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UK sees surge in IT outsourcing contracts

Transformation projects drive IaaS growth, but SaaS declines. Some sectors are renegotiating and restructuring contracts to reduce costs

The value of UK outsourcing contracts across Europe, the Middle East and Africa (EMEA) grew by 60% in the third quarter of 2020 compared with 2019, according to the latest ISG Index.

Looking at contracts worth €5m (£4m) or more, ISG reported that the value of UK managed services contracts totalled €877m (£794m).

Across EMEA, the average contract value of traditional managed services rose by 10% year on year to €2.2bn (£2bn), and ITO (IT infrastructure and operations management) contracts grew by 36% to €1.8bn (£1.6bn). It also reported that ITO and BPO (business process outsourcing) contracts in the UK experienced “double-digit growth”.

ISG said that in the UK and Ireland, the pharmaceuticals, technology and utilities industries are continuing to invest in digital capabilities and core technology operations (cloud, network and data) to support artificial intelligence (AI) and machine learning. It also reported that because of Covid-19, the travel and retail sectors are desperate to reduce costs, which has led to a rise in new sourcing partnerships, as well as a refresh and renewal of existing deals.

“We noted a sharp rise in contract restructurings, up nearly 40% from last year and 85% quarter on quarter,” said Steve Hall, partner and president, ISG EMEA. “With enterprises pushing for cost savings and reluctant to switch to or add new vendors amid the pandemic, these results are not surprising.”

The ISG Index of IT outsourcing for the third quarter also showed that cloud-based services (as-a-service) grew by 9% year on year to €1.7bn (£1.5bn). Breaking this down, infrastructure-as-a-service (IaaS) rose by 16% to €1.2bn (£1.1bn), but the software-as-a-service (SaaS) sector declined by 7%  to €431m (£391m). According to ISG, this represents the lowest quarterly total average contract value for SaaS in almost three years.

Although demand for SaaS declined, ISG said there were several large deals in the quarter, including SAP S/4 Hana at Carrefour, Telefonica, Aon, BNP Paribas and Deutsche Börse, and Workday at Air Liquide and ThyssenKrupp.

Looking at some of the bigger contracts, ISG said the ITO market was boosted by demand for application development and maintenance deals. For instance, Ericsson signed a five-year contract with HCL and department store John Lewis began work with Wipro on an IT infrastructure transformation project.

In terms of major IaaS deals, ISG highlighted HSBC’s contract with Amazon Web Services to drive its digital transformation, Standard Chartered Bank’s use of Microsoft Azure, and Renault’s partnership with Google Cloud to accelerate its Industry 4.0 transformation.

Hall added: “The EMEA managed services market was supported by robust deal activity this quarter, with the number of contracts up more than 20% over last year and the prior quarter. However, following a general pattern we’ve seen in other regions, 85% of the deals were under €17m (£15m), with only 10 contracts in the entire region valued at over €34m (£31m).”

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