Cloud-fuelled European IT outsourcing spend hits record high

European organisations have mirrored the global spending trend, with record levels invested in IT outsourcing driven by cloud service investments.

In Europe, the value of contracts signed during the third quarter of this year reached a record £4.7bn, 36% higher than the same quarter last year and 4% higher than the previous quarter this year.

The increase was driven by heavy spending on cloud services, which totalled £2.4bn, 59% higher than last year. In Europe, infrastructure-as-a-service (IaaS) and software-as-a-service (SaaS) deals were both up 59%, to records of £1.75bn and £677m respectively. 

“Demand for IaaS and SaaS solutions remains robust as European companies pick up the pace in their adoption of cloud-based technologies and services,” said Steve Hall, partner and president of ISG EMEA. “The region has been slower than others to move to the cloud due to privacy and security concerns, but that appears to be abating as companies accelerate their digital transformations.  

ISG, which measures contracts with a value of £3.6m or more, last week published record global spending figures with $21.8bn spent on IT and IT-enabled business services during the past quarter, with cloud computing accounting for $13.4bn of this. It expects global cloud-based IaaS and SaaS contracts to be worth 25% more in 2021 overall, compared with 2020, and expects firm-managed services contract values to increase by just over 10% during the same period.

While the value of traditional IT outsourcing contracts in Europe, including IT outsourcing and BPO, increased 19% to £2.3bn of total spend, UK organisations invested 61% less on them during the third quarter, with a total of £296m spent, making this its weakest since the third quarter 2002.

ISG said that despite the drop in the latest quarter, “the first half of the year was robust, and the fourth quarter is expected to see the UK back in line with previous years”. “The UK had a weak third quarter compared with the past several years, but the first six months were very robust and there remains a strong pipeline of deals. Infrastructure spend in the UK was down significantly, but cloud spend was up,” said Hall. “Traditional datacentre and ITO deals remain weak in the UK market as organisations continue to shift spend to cloud hyperscalers.”

But the UK IT services sector still faces challenges, with spending expected to remain flat in the financial services sector in 2021/22 compared with 2019, with a 23% drop in spending in the energy sector, a 9% reduction in the travel, transport and leisure segment, and a 1% fall in Telecoms and Media predicted.

There will, however, be a 17% rise in the amount manufacturers spend on IT services, with the business services and retail sectors increasing spending by 7%.

The DACH region, which includes Germany, also recorded a decline in spending on these services, with an 8% drop to £379m, but France saw a 201% increase with a total of £552m spent.

Hall put this down to a traditionally slow quarter due to the holiday season and its impact on deal flow. “Volume is in-line when normalised for seasonality, so we don’t see a long-term trend or broader concern with the DACH market,” he said.

On traditional IT services in Europe, Hall said: “Deal flow remains active, but we saw a number of them move to later stages in financial services, and we continue to see weakness in the manufacturing sector, as the economic recovery in Europe remains choppy.”