growth was driven by a resurgence in the managed services market, with ACV up 32% year-over-year to US$1.4 billion, the region's best quarter in the last 12 years. Compared to Q1 2024, ACV increased 34% quarter-over-quarter. Both the year-over-year and quarter-over-quarter comparisons are against strong quarters of over US$1 billion.
81 managed services agreements were signed during the quarter, up 37% year over year and up 23% quarter over quarter. Deal volume increased due to a 44% increase in smaller deals between $5 million and $20 million annually, while the value of restructured agreements reached a record high of $548 million ACV, up 163% year over year.
Demand for cloud-based services increased 1% to US$3.6 billion, but ACV declined 8% quarter-over-quarter compared to Q1 2024. This marks the third quarter of growth for XaaS, with average growth of 18% year-over-year during that period, but breaking out of five consecutive quarters of declines that saw an average decline of 20%.
“The growing demand for traditional IT and business services in Asia Pacific reflects a continued focus on cost optimization in a still-uncertain economy,” said Michael Gale, partner and regional leader, ISG Asia Pacific. “After a tough downturn, cloud-based services are beginning to rise again as companies focus on data modernization to enable large-scale GenAI adoption.”
Within managed services, IT outsourcing (ITO) ACV grew 8% to just over USD 1 billion, driven by strong demand for bundled infrastructure and application development and maintenance (ADM) services, as well as data center services, while business process outsourcing (BPO) grew 237% year-over-year to USD 367 million, driven by triple-digit growth in customer engagement, facilities management, HR, and engineering, research and development (ER&D) services.
From a geographic perspective, demand for managed services increased significantly in Korea, China and Japan, with Japan in particular posting its best quarter ever, registering triple-digit growth, while the region's two largest markets, Australia/New Zealand (ANZ) and India, moved in the opposite direction, with ANZ down 30% quarterly and India up 4%.
By sector, manufacturing, telecommunications and energy all increased, while banking, financial services and insurance (BFSI) and travel and transportation declined during the quarter.
In the XaaS segment, Infrastructure as a Service (IaaS) ACV remained flat at US$3.2 billion, while Software as a Service (SaaS) ACV increased 8% to US$430 million.
First Half Results
The overall ACV of the Asia Pacific market increased 19% year-over-year to US$9.9 billion, a dramatic turnaround from the first half of 2023, when the market declined 20% compared to the same period in 2022, when Asia Pacific demand peaked.
Managed services posted its strongest first half ever with ACV up 26% year over year to nearly US$2.5 billion. ITO ACV increased nearly 5% to US$1.7 billion and BPO ACV surged 126% to US$773 million.
By vertical, BFSI managed services ACV grew 43.5% year-to-date, while most other verticals also saw strong growth in the first half except manufacturing, which declined 17%.
On the cloud side, XaaS ACV increased 17% to US$7.5 billion, IaaS increased 18% to US$6.6 billion, and SaaS increased 13% to US$878 million.
World Predictions for 2024
For the full year, ISG now expects managed services revenue growth of 2%, down 100 basis points from its April forecast, and XaaS revenue growth of 14%, down from its April forecast of 15% growth.
“Uncertainty continues in the IT and business services market with no clear catalyst to boost discretionary spending at present,” said Steve Hall, president and chief AI officer at ISG and global leader of the ISG Index. “Activity in the key BFSI sector remains subdued due to a prolonged high interest rate environment, impacting overall market growth. Companies in general remain focused on cost optimization, and while AI growth is robust, it may be masking underlying weaknesses in the IT and business services industry.”
About ISG Index™
The ISG Index™ is recognized as the authoritative source of market intelligence for the global technology and business services industry. For 87 consecutive quarters, it has provided financial analysts, corporate buyers, software and service providers, law firms, universities and the media with in-depth access to the latest industry data and trends. For more information about the ISG Index, or to view a replay of the 2Q24 webcast or download the presentation slides, please visit this 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 900 clients, including more than 75 of the world's top 100 companies, ISG is focused on helping enterprises, public sector organizations, and service and technology providers achieve operational excellence and accelerated growth. The firm specializes in digital transformation services, including AI and automation, cloud and data analytics, sourcing advisory, managed governance and risk services, network carrier services, strategy and operations design, change management, and market intelligence and technology research and analysis. Founded in 2006 and based in Stamford, Connecticut, ISG employs more than 1,600 digitally-enabled professionals operating in more than 20 countries, a global team known for its world-class research and analysis capabilities driven by innovative thinking, market impact, deep industry and technology expertise, and the most comprehensive market data in the industry. For more information, please visit www.isg-one.com.
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