Sourcing spend drops

The COVID-19 pandemic had a chilling effect on second-quarter outsourcing spending across the Europe, Middle East and Africa (EMEA) region, particularly on traditional managed services, which dropped 21 percent, according to the latest state-of-the-industry report from Information Services Group (ISG), a leading global technology research and advisory firm.

The EMEA ISG Index™, which measures commercial outsourcing contracts with annual contract
value (ACV) of €5 million (£4 million) or more, shows combined market ACV (including both as-a-service and managed services) in EMEA was down 9 percent, to €3.9 billion (£3.6 billion), in the second quarter, the first time since 2018 the region has recorded back-to-back declining quarters.

Managed services weighed down overall results, with a 21 percent drop in ACV, to €2.3 billion (£2.1 billion). Within managed services, information technology outsourcing (ITO) was down 19 percent, to €1.9 billion (£1.7 billion), while business process outsourcing (BPO) slumped 31 percent, to €346.4 million (£314.0 million).

The region, meanwhile, saw accelerating demand for cloud services to accommodate remote working and improve data security. Second-quarter as-a-service ACV increased 13 percent, to €1.7 billion (£1.5 billion), on a 23 percent surge in infrastructure-as-a-service (IaaS) ACV, to €1.2 billion (£1.1 billion), even as software-as-a-service (SaaS) declined 8 percent, to €419 million (£379 million).

EMEA was off to a strong start in 2020 before the pandemic hit the region in March. The region’s early momentum is reflected in its half-year performance, which came in at relatively the same level as the prior two years despite the precipitous drop in demand this year related to the pandemic. First-half combined market ACV of €8.3 billion (£7.5 billion) was off 2 percent from a record first half in 2019. As-a-service for the 2020 half year was up 9 percent, to €3.5 billion (£3.2 billion), while managed services was down 9 percent, to €4.8 billion (£4.4 billion), from the like period a year ago.

“COVID-19 has seen every organization completely restructure the way they work, and that has driven growing demand for public cloud and infrastructure-as-a-service,” said Steve Hall, president, ISG EMEA. “Cloud enables you to do three things: to be resilient for what might come next; to be agile, turning demand up and down as needed; and to be commercially cautious through flexible contracts. As there is continued pressure on costs, we’ll see demand for cloud-based services increase.”

Market Insights

In DACH, managed services ACV increased by 38 percent in the first half, to €1.4 billion (£1.3 billion), compared with the same period last year. This seemingly robust performance was skewed by an usually strong first quarter—before the pandemic hit—compared with a fairly weak first quarter in 2019. Managed services ACV in DACH for the second quarter was down a modest 2.4 percent to €596 million (£541 million), from the same quarter last year.

“DACH has performed relatively well compared to the rest of Europe. At the moment, the sourcing market there is relatively stable compared to 2019,” said Hall. “Despite strong demand for the public cloud and infrastructure-as-a-service, we see some risk of further decline in managed services in the second half.”

In the UK and Ireland, the impact of the pandemic caused second-quarter managed services ACV to decline 5.6 percent versus the prior year, to €734 million (£663 million). For the half year, managed services was down 10.8 percent, to just over €1.3 billion (£1.2 billion). Demand for cloud technology in this market is expected to continue growing, to support remote working, while managed services remains under pressure from the pandemic.

In France, second-quarter managed services ACV was down 11 percent, to €197.7 million (£179 million), and for the half year, it was down 25.4 percent, to just over €410 million (£372 million), as the pandemic weakened demand.

Sector Performance

The financial services industry was deeply impacted by the pandemic, with managed services ACV down 40 percent, to €1.1 billion (£1.03 billion), in the first half of the year. In contrast, Infrastructure-as-a-service ACV in the financial services sector increased by 15.4 percent, to €410 million (£372 million), in the same period.

“The banking sector faced challenges in switching to working from home because of complex security and regulatory compliance processes. At the same time, interest rates dropped, compressing net interest margins. Loan losses and delays also affected profits,” said Hall. “The pandemic pushed the creation of digital bank capabilities, the move to cloud, and open banking platforms that better suit working from home.”

The retail and consumer packaged goods sector also faced obvious challenges. Restaurants and stores that had to close during lockdown focused on reducing or cancelling discretionary projects to save money. But those that stayed open (chemists and food shops, for example) and the companies making products to supply those stores had a very different experience. Overall, the sector continued to invest, with managed services ACV increasing by 16 percent to €321 million (£291 million) to date in 2020, compared to the first half of 2019. Infrastructure-as-a-service ACV increased over the same period by 19 percent as businesses in the sector accelerated their digital transformation activities. 

“Retailers are seeing pent-up demand for online commerce enabled by automation, and they’re seeking expertise in managing inventory, delivery and omni-channel e-commerce,” said Hall.

Forecast 

ISG is forecasting slight sequential growth for the combined global market in the third and fourth quarters of 2020. For the full year, the firm is projecting the managed services market will be down 7.5 percent, slightly more than the 7 percent decline it forecasted for 2020 in the first quarter.

“Looking ahead to the final two quarters of 2020, we expect the volume of larger deals to be down as enterprises focus more in the near term on business resiliency and operating efficiency than on broad-based digital transformation,” said Hall