Europe Witnesses AI Cloud Surge in Q4 Amid Managed Services Decline

Europe Witnesses AI Cloud Surge in Q4 Amid Managed Services Decline

Europe’s AI Cloud Market: A Q4 Snapshot

The European IT and business services market experienced a notable shift in the fourth quarter, with a surge in AI-driven cloud demand counterbalancing a decline in managed services. According to the latest report from Information Services Group (ISG), the combined market annual contract value (ACV) rose 17% year-over-year, reaching $8.3 billion. However, this impressive growth was tempered by a 7% sequential drop compared to a record-setting third quarter.

Rising AI Cloud Demand Amid Economic and Geopolitical Challenges

Despite ongoing economic uncertainties and geopolitical tensions, the demand for cloud services surged to unprecedented levels. Steve Hall, President of ISG EMEA, highlighted this trend, stating, “Enterprises are accelerating their shift to the cloud, seeking cost efficiencies and innovation powered by AI.” Cloud-based as-a-service (XaaS) offerings saw a remarkable 42% year-over-year growth, with ACV climbing to $4.6 billion—marking the highest quarterly growth rate since Q2 of 2022.

Managed Services: A Declining Trend

Managed services ACV, on the other hand, faced a decline, falling by 5% year-over-year to $3.7 billion. This represented a significant 25% drop from Q3, which had previously set a record. The quarter also saw fewer mega-deals (contracts with an annual value exceeding $100 million), with just one awarded compared to six in Q3. However, smaller deals in the $5 million to $9 million range rose by 12%, underscoring a shift in market dynamics.

Cloud Segments Driving Growth

Both infrastructure-as-a-service (IaaS) and software-as-a-service (SaaS) segments contributed significantly to the XaaS market’s growth. IaaS saw a staggering 52% year-on-year increase, reaching $3.4 billion, while SaaS grew by 21% to $1.2 billion. Over the past year, Europe’s demand for cloud services has averaged a quarterly growth rate of 23.5%.

Full-Year Performance and Industry Insights

For the full year, the combined market ACV reached a record $32.6 billion, up 14% compared to 2023. Managed services ACV hit $16.6 billion, driven primarily by strong Q3 performance. In the cloud segment, XaaS ACV jumped 23% to $16 billion, with IaaS and SaaS growing 30% and 8%, respectively.

Industries such as travel and transportation experienced significant growth, with ACV soaring 84% year-over-year. However, the banking, financial services, and insurance (BFSI) sector saw a 22% decline, highlighting disparities across verticals.

Geographic Performance

Regionally, the U.K. witnessed a steep 33% decline in managed services ACV during Q4, marking its weakest quarter in two years. In contrast, the DACH region (Germany, Austria, and Switzerland) experienced a 4% rise, while France saw an 11.5% decline.

Looking Ahead: 2025 Forecast

ISG forecasts a 4.5% revenue growth for managed services in 2025, alongside an 18% growth for XaaS. Steve Hall expressed cautious optimism, citing economic and geopolitical challenges but also pointing to the growing momentum in AI spending and early signs of recovery in sectors like BFSI.

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Conclusion: A Mixed Bag for Europe’s IT Market

The Q4 results underscore a dual narrative for Europe’s IT and business services market. While managed services face headwinds, the accelerating demand for AI-driven cloud solutions offers a promising path forward. With enterprises doubling down on cloud migration and AI innovation, the stage is set for a dynamic 2025.

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