The Asia Pacific region witnessed a significant decline in demand for traditional managed services and a continued decrease in spending on cloud services in the third quarter, following a robust second quarter, according to a report released by Information Services Group (ISG).
The Asia Pacific ISG Index, a measure of commercial outsourcing contracts with an annual contract value (ACV) of $5 million or more, revealed a 10 percent decline in third-quarter ACV for the combined market compared to the prior year, amounting to $4.0 billion. This decrease was primarily driven by declines in both the managed services and cloud-based XaaS (Anything as a Service) segments.
The ACV for managed services experienced a 13 percent decline compared to the prior year and a significant 40 percent sequential decrease compared to the second quarter, totaling $651 million. Notably, this was the first time in the last 12 months that managed services ACV fell below $800 million in a quarter. The managed services market had two quarters with ACV exceeding $1 billion during this period.
In the third quarter, a total of 41 managed services contracts were awarded, marking a 24 percent decrease from the prior year. The ACV of new-scope contracts increased by 28 percent, while the ACV of restructured contracts saw a significant 81 percent year-on-year decline. The market experienced declines across most industry segments, except for manufacturing, which saw a notable 16 percent ACV growth.
Within the XaaS segment, the ACV was down by 9 percent compared to the prior year, amounting to $3.4 billion. Despite this being the fifth consecutive quarter of decline, the market appears to have stabilized over the last three quarters after peaking at US $5 billion at the end of 2021.
Scott Bertsch, partner and regional leader at ISG Asia Pacific, stated, “Managed services has been running hot in the region over the past year, so this quarter’s decline represents a pause for the market.”
In the managed services sector, IT outsourcing (ITO) ACV declined by 9 percent to $502 million, while business process outsourcing (BPO) fell by 25 percent to $149 million.
In the XaaS segment, infrastructure-as-a-service (IaaS) ACV saw an 11 percent decrease, amounting to $3.0 billion, while software-as-a-service (SaaS) ACV increased by 3 percent, reaching $389 million.
The combined market in Asia Pacific showed a 13 percent decline versus the prior year, reaching US $12.9 billion. This decline marked the first downturn in nine months since 2016, when the market pulled back by 3 percent.
Managed services experienced a 25 percent rise, reaching $2.6 billion, its highest level since 2012. A total of 160 contracts were awarded, marking a 10 percent decrease from the prior-year period. ITO ACV rose by 37 percent to $2.1 billion, while BPO was down by 9 percent to $502 million. The region witnessed strong growth in manufacturing and media and telecommunications, while financial services experienced a decline year to date. Australia-New Zealand, the region’s largest geographic market, was up by 54 percent, while India, its second largest market, nearly doubled its spending over the prior year.
In the XaaS segment, spending through nine months fell by 19 percent to $10.3 billion, marking the region’s first downturn at the three-quarters mark. IaaS was down by 19.5 percent to $9.2 billion, and SaaS declined by 18 percent, reaching $1.1 billion.
2023 Global Forecast:
ISG raised its forecast for managed services growth by 40 basis points, projecting a growth rate of 5.4 percent for the year. The forecast for XaaS revenue growth in 2023 remains at 11.5 percent, according to ISG’s latest projections.