APAC IT, business services market down sharply in Q2, finds ISG Index™

Scott Bertsch, Partner and Regional leader, ISG APAC

APAC’s IT and business services market was down sharply in the second quarter, buffeted by slowing demand in several key geographies, the latest state-of-the-industry report from Information Services Group (ISG), a global technology research and advisory firm, finds.

What were the findings of ISG’s report?

The Asia Pacific ISG Index™, which measures commercial outsourcing contracts with annual contract value (ACV) of $5m+, shows second-quarter ACV at $3.0bn for the combined market—including cloud-based XaaS and managed services. That was down 33% versus last year’s second quarter and 31% sequentially from the first quarter, both strong periods.

It was also the sharpest quarterly decline in the region’s combined market ever recorded by the ISG Index, and the third quarter in the past four in which growth slowed sequentially.

ACV for cloud-based XaaS, a long-time growth engine for the region, slumped 38% YoY and 44% against the first quarter, to $2.2bn. It was the lowest quarterly XaaS ACV for the region since the pandemic-impacted third quarter of 2020. The slowdown reflects weakness in China, impacted by extended lockdowns and a tighter regulatory environment for the tech sector. China’s big hyperscalers – like Baidu, Alibaba and Tencent – saw their growth stall.

Within the XaaS segment, infrastructure-as-a-service (IaaS) was down 43% from a year ago, to $1.8 billion, even as software-as-a-service (SaaS) advanced 16% year on year, to US $378 million. The latter reflects the continuing trend away from traditional, on-premises software licensing, as well as growing uptake on SAP S/4 HANA and Microsoft Dynamics.

On the managed services side, ACV declined 17% YoY, to $826m, but was up 63% against the first quarter. Demand for managed services has exceeded $800m in three of the last five quarters, a sustained level of performance above historical norms. India and Southeast Asia were up in the quarter, while ANZ, Japan and China declined against strong prior-year periods.

There were 76 managed services contracts signed during the second quarter, the most ever recorded for the region, beating the previous high of 72 in the second quarter of 2017.

What were the executive’s thoughts on the report?

“Asia Pacific has been on a tremendous run, topping US $4 billion for four straight quarters dating back to last year,” said Scott Bertsch, partner and regional leader, ISG Asia Pacific.

“We have seen a gradual slowing of the market in recent quarters, although demand remains high. Economic headwinds dramatically slowed the market in the second quarter, particularly in ANZ, Japan and China, which all faced difficult comparisons with prior periods,” Scott said.

What were the first-half year results?

First-half ACV for the combined market, at $7.4bn, was down 5.5% versus the same period last year, the first time ACV declined in a first half since 2016. ACV for XaaS was US $6.1bn, down 6%, the first time the region’s XaaS market has been down at the half-year mark.

Managed services ACV, at US $1.3 billion, was down 4% versus the prior-year period. There were 123 managed services contracts signed in the first half, up 27% over the like period in 2021, and the highest volume Asia Pacific (APAC) has ever recorded in the first half.

With the potential for continued economic uncertainty, ISG lowered its 2022 growth forecast for cloud-based XaaS (IaaS and SaaS) to 18%, from 22% a quarter ago, and reduced its global growth forecast for managed services to 3.5%, from 5.1% in the first quarter.