APAC’s spending on cloud services down sharply in Q3, reveals ISG

Scott Bertsch, Partner and Regional leader, ISG APAC

Spending on cloud services in Asia Pacific was down in the third quarter, as the market was weighed down by economic concerns and business disruptions in China, the latest state-of-the-industry report from Information Services Group (ISG), a tech research firm, finds.

What were the findings of ISG survey?

The Asia Pacific ISG Index™, which measures commercial outsourcing contracts with annual contract value (ACV) of US $5 million or more, shows third-quarter ACV for the combined market (managed services and cloud-based XaaS) dropped 29%, to US $3.1 billion.

Third quarter results

Although the combined market rose 3% sequentially from a weak second quarter, it was down from its peak of $5bn in the fourth quarter of 2021. Cloud-based XaaS continues to dominate this market, accounting for 80% of combined market ACV year to date.

But that was down from an 83% share last year, as spending on cloud services has rapidly decelerated the last two quarters. In the third quarter, XaaS ACV slumped 37% versus the prior year, to $2.4 billion, but was up 9% against a weak second quarter. Within this segment, infrastructure as-a-service (IaaS) fell 40% versus the prior year, to $2.0 billion, while software-as-a-service (SaaS) fared a bit better, down 15%, to $390 million.

On the managed services side, ACV advanced 17% YoY, to $745m. Spending on IT outsourcing (ITO) rose 23%, to $545m, while business process outsourcing (BPO) rose 1%, to $199m. The ITO market was buoyed by strong demand for application development and maintenance services, while the BPO market saw strong demand for contact center services.

There were 53 managed services contracts signed during the third quarter, down 12%. From a geographic standpoint, the India and Southeast Asia markets were up substantially from last year, while enterprises pulled back on spending in Japan and China. The region’s largest geographic market by ACV, Australia-New Zealand (ANZ), posted a second straight quarter with ACV greater than US $250 million. Spending in ANZ was up 4% versus the prior year.

Year-to-Date Results

Asia Pacific’s combined market generated ACV of $10.6 billion, down 14% versus the same period last year, the steepest decline since ISG began measuring the combined market in 2015. XaaS ACV declined 17%, to $8.6bn, while managed services rose 2%, to $2.1bn. Enterprises signed 177 managed services contracts in the period, the highest volume ever.

2022 Global Forecast

Information Services Group sees economic uncertainty caused by rising interest rates, energy shortages, supply chain disruptions and continuing inflation dampening enterprise demand in the near term. The firm maintained its growth forecast for managed services at 3.5% for the year, and lowered its forecast for XaaS to 10.5%, down from 18% last quarter.

What were the executive’s thoughts on the survey?

“Much of the slump in IaaS can be attributed to lower demand for cloud services provided by China’s big four hyperscalers,” said Scott Bertsch, partner and regional leader, ISG Asia Pacific.

“The country’s crackdown on tech companies, combined with its zero-Covid policy, makes it difficult for enterprises to do business with China’s hyperscalers. In general, enterprises are slowing their spending on cloud services in response to weak economic conditions.”