A rise in the number of traditional sourcing contracts fuelled overall market growth in the Europe, Middle East and Africa (EMEA) region in the second quarter, according to the findings of the 2Q17 EMEA ISG Index™ released by Information Services Group (ISG), a leading global technology research and advisory firm.
The EMEA ISG Index™, which measures commercial outsourcing contracts with an annual contract value (ACV) of ˆ4 million or more, shows ACV for the combined EMEA market (including both as-a-service and traditional sourcing) reached ˆ2.8 billion in the second quarter, up 13 percent. Traditional sourcing grew 5 percent, to ˆ2 billion, on the strength of 188 contract awards, the second most ever for a quarter. ACV in the as-a-service (Infrastructure-as-a-Service and Software-as-a-Service) segment grew 40 percent, although the region continues to remain more dependent on traditional sourcing than other parts of the world.
For the first half, the combined commercial market reached ˆ6.3 billion, up 13 percent year on year. The number of contracts signed in the period reached 340, the second-highest number ever for the region. Traditional sourcing ACV was up 5 percent, while as-a-service values increased 48 percent in the period, fueled by an 80 percent increase in IaaS. As-a-service contracting now accounts for almost 30 percent of the region’s sourcing spend.
First-half market growth in EMEA was driven by a notably strong first quarter that included six mega relationships (contracts with an annual value of ˆ80 million or more). In contrast, with just a single mega-relationship signing, second-quarter ACV for the region declined 22 percent sequentially from the first quarter.
Globally, ACV for the combined commercial market stood at ˆ7.5 billion for this quarter, up 9 percent over last year, but down 11 percent from the record first quarter of 2017. During the quarter, as-a-service ACV climbed 32 percent, to just over ˆ3 billion, while traditional sourcing ACV declined 3 percent, to ˆ4.4 billion.
Market Insights
Looking at traditional sourcing by country, the UK saw quarterly values return to recent norms following the record-breaking first quarter. The 51 contracts signed in the second quarter yielded ˆ630 million, a decline of 56 percent sequentially, and 6 percent year on year. Just one mega relationship was signed in the UK in the second quarter compared with the four signings in the first quarter that drove values up substantially. For the half year, more than ˆ2 billion was awarded, the strongest UK performance in five years. Contracting activity was also robust, with 106 awards in the period, a rise of 8 percent year on year.
Following its strong start to 2017, the DACH region saw its second quarter ACV fall 23 percent sequentially and 18 percent year on year. The number of contract awards also declined. This poor performance pulled down the half-year results for DACH. ACV in the first half of 2017 reached just over ˆ1 billion, down 5 percent year on year, while the number of contract signings fell by 14 percent for the period.
Both ACV and sourcing activity rebounded strongly in France in the second quarter, following a very weak start to the year. France enjoyed its strongest quarterly performance in three years with ACV of ˆ320 million, a rise of 255 percent sequentially and 129 percent year on year. The 24 contract awards were substantially ahead of the prior quarter and more than double the prior year. The strong second-quarter performance lifted France’s half-year figures; ACV for the half was 48 percent ahead of the same period last year, while contract counts grew 27 percent.
Sector Breakdown
By industry, the data reveal a mixed picture. The region’s largest vertical, Financial Services, grew 31 percent in the first half compared to the like period in 2016. Both traditional sourcing and as-a-service showed strength. Traditional sourcing ACV increased 27 percent year on year, while as-a-service continued on its trajectory of strong growth, now accounting for 18 percent of total Financial Services values.
The Energy sector was another strong performer. Its first-half ACV increased 44 percent year on year, with as-a-service now accounting for 11 percent of the sector total.
In contrast, ACV in the Manufacturing sector tumbled 26 percent in the first half of 2017. Strong growth in as-a-service contracting, up 45 percent, was not enough to overcome the drop in traditional sourcing ACV.
Forecast
Barry Matthews, partner, ISG, said: “Traditional sourcing continues to account for the lion’s share of contracting in EMEA but the as-a-service segment is growing, albeit at a less aggressive rate than we have seen in the Americas and Asia Pacific regions. Looking ahead to the rest of 2017, we expect a robust second half for EMEA, with traditional sourcing spend growing by a mid-single-digit percentage for the year, while as-a-service spending is expected to remain fairly flat."
