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Spending on IT and business process outsourcing in Europe, the Middle East and Africa (EMEA) was cut dramatically after the Covid-19 crisis hit business in early March.
This contributed to global spending on traditional IT outsourcing contracts grinding to a near-halt towards the end of the first quarter of this year.
According to figures from technology advisory ISG, the first quarter saw normal levels of investment globally up until March, with 85% of the total spend in the quarter made in January and February. But things slowed dramatically in March.
In its latest market update, ISG said the sudden decline was largely caused by spending cuts in industries such as travel, transportation, hospitality, retail and financial services, which were all hit hard by the onset of Covid-19.
In the EMEA region, the total value of deals agreed in the first quarter, taking into account contracts worth €5m or more, reach €4.5bn. This was an increase of 4% on the same quarter last year, but because of the coronavirus crisis, it fell well short of a bigger increase that had been expected.
“EMEA was on track to deliver 7-9% growth, but demand was curtailed by the coronavirus pandemic, which first hit the region in early March,” said ISG. More than half of the total spend (€2.7bn) went on managed services, which includes traditional IT outsourcing.
The sudden slowdown resulted in spending falling 6% in the first quarter compared with the previous quarter. Meanwhile, spending on business process outsourcing (BPO) in the first quarter was €290m, a drop of 51% from the previous quarter.
Cloud-based as-a-service spending saw minimal impact from Covid-19 in the first quarter. The total value of as-a-service contracts reached €1.8bn, an increase of 1% on the same quarter last year. Infrastructure as a service (IaaS) accounted for €1.4bn of this, showing a 7% increase year on year. IaaS spending is being boosted by companies investing in making it possible for staff to work from home. More workloads are likely to be moved to the cloud to support remote working.
“Cloud is gaining more relevance every quarter as customers move from on-premise, capex-driven deals to an on-demand operating model,” said Steve Hall, president at ISG in EMEA. “This will only increase as Covid-19 highlights the importance of cloud-based infrastructure.”
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However, software-as-a-service spending was 13% less than in the first quarter of 2019, at €478m.
Hall said businesses that had made good progress on digital transformation would be more robust during the global downturn. “Firms that took their digital transformation seriously in the past couple of years are likely to weather the Covid-19 storm better,” he said. “Those that didn’t make significant progress on their digital transformations will need to accelerate their digital investments now.”
But the coronavirus is not the only impediment to outsourcing growth in the UK, with spending sluggish during the quarter as the country “continues to grapple with Brexit anxiety”, said ISG.