European IT outsourcing spend up in 2020 after cloud boost
IT outsourcing sector growth is an indication that businesses are beginning to see light at the end of the tunnel amid the Covid-19 pandemic and the economic disruption it has brought
Organisations in Europe spent over $20bn (£16.4bn) on IT and business process outsourcing in 2020. Boosted by increased cloud take-up, this was a 7% increase on the previous year.
According to the latest figures from ISG, which records all deals worth $5m or more, total global spend reached $59.8bn last year, also up 7% on 2019.
Like Europe, where the total value of cloud-based as-a-service contracts saw the biggest growth in terms of value, reaching over $8bn following a 15% increase, global as-a-service deals rose by 17% to about $33bn.
In the final quarter of 2020, a period marked by the Covid-19 pandemic, the Europe, Middle East and Africa region saw a record quarter for spending, with $6.2bn in contract value.
IT outsourcing – traditional IT services contracts for which an organisation hires an outside service provider – represented more than half of the total value at $3.6bn, but cloud-based as-a-service deals jumped in value by 25% compared with the equivalent period in 2019, totaling $2.2bn.
As part of the cloud service growth, the value of infrastructure-as-a-service contracts leapt by 34% compared with the fourth quarter last year, hitting $1.6bn, while software as a service reached $578m in the quarter, a 5% increase.
For the 2020 full year, the value of traditional IT services contracts globally increased by 2% to a record $21.4bn. At the same time, the total value of as-a-service contracts reached $24.3bn.
Steve Hall, president of ISG, said the promise of Covid-19 vaccination programmes across the world had raised confidence. “Demand is picking up and deals are moving forward as businesses adjust to the pandemic and look ahead to the economy reopening more fully now that vaccines have arrived,” he said.
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But Hall warned that the recovery “will be hit or miss in the short term” because of disparities between countries and sectors. “Enterprises continue to focus on cost takeout and applying savings to digital initiatives,” he added. “Agility, resiliency and transformation are common themes.”
The second quarter bore the brunt of Covid-19’s impact, with huge falls as traditional outsourcing contracts dried up. This came amid a sudden decline largely caused by spending cuts in industries such as travel, transportation, hospitality, retail and financial services. For example, traditional deals in Europe fell in value by 21% overall.
But demand is expected to increase this year, particularly in cloud-based services. ISG has forecast the market for cloud-based services to grow 20% globally in 2021.
“This year looks to be another year of robust growth for the hyperscalers as they continue to push into the enterprise space with long-term agreements, especially in Europe,” said Hall. “Growing contract backlogs will provide a sustainable and steady source of revenue for many years down the line and enable the industry leaders to target under-penetrated markets.”
The exception to the growth seen in all sectors was in the business process outsourcing sector, which saw a 23% decrease in the total value of contracts at $5.2bn. Europe is experiencing this trend, with the value of contracts signed in the fourth quarter of 2020 only $400m – 66% lower than for the equivalent three-month period a year earlier.