Data from the EMEA ISG Index™, which measures commercial outsourcing contracts with annual contract value (ACV) of ˆ4 million or more, reveal the EMEA market, which fell sharply in the third quarter after starting the year strongly, rebounded in the fourth quarter, up 27 percent sequentially. Year-over-year, however, EMEA, was flat with the prior year, with combined fourth-quarter ACV of ˆ3 billion in 2017. Traditional sourcing, at ˆ1.9 billion, was down 11 percent versus the prior year, while as-a-service sourcing, at a record ˆ1.1 billion for the region, was up 27 percent.
For the full year, EMEA generated ˆ12.2 billion in ACV, up 3 percent against 2016. Traditional sourcing ACV of ˆ8.3 billion was down 8 percent, but as-a-service sourcing soared 41 percent, to ˆ3.9 billion, as demand for cloud-based services accelerated across the region.
The rise of as-a-service sourcing was driven by demand for Infrastructure-as-a-Service (IaaS). While Software-as-a-Service (SaaS) ACV of ˆ900 million was flat for the year, IaaS ACV soared 58 percent versus the prior year, reaching ˆ3 billion. In contrast, traditional sourcing ACV declined for the fourth consecutive year, despite a slight increase in the number of contracts. Although ITO values, at ˆ6.5 billion, remained steady, BPO ACV in the region fell to ˆ1.8 billion, its lowest level in a decade.
Globally, the market also saw a strong final quarter, with ACV for the combined market establishing a new record at ˆ34.6 billion. Global trends reflect those in EMEA, with newer technologies continuing to gain momentum. As-a-service continued to reach new highs on a global scale, overtaking traditional sourcing in the Americas and Asia Pacific in the fourth quarter, as businesses spend more on cloud-based technology to drive digital transformation.
Market Insights
Looking at traditional sourcing by geography, 2017 saw a mix of performance across the region.
Despite uncertainty around Brexit, the UK saw sourcing activity and ACV grow in 2017. This follows the broader trend of organizations entering into higher numbers of smaller-value contracts, as they look to take a more agile approach to sourcing. The 206 contracts and ˆ3.2 billion in ACV were both up 18 percent year on year, albeit on a soft compare with 2016, the UK’s weakest year in a decade.
France, despite a dip in the fourth quarter of 2017, posted annual ACV growth of 8 percent. The number of contract awards, although down very slightly on the previous year, remains strong, at 62. In contrast, Southern Europe ACV plummeted more than 70 percent to its lowest level in five years.
With fewer large deal awards, ACV in DACH fell 16 percent in 2017. The 165 contracts signed was also down compared with the previous year, by 13 percent. The continuing uncertainty following the elections in Germany pulled the market down in the second half of 2017.
An absence of large deals in the Nordics region resulted in a decline in ACV of 18 percent, despite contract numbers remaining steady.
Sector Breakdown
All industry sectors in EMEA demonstrated growth in as-a-service ACV in 2017, while traditional sourcing performance varied.
Financial Services dominated in EMEA during 2017. Combined ACV in the sector reached ˆ3.4 billion, an increase of 21 percent compared with 2016 levels. As-a-service ACV hit ˆ700 million in Financial Services, a year-on-year increase of 40 percent.
The Business Services sector mirrored the performance of as-a-service contracting in Financial Services, also recording AVC of ˆ700 million and a 40 percent increase compared with the prior year.
In contrast, Manufacturing’s combined ACV fell 21 percent in 2017, pulled down by a steep decline in traditional sourcing, and despite a 50 percent increase in as-a-service values. Recent trends indicate significant spending on supply chain optimization in the manufacturing sector. Connected devices supported by edge computing, IoT, and data analytics will increasingly become a major focus in the manufacturing sector.
Forecast
Steven Hall, partner and president, ISG, said: “Despite a dip in the third quarter of 2017, the market recovered in the final quarter and demonstrated steady overall performance for the year. It is especially heartening to see the adoption of cloud-based services accelerate across the region, following a slow start in previous years. European businesses are seeing the potential of new technologies to help them on their digital transformation journeys, while reducing costs and improving agility. Macroeconomic uncertainty across Europe makes the business of predictions tricky. Nonetheless, the trend towards as-a-service is one we can expect to see accelerating over the next 12 months, with consistent growth of 20 percent or higher for the as-a-service market.”
