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“There is a degree of uncertainty in the European market that continues to depress demand for outsourcing,” said Steve Hall, partner and president, ISG EMEA. “The focus on preparations for the sweeping GDPR data-privacy regulation and the impact this will have on business relationships is front of mind for many organizations and has led to a shift in priorities. The recent demise of Carillion and the financial uncertainty of some high-profile outsourcing companies has been extensively reported and has added a new degree of caution in the market.”
Data from the EMEA ISG Index™, which measures commercial outsourcing contracts with annual contract value (ACV) of ˆ4 million or more, reveal that EMEA’s first-quarter combined market ACV of ˆ3 billion was down 20 percent compared with the same period last year. The decline was driven by a sharp fall in traditional sourcing values, which dropped 40 percent compared with the notably strong first quarter of 2017, despite just a 3 percent drop in the number of contracts signed.
While traditional sourcing stumbled, as-a-service soared, rising 40 percent over last year. As-a-service ACV of ˆ1.4 billion was the highest recorded in the region and represented 46 percent of the combined regional market.
The increase in as-a-service sourcing was driven by demand for Infrastructure-as-a-Service (IaaS). Over the trailing 12 months, IaaS ACV increased 48 percent on the prior period and easily outpaced the 13 percent rise in Software-as-a-Service (SaaS).
Globally, the combined market reached a record high of ˆ9.8 billion in the first quarter of 2018, driven by 40 percent growth in the as-a-service sector, which reached ˆ4.7 billion of ACV. The new quarterly high for as-a-service is far beyond the ˆ3 billion - ˆ3.5 billion range in three of the last four quarters, and nearly double the typical ACV of just two years ago.
Market Insights
Looking at traditional sourcing by geography, poor showings in Europe’s largest markets, the UK and DACH, were a drag on regional performance.
Although traditional sourcing ACV in the UK rose 3 percent sequentially in the first quarter, it was down more than 60 percent compared with the same period in 2017. The number of contracts for the period held steady, although contract values were much smaller. 2018 yielded the lowest first-quarter ACV since 2010.
DACH had its third consecutive quarter of poor performance and its ACV of ˆ438 million was its lowest quarterly total since the beginning of 2014. The reduced appetite for traditional sourcing in DACH has been evident in each of the last three quarters, impacted by a shift in focus to GDPR and the implementation of new technologies.
Traditional sourcing in France showed robust growth in the first quarter compared with the tepid start to 2017. ACV grew 30 percent year-on-year, while contract numbers grew by more than two-thirds, albeit compared with a soft 2017 first quarter. Although still a small market, France has shown steady growth in the trailing 12 months.
The Nordics region continued its bumpy quarterly performance with an increase in ACV of 16 percent in the first quarter of 2018 and a rise of 45 percent in the number of contracts. Despite its uneven performance, in the trailing 12 months the Nordics grew by both ACV and number of contracts compared with the prior period.
Sector Breakdown
All industry sectors in EMEA demonstrated growth in as-a-service ACV in the trailing 12-month period. In contrast, all posted declining ACV in traditional sourcing, except for the Consumer Packaged Goods sector.
The Financial Services sector reached ˆ2.9 billion in the trailing 12-month period, down modestly on the prior period. As-a-service values in the sector increased 45 percent, while traditional sourcing fell 16 percent.
The Manufacturing sector continued its steady decline in ACV. Its ˆ1.75 billion in ACV was down 11 percent compared with the prior period, but as-a-service ACV grew 38 percent.
The Telecom & Media sector, with ACV of ˆ1 billion in the trailing 12-month period, registered the largest drop in ACV, down 46 percent compared with the prior period and despite a 32 percent lift in as-a-service ACV.
Forecast
Looking at the remainder of the year, Hall commented: “While traditional sourcing may have a bumpy ride in coming quarters, the trend toward as-a-service will continue to accelerate across Europe through 2018.”
