Cost-cutting and digital transformation spur increased European IT outsourcing in 2019

Spending on IT outsourcing in Europe increased by 10% last year compared to 2018 as a result of organisations’ need to reduce costs while continuing to transform digitally.

Investment in both traditional IT outsourcing and as-a-service contracts in the Europe, Middle East and Africa (EMEA) region saw significant increases in spending, according to figures from the latest ISG outsourcing index.

Traditional services, in which an organisation buys people to provide a service, saw an 8% increase in spending, hitting €10.7bn, while a total of €6.4bn was invested in cloud-based as-a-service contracts – a 13% rise on the previous year. As-a-service contacts accounted for 37% of the total spending in 2019.

ISG monitors IT and business process services contracts in EMEA that are worth over €5bn (£4.2bn). The reason for the increases are largely two-fold, it said.

Barry Matthews, partner at ISG, said cost-cutting and digital transformation are the underlying drivers of outsourcing growth. “We are seeing lots of focus on cost reduction, which is not surprising given the economic uncertainty,” he said.

A byproduct of this is shorter contracts, said Matthews. “Organisations want to get more flexibility with their contracts, so are signing shorter contracts, which are about three years in length and $15m in value on average,” he added.

“Meanwhile, everybody is investing in digital, and cloud is core to everything. All organisations we talk to are trying to reinvent their business models around digital, and it all starts with the technology backbone.”

Matthews said that in the traditional outsourcing segment, it is largely the usual suspects in terms of suppliers that are being used, but the as-a-service market is much more competitive. “We track 2,500 as-a-service providers and it is incredibly competitive,” he said. These include the relatively small suppliers, right up to Google and Microsoft, he added.

Matthews said even the traditional IT outsourcing providers have some form of platform-as-a-service offering because they have had to evolve into digital experts. “This is part of the reason for so many mergers and acquisitions in the market,” he pointed out.

But as-a-service, which now accounts for nearly 40% of all contract value, according to ISG, will reach a limit. “You will always need people to make sure everything works together and can’t rely on everything as a service,” said Matthews. “Growth will slow eventually, but we expect as-a-service to continue to grow over the next two years.”

Turning to Brexit, Matthews said there is still uncertainty for suppliers on how they will operate across Europe when the UK ends its transition period before exiting the EU. “Everyone is uncertain about things like what it will mean from a travel and regulatory perspective, but everyone is presuming it will be OK,” he said.