ISG reveals APAC cloud spend off sharply declines in the fourth quarter

Scott Bertsch, Partner and Regional Leader at ISG Asia Pacific

The general spending on cloud services in the Asia Pacific was down sharply in the fourth quarter, buffeted by the troubled technology sector in China, according to the latest and most recent state-of-the-industry report from Information Services Group (ISG), a leading global technology research and advisory firm. This report is known as The Asia Pacific ISG Index™.

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.

What were the key results according to the ISG Index?

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.

For the fourth-quarter of the year, XaaS spending, on the other hand, was down to 48 percent from the previous 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 of 2022 according to the report, the Asia Pacific’s combined market generated ACV of US $13.8 billion, which was down 21 percent versus in 2021, the steepest decline since ISG began measuring the combined market value in 2015. XaaS ACV declined 27.5 percent, to US $10.4 billion, while its managed services rose by 9 percent, to US $3.4 billion. Enterprises in Asia 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.

What was the general geographic performance?

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 previous 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, up 74 percent, and finished 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 ended the year with managed services ACV of US $612 million, up 52 percent, and had its best quarter in the fourth quarter, with ACV of US $205 million, double the prior year.

What were the executive remarks on the ISG Index™?

This is versus the third quarter, combined market spending was up 14 percent, the best sequential growth of the three regions according to the ISG Index measures. “The technology sector in China continues to have outsized impact on the overall Asia Pacific region. If you exclude China, the 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 had its second-best quarter ever, trailing only the second quarter of 2022,” Bertsch said. “The Asia Pacific region saw a 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 this quarter, a new record.”

What is the 2023 global forecast?

ISG predicts and sees several potential positive developments for the Asia Pacific 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 that XaaS providers are still dealing with “technology excess” and therefore compensating for the softening demand by reducing the size of their work forces after a period of significant hiring over the last few years. Given this, ISG is forecasting annual ACV growth of 17 percent for the XaaS market in 2023, lower than in all the previous years.

As for managed services, the general shift towards cost optimization “should provide favorable tailwinds for this current market,” ISG analysts said in response. Information Services Group(ISG) is forecasting and predicting 5 percent ACV growth for managed services in 2023.


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