SYDNEY -- Asia Pacific’s spending on IT and business services surged above US $5 billion for the first time in two years, led by a resurgence in managed services demand, according to the latest state-of-the-industry report from Information Services Group (ISG) (Nasdaq: III), a leading global technology research and advisory firm.

The Asia Pacific ISG Index™, which measures commercial outsourcing contracts with annual contract value (ACV) of US $5 million or more, shows second-quarter ACV for the combined market (both cloud-based XaaS and managed services) rose 8 percent versus the prior year, to just over US $5.0 billion, the first time in seven quarters it eclipsed the US $5 billion mark and the third straight quarter the region delivered year-on-year growth.

Growth in the second quarter was powered by a resurgent market for managed services, which saw its ACV climb 32 percent over the prior year, to US $1.4 billion, the region’s best quarter in 12 years. Versus the first quarter of 2024, ACV was up 34 percent sequentially. Both the year-over-year and quarter-over-quarter comparisons came against strong US $1 billion-plus quarters.

During the quarter, 81 managed services contracts were awarded, up 37 percent year on year and 23 percent quarter over quarter. Deal volume was boosted by 44 percent growth in smaller deals valued between US $5 million and US $20 million per year. The value of restructured contracts, meanwhile, reached a record US $548 million of ACV, up 163 percent versus the prior year.

Demand for cloud-based services grew 1 percent, to US $3.6 billion, but ACV was down 8 percent sequentially against the first quarter of 2024. It was the third straight quarter XaaS has grown, averaging 18 percent year-on-year growth over that span, coming off a streak of five straight down quarters averaging 20 percent declines.

“Asia Pacific’s rising demand for traditional IT and business services reflects a continuing focus on cost optimization in a still uncertain economy,” said Michael Gale, partner and regional leader, ISG Asia Pacific. “Cloud-based services, which have been through a brutal downturn, are beginning to rise again, as enterprises focus on the data modernization that will enable GenAI adoption at scale.”

Within managed services, IT outsourcing (ITO) ACV rose 8 percent, to just over US $1 billion, driven by strong demand for bundled infrastructure and application development and maintenance (ADM) services and data center services. Business process outsourcing (BPO), meanwhile, surged 237 percent year on year, to US $367 million, led by triple-digit growth in customer engagement, facilities management, HR and engineering, research and development (ER&D) services.

From a geographic perspective, demand for managed services was up markedly in South Korea, China and Japan, the latter two markets producing their best quarters ever, up triple digits. The region’s two largest markets, Australia/New Zealand (ANZ) and India, meanwhile, moved in opposite directions, with ANZ down 30 percent in the quarter and India up 4 percent.

By industry, manufacturing, telecommunication and energy all moved to the upside, while banking, financial services and insurance (BFSI) and travel and transportation pulled back during the quarter.

Within the XaaS segment, infrastructure-as-a-service (IaaS) ACV was flat, at US $3.2 billion, while software-as-a-service (SaaS) ACV rose 8 percent, to US $430 million.

First-Half Results

Asia Pacific’s combined market ACV rose 19 percent versus the prior year, to US $9.9 billion, a dramatic turnaround from the first half of 2023, when the market was down 20 percent versus the same period in 2022, when Asia Pacific demand reached its zenith.

Managed services produced its best first half ever, with ACV of nearly US $2.5 billion, up 26 percent year on year. ITO ACV was up nearly 5 percent, to US $1.7 billion, while BPO ACV surged 126 percent, to US $773 million.

Among industries, managed services ACV in BFSI was up 43.5 percent year to date, with most other verticals up sizably in the half, with the exception of manufacturing, which pulled back 17 percent.

On the cloud side, XaaS ACV rose 17 percent, to US $7.5 billion. IaaS climbed 18 percent, to US $6.6 billion, and SaaS advanced 13 percent, to US $878 million.

2024 Global Forecast

For the full year, ISG is forecasting 2 percent revenue growth for managed services, down 100 basis points from its April forecast, and 14 percent revenue growth for XaaS, down from its 15 percent growth forecast in April.

“Uncertainty persists in the IT and business services market, with no clear catalyst at the moment to push discretionary spending higher,” said Steve Hall, president and chief AI officer of ISG, and global leader of the ISG Index. “Activity in the important BFSI sector remains dampened, due to the higher-for-longer interest rate environment, impacting the overall growth of the market. Enterprises in general continue to focus on cost optimization, and AI growth, while strong, is likely masking underlying weakness in the IT and business services industry.”