Europe cloud, AI boom outpace managed services as outsourcing hits $9Bn
CONNECTICUT, UNITED STATES — Europe’s cloud services market surged in Q2, fueled by strong AI adoption, while managed services lagged due to economic pressures. The latest ISG Index reveals a 14% annual rise in outsourcing contracts, reaching $9 billion, as enterprises prioritize cost efficiency and digital sovereignty.
AI and cloud expansion outpace managed services slowdown
Cloud infrastructure-as-a-service (IaaS) was the biggest gainer, increasing 43% to $3.9 billion, and software-as-a-service (SaaS) grew 12% to $1.2 billion.
It is the fifth consecutive quarter of above 10% XaaS growth, demonstrating how enterprises are turning towards scalable, high-performance solutions powered by AI.
On the other hand, managed services experienced a 4% annual reduction, reaching $3.9 billion, while outsourcing of IT (ITO) declined by up to 0.2%, and organizations reduced their discretionary expenditures. Business process outsourcing (BPO) experienced a 23% growth to reach $667 million, primarily driven by customer engagement and finance services.
The deceleration is related to macroeconomic instability, with lower-end deals below $10 million decreasing by 31%, as companies continue to focus on larger, more cost-efficient contracts.
Sovereign cloud and ER&D investments as key trends
Uncertainty in geopolitics and the economy has also prompted Europe to pay more attention to digital sovereignty, and the sovereign cloud is gaining prominence as a rapidly growing area. Steve Hall, EMEA president of ISG, noted that although data control and security through AI are priorities, regional instability has led to discussions on these matters.
“Given the region’s macroeconomic and geopolitical instability, there has been a lot of discussion around digital sovereignty in Europe. We view sovereign clouds as a potential growth segment for the industry going forward,” said Hall.
The DACH region leads as the largest market for managed services in Europe, with an 11% increase to 1 billion. Meanwhile, France saw a 142% increase to $817 million, surpassing the UK’s 41% drop to $770 million.
Meanwhile, engineering, research, and development (ER&D) spending increased 193% to $953 million, signaling a significant investment in digital innovation.
Industries such as travel and retail drove managed services growth, while banking and finance—traditionally Europe’s largest sector—declined by 8%.
For 2025, ISG forecasts a modest 1.3% increase in managed services, but has raised its XaaS growth projection to 21%, citing relentless demand for AI in various industries.
Information Services Group (ISG) recently ranked #55 in the OA500 2025, an objective index of the world’s top 500 outsourcing companies.
