Asia Pacific Cloud Spend Off Sharply in Q4, ISG Index™ Finds
Managed services growth of 21% not enough to offset drop in XaaS spending
ISG forecasts 17% XaaS growth and 5% managed services growth globally in 2023
The Asia Pacific ISG Index™, which measures commercial outsourcing contracts with annual contract value (ACV) of US $5 million or more, shows fourth-quarter ACV for the combined market (managed services and cloud-based XaaS) dropped 33 percent, to US $3.4 billion, with particular weakness in infrastructure-as-a-service (IaaS) spending due to lockdowns and technology regulation in China that impacted the country’s large hyperscale providers. Versus the third quarter, combined market spending was up 14 percent, the best sequential growth of the three regions the ISG Index measures.
“The tech sector in China continues to have outsized impact on the overall Asia Pacific region. If you exclude China, Asia Pacific’s combined market ACV for the quarter would have been up 10 percent over the prior year,” said Scott Bertsch, partner and regional leader, ISG Asia Pacific.
The managed services sector outperformed the overall market in the fourth quarter, with ACV up 21 percent, to US $1.3 billion, and 96 contracts signed in the quarter, up 52 percent year over year. Within managed services, IT outsourcing (ITO) was up 19 percent, to US $877 million, while business process outsourcing (BPO) climbed 26 percent, to US $437 million. Compared with the third quarter, overall managed services spending was up 76 percent.
“Managed services had its second-best quarter ever, trailing only the second quarter of 2012,” Bertsch said. “The region saw strong demand for infrastructure and managed network services, as well as industry-specific BPO services and facilities management. Nearly 100 managed services contracts were signed in the quarter, a new record.”
Fourth-quarter XaaS spending, on the other hand, was down 48 percent from the prior year, at US $2.1 billion. IaaS spending was off 53 percent, to US $1.7 billion, while software-as-a-service (SaaS) spending declined 9 percent, to US $412 million.
For the full year, Asia Pacific’s combined market generated ACV of US $13.8 billion, down 21 percent versus 2021, the steepest decline since ISG began measuring the combined market in 2015. XaaS ACV declined 27.5 percent, to US $10.4 billion, while managed services rose 9 percent, to US $3.4 billion. Enterprises signed 273 managed services contracts in 2022, up 24 percent over the prior year.
Within the XaaS segment, IaaS was down 31 percent, to US $8.8 billion for the year, while SaaS eked out a small increase, up 0.1 percent, to US $1.6 billion. On the managed services side, ITO advanced 4 percent, to US $2.4 billion, while BPO climbed 27 percent, to US $989 million.
For the full year, Australia/New Zealand (ANZ), the region’s largest market, generated US $1.1 billion of managed services ACV, down 14 percent versus the prior year, even though it had its strongest quarter of the year in the fourth quarter, with ACV of US $469 million.
Southeast Asia, the region’s second-largest market, produced US $795 million of managed services ACV for the year, up 74 percent, and finished 2022 with its best quarter ever, at US $344 million of ACV in the fourth quarter, up 46 percent over the prior year. Also among the region’s big gainers, India finished the year with managed services ACV of US $612 million, up 52 percent, and had its best quarter of 2022 in the fourth quarter, with ACV of US $205 million, double the prior year.
2023 Global Forecast
ISG sees several potential positive developments for the market heading into 2023, including interest rate hikes coming to an end, inflation lessening, China reopening, supply chains beginning to normalize, and the U.S. dollar coming off recent highs.
ISG analysts said XaaS providers are still dealing with “tech excess” and compensating for softening demand by reducing the size of their work forces after a period of significant hiring the last few years. Given this, ISG is forecasting annual ACV growth of 17 percent for the XaaS market in 2023, lower than in prior years.
As for managed services, the shift toward cost optimization “should provide favorable tailwinds for this market,” ISG analysts said. ISG is forecasting 5 percent ACV growth for managed services in 2023.
About the ISG Index™
The ISG Index™ is recognized as the authoritative source for marketplace intelligence on the global technology and business services industry. For 81 consecutive quarters, it has detailed the latest industry data and trends for financial analysts, enterprise buyers, software and service providers, law firms, universities and the media. For more information about the ISG Index, visit this webpage.
ISG (Information Services Group) (Nasdaq: III) is a leading global technology research and advisory firm. A trusted business partner to more than 800 clients, including more than 75 of the world’s top 100 enterprises, ISG is committed to helping corporations, public sector organizations, and service and technology providers achieve operational excellence and faster growth. The firm specializes in digital transformation services, including automation, cloud and data analytics; sourcing advisory; managed governance and risk services; network carrier services; strategy and operations design; change management; market intelligence and technology research and analysis. Founded in 2006, and based in Stamford, Conn., ISG employs more than 1,300 digital-ready professionals operating in more than 20 countries—a global team known for its innovative thinking, market influence, deep industry and technology expertise, and world-class research and analytical capabilities based on the industry’s most comprehensive marketplace data. For more information, visit www.isg-one.com.
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