Asia Pacific's Demand for IT and Business Services Slows in Q2, ISG Index™ Shows
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) was down slightly (0.3 percent) versus the prior year, to US $4.7 billion. Sequentially, the market fell 12 percent compared with the first quarter. It was the first time the Asia Pacific market pulled back since the second quarter last year.
Fueled by interest in AI, demand for cloud-based services remained robust, up 16 percent year on year, to US $3.9 billion, even as demand slowed 15 percent from the first quarter. Managed services, meanwhile, slumped 40 percent, to US $823 million, but rose 6 percent against the first quarter.
Within the XaaS segment, infrastructure-as-a-service (IaaS) ACV advanced 17 percent, at US $3.4 billion, while software-as-a-service (SaaS) ACV grew 13 percent, to US $500 million.
In managed services, IT outsourcing (ITO) ACV fell 46 percent, to US $539 billion, with even the largest and fastest-growing service area, application development and management (ADM), down more than 30 percent. Business process outsourcing (BPO) also had a weak quarter, down 34 percent, to US $133 million, with only customer engagement and facilities management services showing growth. Engineering, research and development (ER&D) services didn't fare much better, down 15 percent, to US $152 million.
During the quarter, 69 managed services contracts were awarded, down 18 percent year on year.
Among industries, the region's largest industry for sourcing—banking, financial services and insurance (BFSI)—was up 1.4 percent. Travel, transportation and leisure and retail both generated double-digit growth off smaller bases. All other sectors were down by double digits.
Geographically, South Korea was the only market that grew, albeit off a small base. Australia-New Zealand was down 33 percent, India was down 16 percent and Japan was down 35 percent.
'Macroeconomic and geopolitical uncertainty is really taking a toll on the Asia Pacific market at the moment. The only bright spot right now is AI, which has companies investing in cloud services to take advantage of the massive computing power needed to run AI at scale,' said Michael Gale, partner and regional leader, ISG Asia Pacific. 'Given the quarter-over-quarter improvement we saw in managed services, we hope to see a turnaround in the overall market during the second half.'
First-Half Results
Asia Pacific's combined market ACV in the first half rose 4.3 percent versus the prior year, to US $10.1 billion. All the growth can be attributed to the XaaS segment, which rose 17 percent, to US $8.5 billion. Within XaaS, IaaS was up 17 percent, to US $7.4 billion, while SaaS rose 16 percent, to US $1.0 billion.
Managed services, meanwhile, declined 34 percent, to US $1.6 billion. All its component pieces were down double digits, including ITO, down 31 percent, to US $1.1 billion; BPO, down 33 percent, to US $288 million, and ER&D down 51 percent, to US $175 million. The 126 managed services contracts awarded in the first half were down 16 percent from the prior year.
Among industries, the largest sector for outsourcing, BFSI, was down 16 percent, while the second largest, manufacturing, was off 19 percent.
Among geographic markets, only India managed growth in the first half, up 2.4 percent.
2025 Global Forecast
For the full year, ISG is maintaining its forecast of 1.3 percent revenue growth for managed services, reflecting a stabilizing tariff environment but also continued weakness in discretionary spending. At the same time, ISG is raising its previous growth forecast for cloud-based XaaS by 300 basis points, to 21 percent, based on continuing strong demand for AI-driven transformation.
About the ISG Index™
The ISG Index™ is recognized as the authoritative source for marketplace intelligence on the global technology and business services industry. For 91 consecutive quarters, it has detailed the latest industry data and trends for financial analysts, enterprise buyers, software and service providers, law firms, universities and the media.
The 2Q25 Global ISG Index results were presented during a webcast on July 10. To view a replay of the webcast and download presentation slides, visit this webpage.
About ISG
ISG (Nasdaq: III) is a global AI-centered technology research and advisory firm. A trusted partner to more than 900 clients, including 75 of the world's top 100 enterprises, ISG is a long-time leader in technology and business services that is now at the forefront of leveraging AI to help organizations achieve operational excellence and faster growth. The firm, founded in 2006, is known for its proprietary market data, in-depth knowledge of provider ecosystems, and the expertise of its 1,600 professionals worldwide working together to help clients maximize the value of their technology investments.
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