ISG Index

Europe’s market for technology services and software slowed in the third quarter despite continuing strong demand for AI, according to the latest state-of-the-industry report from Information Services Group (ISG) (Nasdaq: III), a global AI-centered technology research and advisory firm.

The EMEA ISG Index, which measures commercial outsourcing contracts with annual contract value (ACV) of US $5 million or more, shows third-quarter ACV for the combined market (both managed services and cloud-based as-a-service) rose 5 percent, to US $9.7 billion. Although the market has grown for seven consecutive quarters, averaging 14 percent quarterly growth during that span, the rate of growth in the third quarter was the lowest since the second quarter last year.

“The market in Europe continues to be buoyed by strong, double-digit growth in cloud services as companies race to realize their AI ambitions,” said Steve Hall, president, ISG EMEA and the firm’s chief AI officer. “That growth, however, masks an underlying weakness in managed services. Macro instability, tariff pressure and political risk are slowing deal approvals. We’re seeing deals scoped but not closed. Clients are active, but cautious—and prioritizing only what clearly ties to outcomes.”

Third-Quarter Results by Segment

ACV for the as-a-service (XaaS) segment soared 41 percent year on year, to a record US $5.9 billion. It was the sixth straight quarter XaaS has grown by double digits, averaging 33 percent quarterly growth in that span. Growth accelerated from the second quarter, up 840 basis points in Q3.

Within this segment, infrastructure-as-a-service (IaaS) climbed 50 percent year on year, to a record US $4.5 billion. Software-as-a-service (SaaS) grew 17 percent, to US $1.3 billion.

Managed services ACV in the third quarter slumped 25 percent, to US $3.8 billion. A total of 247 managed services contracts were awarded in the quarter, down 22 percent from the prior year but up 5 percent from Q2. Among them were two mega deals (ACV of US $100 million or more), compared with six signed in the third quarter last year. The volume of smaller deals under US $10 million declined 38 percent year on year, as enterprises limited discretionary projects.