Q3 ISG Index shows managed services still growing versus prior year – but down 43% from second quarter.
The market for IT and business services in APAC continued to grow in the third quarter on solid demand for both managed and cloud-based services, although it decelerated from a strong Q2, according to the latest state-of-the-industry report from Information Services Group (ISG).
The Asia Pacific ISG Index, which measures commercial outsourcing contracts with annual contract value (ACV) of US $5 million or more, shows third-quarter ACV for the combined market (both cloud-based XaaS and managed services) rose 10 percent versus the prior year, to US $4.6 billion, but was down 5% versus the second quarter.
Demand for managed services remained solid, with ACV up 17 percent over the prior year, to US $794 million, but down 43% from the second quarter. A total of 57 managed services contracts were awarded, up 36% year on year but down 30% quarter over quarter.
New scope awards propelled the market, with volume up 47% and ACV up 18% versus the prior year.
Demand for cloud-based services grew 8% to US $3.8 billion and was up 10% sequentially from the second quarter.
Although quarterly demand for XaaS has not exceeded the US $4 billion level since the second quarter of 2022, it was the third time in the last four quarters that ACV exceeded US $3.5 billion.
“After two consecutive quarters with managed services ACV of more than US $1 billion, Asia Pacific has settled back into a more typical US $800 million range,” said Michael Gale, Partner and Regional Leader, ISG Asia Pacific.
“Growth in the region has always been driven more by cloud services, given the market’s maturity and cloud-first mindset, and that segment is rebounding after a significant slump the last two years.”
Within managed services, IT outsourcing (ITO) ACV rose 18% to US $622 million, driven by surging demand for application development and maintenance (ADM) services, up 238% in the quarter.
Business process outsourcing (BPO), meanwhile, was up 12% to US $173 million, led by strong growth in engineering, research and development (ER&D) services.
From a geographic perspective, demand for managed services was up by triple digits in China and Japan, and by double digits in South Korea.
The region’s two largest markets, Australia/New Zealand (ANZ) and India, meanwhile, moved in opposite directions, with ANZ up 79% in the quarter and India down 61% – its weakest quarter since the first quarter of 2022.
By industry, banking, financial services and insurance (BFSI), energy and travel and transportation all moved to the upside, while manufacturing pulled back 19% for the quarter.
Within the XaaS segment, infrastructure-as-a-service (IaaS) ACV was up 8% at US $3.3 billion, while software-as-a-service (SaaS) ACV rose 14% to US $444 million.
Nine-Month Results
APAC’s combined market ACV rose 13% versus the prior year, to US $14.2 billion, a significant turnaround from the same period last year, when the market was down 17%.
However, the market year-to-date is still off 6% from a record first nine months of 2022.
Managed services produced its best first nine months ever, with ACV of nearly US $3.2 billion, up 24% year on year. ITO ACV was up 8% to US $2.3 billion, while BPO ACV surged 91% to US $946 million.
On the cloud side, XaaS ACV rose 11% to nearly US $11.0 billion. IaaS climbed 10% to US $9.6 billion and SaaS advanced 13% to US $1.3 billion.
2024 Global Forecast
For the full year, ISG is maintaining its forecast of 2% revenue growth for managed services and 14% revenue growth for XaaS. The firm sees stronger growth in 2025.
“Despite a strong third quarter, we are maintaining our full year forecast due to continued mixed signals in the market, especially softness in the BFSI sector,” said Gale.
“Recent rate cuts by the Fed and European Central Bank are expected to boost IT spending in the coming year and other factors, such as the growing interest in GenAI, increased server shipments and the reacceleration of hyperscaler revenues, all point to a more positive outlook in 2025.”
