Traditional IT outsourcing rockets as Europe’s businesses cut costs

Demand for IT outsourcing services spending in Europe bounced back in the latest quarter despite a reduction in cloud services investments, as businesses turned to traditional outsourcing to cut costs amid the challenging business environment.

European organisations spent $7.8bn on IT and BPO services in the second quarter of this year, which was 3.5% higher than the same period last year and 9% higher than the previous quarter, according to ISG, which records all deals worth more than $5m.

Traditional IT outsourcing contracts – labelled “managed services” by ISG – saw a 15% increase in total value, with European organisations investing $4.5bn in 283 of these contracts, which include traditional IT outsourcing and business process outsourcing deals.

“Europe rebounded in the second quarter, reversing a two-quarter losing streak on the strength of double-digit growth in the managed services sector,” said Steve Hall, president of EMEA for ISG. “Growing demand for managed services reflects the role outsourcing plays as a lever for cost optimisation, especially in the face of weak economic conditions.”

At the same time, spending on cloud based services dropped 8% to £3.3bn. Within this category, spending on infrastructure as a service fell 13% to $2.2bn, and software-as-a-service (SaaS) spending was flat at $1.1bn.

“Even though Europe’s drop in [cloud services] demand is not as steep as in other regions, it nevertheless indicates EMEA is not immune to the market malaise affecting the global [cloud services] sector,” Hall said.

“The slowdown we’ve been seeing in China’s hyperscaler market is now spreading to the big three [AWS, Microsoft Azure and Google Cloud]. Enterprises that scaled up quickly during the pandemic are now rationalising their cloud costs.”

During the second quarter of this year, UK based businesses generated $1.5bn in managed services spending, which was 50% higher than in the same quarter last year, with “strong demand” for IT outsourcing in sectors including retail, energy and telco.

The second latest market, behind the UK, was the DACH region made up of Germany, Austria and Switzerland, which saw 16% increase in spending on managed services, reaching $894m. In the DACH region, there was particular demand for application development management services.

In contrast to the UK, DACH spending on managed services declined 20% to $393m.

Elsewhere, Southern Europe (Spain, Portugal and Italy) rose 17%, to US $717m of ACV, with growth in contact centre BPO and in the energy and telco/media industries.

ISG predicts revenue growth for cloud services in the whole of 2023 to be 11.5% higher than 2022, and sales of managed services to be  5% higher for the same period.

Hall said the most difficult challenges will soon pass: “Excitement is growing around generative AI. That could provide a much-needed tailwind for cloud services.”

A recent survey from IT services giant Accenture revealed that 98% of senior executives believe AI will spark significant creativity and innovation, and 95% said it will usher in a new era of enterprise intelligence.