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Spending on cloud services in Asia Pacific fell sharply in the fourth quarter, weighed down by China’s troubled technology sector, according to the latest State of the Industry report from Information Services Group (NASDAQ:III), a leading global technology research and advisory firm.

The Asia Pacific ISG Index™, which measures business outsourcing contracts with an annual contract value (ACV) of $5 million or more, shows that fourth-quarter ACV for the combined market (managed services and cloud-based XaaS) fell 33 percent, to the US at $3.4 billion, with particular weakness in infrastructure-as-a-service (IaaS) spending due to lockdowns and technology regulation in China affecting the country’s ultra-high-end service providers. Compared to the third quarter, market share spending increased 14 percent, the best sequential growth of the three regions measured by the ISG.

“China’s technology sector continues to have a significant impact on the Asia-Pacific region as a whole. If you exclude China, ACV in the Asia-Pacific combined market for the quarter was up 10 percent,” said Scott Birch, partner and regional lead at ISG Asia Pacific. percent compared to the previous year.

The managed services segment outperformed the overall market in the fourth quarter, with ACV up 21% to $1.3 billion, and 96 contracts were signed in the quarter, up 52% ​​year-over-year. Within managed services, IT outsourcing (ITO) increased 19% to $877 million, while Business Process Outsourcing (BPO) increased 26% to $437 million. Compared to the third quarter, overall managed services spending increased by 76 percent.

“Managed Services had its second-best quarter ever, behind only the second quarter of 2012,” Birch said. The region saw strong demand for infrastructure and managed network services, as well as industry-specific process outsourcing and facility management services. Nearly 100 managed services contracts were signed in the quarter, which is a new record.”

On the other hand, XaaS spending in the fourth quarter was down 48 percent from a year earlier, at $2.1 billion. IaaS spending fell 53 percent, to $1.7 billion, while software-as-a-service (SaaS) spending fell 9 percent, to $412 million.

Full year results

For the full year, the Asia Pacific aggregate market generated ACV of $13.8 billion, down 21 percent compared to 2021, the largest drop since ISG began measuring the aggregate market in 2015. XaaS ACV fell 27.5 percent, to $10.4 billion US, while managed services rose 9% to $3.4 billion. Companies signed 273 managed services contracts in 2022, up 24 percent from the previous year.

Within the XaaS segment, IaaS was down 31 percent, to $8.8 billion for the year, while SaaS posted a slight increase, up 0.1 percent, to $1.6 billion. On the managed services side, ITO advanced 4 percent, to $2.4 billion, while outsourcing increased 27 percent, to $989 million.

geographical performance

For the full year, Australia/New Zealand (ANZ), the region’s largest market, generated $1.1 billion in managed services ACV, down 14 percent year-over-year, although it had its strongest quarter of the year in the fourth quarter, with ACV of 469. million US dollars.

Southeast Asia, the second largest market in the region, generated $795 million of ACV for managed services for the year, up 74 percent, and ended 2022 with its best quarter ever, at $344 million of ACV in the fourth quarter, up 46 percent from last year. Also among the biggest gainers in the region, India ended the year with managed services ACV of $612 million, up 52 percent, and had its best quarter of 2022 in the fourth quarter, with ACV of $205 million, double the previous year.

2023 Global Outlook

The ISG sees several potential positive market developments heading into 2023, including interest rate increases coming to an end, inflation reducing, China reopening, supply chains starting to return to normal, and the US dollar reversing its recent highs.

ISG analysts said XaaS providers are still dealing with “technology overflow” and are making up for sluggish demand by reducing the size of their workforce after a period of heavy hiring in the past few years. Given this, ISG expects annual ACV growth of 17 percent for the XaaS market in 2023, down from previous years.

As for managed services, the shift towards cost optimization “should provide a tailwind for this market,” ISG analysts said. ISG expects 5 percent growth in ACV for managed services in 2023.

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