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Covid-19: European sourcing spending declines

In response to Covid-19, companies are reducing their spending on managed services. However, there is still strong demand for cloud services that enable distributed working.
E-3 Magazine
October 15, 2020
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This text has been automatically translated from German to English.

In the wake of the Covod 19 pandemic, outsourcing demand cooled sharply in Europe, the Middle East and Africa (EMEA) in the second quarter of 2020, particularly for traditional managed services, which fell 21 percent. This is reported in the latest EMEA ISG Index based on the latest sourcing industry figures.

The EMEA ISG Index tracks private sector outsourcing deals with an Annual Contract Value (ACV) of at least €5 million. The latest index shows that the total second quarter as-a-service and managed services market declined 9 percent year-on-year to a total of €3.9 billion. This is the first time since 2018 that the EMEA region has recorded two consecutive quarters of decline.

Classic managed services dragged down the results of the overall market. Contract volumes slipped 21 percent to 2.3 billion euros. Within the managed services segment, IT outsourcing (ITO) shrank by 19 percent to 1.9 billion euros, while business process outsourcing (BPO) plummeted 31 percent to 346.4 million euros.

At the same time, the EMEA region saw increased demand for cloud services as a basis for distributed working and improving data security. In the second quarter, the total volume of as-a-service contracts increased by 13 percent to 1.7 billion euros. Infrastructure as a Service (IaaS) accounted for a 23 percent increase to 1.2 billion euros, while Software as a Service declined by 8 percent to 419 million euros.

EMEA got off to a good start in 2020 before the region was hit by the pandemic in March. The early momentum in the region is reflected in its half-year results, which were at about the same level as the previous two years despite the rapid decline in demand due to the pandemic.

Contract volume for the overall market in the first half of the year was EUR 8.3 billion, down 2 percent from the record levels of the first half of 2019. In the first half of 2020, as-a-service increased by 9 percent to EUR 3.5 billion, while managed services declined by 9 percent year-on-year to EUR 4.8 billion.

"Covid-19 has caused all companies to completely restructure the way they do business. This has driven up demand for public cloud services and Infrastructure as a Service"says Barbara Florschütz, Managing Director of Information Services Group (ISG) Germany.

"The cloud enables three things: becoming resilient to what comes next; becoming more agile to expand or constrain demand as needed; and positioning itself to minimize economic risk through flexible contracts."

For the global sourcing market, ISG expects slight, ongoing growth in the third and fourth quarters of 2020. For the full year, the company predicts a decline of 7.5 percent for the managed services market.

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