The EMEA ISG Index measures commercial outsourcing contracts with annual contract value (ACV) of €4 million or more. It shows the EMEA market posted combined fourth-quarter ACV of €3.0 billion. This marks an increase of 5 percent from the prior year.
This rise was bolstered by a 44 percent year-on-year increase in as-a-service ACV to €1.3 billion. This is the result of a strong demand for digital transformation remained an enterprise imperative. Infrastructure-as-a-Service (IaaS) and Software-as-a-Service (SaaS) in EMEA both performed strongly, posting ACV of €960 million and €331 million, respectively. Traditional sourcing, meanwhile, contracted by 12 percent year-on-year to €1.7 billion.
For the full year, EMEA reached €12.9 billion in ACV, up 9 percent against 2017. Traditional sourcing ACV of €8 billion was down 6 percent year-on-year. However, as-a-service grew 48 percent to reach €4.9 billion. The rise in as-a-service sourcing – which now accounts for 38 percent of total ACV for EMEA – continued to be demand-driven for SaaS and IaaS, both of which increased by more than 40 percent in 2018.
Steve Hall, partner and president of ISG, said: “Despite ongoing political and economic uncertainty in Europe and resulting business caution, companies are making significant investments in digital technologies to improve their ability to compete and to engage with their customers. Therefore, the tailwinds of digital transformation are stronger than the headwinds of political and economic issues.”
Globally, fourth-quarter ACV for the combined global market grew 18 percent, to €9.8 billion. As-a-service ACV pushed to new highs in the fourth quarter, up 43 percent year-on-year, while traditional sourcing inched up 2 percent.
Declines in the UK, D/A/CH and France pulled down the traditional sourcing market in 2018.
Full-year ACV in the UK fell by 27 percent, to €2.5 billion, despite a 5 percent increase in the number of contracts. The traditional sourcing market in the UK has slumped since the Brexit vote in June 2016. Prior to the vote, the UK averaged three €800-million quarters for traditional sourcing per year. Since the vote, only one quarter – the first quarter of 2017 – reached that mark.
Traditional sourcing ACV in D/A/CH was down 4 percent in 2018, with a 19 percent drop in contract signings. The economy in D/A/CH slowed in 2018 and fears of a recession have slowed decision-making. The UK Government defeat over the Brexit vote presents a further substantial economic risk to Germany, as well as the UK.
While UK and D/A/CH companies are exercising caution in traditional sourcing decisions, both are increasing their investments in new technologies and as-a-service contracting to improve efficiency and meet consumer demand for new services and channels.
The results of unsettling economic and political factors also are evident in France. Traditional sourcing ACV edges down 3 percent, to €640 million, despite a steeper drop of 13 percent in contract volume. French consumers have turned to online shopping in recent weeks as the Gilet Jaune demonstrations spread, benefiting Amazon and other online retailers and potentially affecting the Retail sector in 2019.
In the Nordics, traditional sourcing was up 20 percent, to €1.1 billion, with the number of contracts growing by 14 percent. The smaller EMEA markets also showed strength with gains in Southern Europe, Africa/Middle East and Russia/Eastern Europe.
The impact of as-a-service contracting was apparent, with all sectors demonstrating strong year-on-year growth. Only Financial Services, Retail, Manufacturing and the Healthcare and Pharma sectors posted gains in traditional sourcing.
Retail saw the highest combined growth of any sector in EMEA in 2018; ACV rose 71 percent for the year. Bucking the trend seen elsewhere, traditional sourcing powered this growth, increasing 125 percent.
In all other sectors, as-a-service growth outstripped that of traditional sourcing. Manufacturing, for instance, saw its combined ACV rise 27 percent on the strength of as-a-service growth of 45 percent, while Financial Services saw combined ACV increase 17 percent, with as-a-service surging 53 percent. Traditional sourcing in each sector was up 18 and 9 percent, respectively.
Elsewhere, the Business Services sector saw its combined ACV grow by 30 percent, driven by strong growth in as-a-service.
“Even though the macro environment is more volatile now than a year ago, demand for sourcing remains strong,” Hall said. “We believe the industry will see an accelerating growth trend in 2019, driven by a growing appetite for digital transformation, even in the face of unforeseen macro-economic challenges.”