Companies 'hitting brakes' on cloud-based projects - analyst

'You don't see this too often', ISG's Steve Hall admits as its index tracking XaaS and outsourcing deals shrinks for first time in nearly six years

A slowdown in cloud-based XaaS projects has fuelled the first annual dip in the global IT outsourcing market for nearly six years, according to market watcher ISG.

The annual contract value (ACV) of the commercial outsourcing contracts ISG tracks fell by three per cent to $23.2bn in the three months to 30 September 2022.

ISG keeps tabs on large managed services and XaaS deals with an ACV of above $5m.

That's the first annual fall its index has registered since the final quarter of 2016.

After a big swell in Covid-induced cloud deals, customers "hit the brakes" on spending in this area during Q3, ISG EMEA president Steve Hall said in a blog.

"[The cloud-based XaaS] market has been growing at a quarterly clip of 40 to 50 per cent of late - no surprise, considering how much work shifted to the cloud during the pandemic - but in the third quarter, ACV declined four per cent versus the prior year. It was the first time since the beginning of 2015 we have seen a down quarter for XaaS."

Although China's big four hyperscalers are encountering lower demand for their cloud services amid Covid-related lockdowns, AWS, Azure and Google Cloud are also seeing "growth slow slightly", Hall noted.

Managed services annual contract value also fell one per cent, with IT outsourcing up two per cent but business services activity shrinking back.

'Dampened' demand in Europe

Looking specifically at Europe, the annual contract value of the deals ISG tracks rose by seven per cent to $7.6bn.

There were some signs of "dampening demand" in the region, ISG said, however, with XaaS registering its lowest quarterly growth since the start of 2015 at five per cent. ACV here hit $3.8bn, with IaaS rising 13 per cent to $2.9bn and SaaS falling 14 per cent to $924m.

"European enterprises continue to press ahead with their digital transformation initiatives, but we are seeing signs of a slowdown in spending over concerns about the region's economy," Hall said.

"Spending on cloud computing has been growing rapidly in Europe, averaging more than 40 per cent growth a quarter over the last five quarters. This quarter marks a decided slowdown in that trend, primarily due to a pullback in SaaS spending, as decision-making slows in response to the broader economic climate."