Despite a decrease in cloud services investments, popularity of IT outsourcing services in Europe increased in the most recent quarter, as businesses reverted to conventional outsourcing to save costs in a hard times for businesses.

Steve Hall, president ISG EMEA and Partner, Digital Advisory Services

"Europe rebounded in the second quarter, reversing a two-quarter losing streak on the strength of double-digit growth in the managed services sector," stated Steve Hall, President and Partner at ISG EMEA, Digital Advisory Services. "Growing demand for managed services reflects the role outsourcing plays as a lever for cost optimization, especially in the face of weak economic conditions."

Classic IT outsourcing deals, called as "managed services" by ISG, increased by 15%, with European organizations investing $4.5 billion in 283 of these deals, which included classic IT outsourcing and BPO (business process outsourcing) contracts.

Throughout the 2Q23, UK-based companies spent $1.5 billion on managed services, which was half more than in the same quarter previous year, owing to "strong demand" for IT outsourcing in industries such as retail, energy, and telecommunications.

"Excitement is growing around generative AI," Hall remarked, adding that the hardest challenges will be overcome shortly. "That could provide a much-needed tailwind for cloud services."

According to ISG they continue to spot high demand for cost-saving measures which leads to strong demand for outsourcing, both in the awards ISG advises and in the larger market data they analyze. Within this backdrop, extension and renewal activity is still quite strong, and mega deal activity was also very strong in the second quarter.

The DACH area, which includes Germany, Austria, and Switzerland, witnessed a 16% growth in expenditure on managed services, reaching $894 million, the second most recent market behind the UK. In comparison to the UK, DACH expenditure on managed services fell 20% to $393 million. Southern Europe (Spain, Portugal, and Italy) increased 17% to US $717m in ACV, with growth in contact center BPO, energy, and telco/media businesses. ISG forecasts that revenue growth for cloud services will be 11.5% greater in 2023 than in 2022, while sales of managed services will be 5% higher over the same year.

"Even though Europe’s drop in demand is not as steep as in other regions, it nevertheless indicates EMEA is not immune to the market malaise affecting the global sector," Hall explained. "The slowdown we’ve been seeing in China’s hyperscaler market is now spreading to the big three… Enterprises that scaled up quickly during the pandemic are now rationalizing their cloud costs.”