Europe's Tech Services Market Hits New High in Q4, on Strong AI, Cloud, Managed Services Demand: ISG Index™
Combined market ACV up 27%, to record US $10.9 billion
Managed services ACV up 19%, while XaaS soars 34%
Demand for technology services in Europe reached a new high in the fourth quarter as the region turned in its best quarterly performance of the year to close out 2025, 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 fourth-quarter ACV for the combined market (both managed services and cloud-based as-a-service) advanced 27 percent, to a record US $10.9 billion. It was the region's eighth consecutive quarter of combined market growth, averaging 16 percent in that span.
"Europe saved its best for last, with accelerating, AI-fueled demand for cloud services, coupled with renewed momentum in managed services, leading the region to its strongest quarterly performance of 2025," said Anthony Drake, president, ISG EMEA. "We also saw surging demand for engineering services relate to AI, and overall deal sizes expanded. While full-year managed services ACV finished roughly flat, the strong Q4 suggests stabilization and improving confidence heading into 2026."
Q4 Results by Segment
Managed services ACV for the fourth quarter rose 19 percent year on year, to US $4.6 billion, and was up 21 percent sequentially from the third quarter. There were 298 managed services contracts awarded in the quarter—the best quarterly performance of the year—up 2 percent against the prior year. Among them were three mega deals (contracts with an annual value of $100 million or more), up from one such contract in the prior year. ACV for both new-scope and restructured contracts was up double digits.
Within managed services, IT outsourcing (ITO) advanced 12 percent year on year, to US $3.1 billion, while business process outsourcing (BPO) rose 25 percent, to US $1.1 billion, and engineering and research and development (ER&D) services soared 90 percent, to US $379 million.
Most industries increased their managed services spending in the quarter. Transportation, retail/consumer products and healthcare/life sciences were all up by triple digits. On the other hand, the region's typically largest sectors all underperformed: banking, financial services and insurance (BFSI) was down 5 percent, manufacturing was down 42 percent and telecom was down 30 percent.
By geographic market, all markets saw rising ACV for the quarter, with the exception of France. DACH, the region's largest sourcing market in the fourth quarter, was up 38 percent, to US $1 billion, and the Nordics were up 26 percent, to US $591 million. The UK was up 2.5 percent, surpassing US $1 billion in ACV, only slightly behind DACH. France was down 22 percent, to US $570 million.
ACV in the cloud-based as-a-service (XaaS) segment soared 34 percent versus the prior year, to US $6.3 billion, and was up 10 percent against the prior quarter. It was the seventh consecutive quarter the region saw double-digit growth in this segment, averaging 34 percent over that span.
Infrastructure-as-a-service (IaaS) spending surged 46 percent, to US $5.0 billion, on strong cloud transformation and AI demand. Software-as-a-service (SaaS), meanwhile, grew by 3 percent, to US $1.3 billion.
Full-Year Results
Combined market ACV was up 17 percent for the full year, to a record US $38.9 billion, fueled by demand for cloud services. The region's growth rate in 2025 was its best since 2021 and slightly ahead of 2024's 14 percent growth.
Managed services ACV was down 1.4 percent, to US $16.7 billion. A total of 1,063 managed services contracts were awarded in 2025, down 10 percent from the prior year. Eleven of those were mega deals, down from 13 in the prior year, while the ACV of those deals (US $1.5 billion) was down 29 percent.
Most industries registered growth in managed services ACV for the year, with the notable exception of several large sectors, including BFSI, down 11 percent; manufacturing, down 2.6 percent, and media and telecom, down 37 percent.
On a geographic basis, the region's largest market, the U.K., was down 14 percent for the year, to US $3.9 billion, while DACH was down 15 percent, to US $3.7 billion. France, meanwhile, advanced 25 percent, to US $2.6 billion, and the Nordics climbed 34 percent, to US $2.2 billion.
The XaaS market, at a record US $22.2 billion, grew 37 percent, a rate second only to the 44 percent growth this segment registered in 2018, and up significantly from its 21.5 percent growth in 2024. XaaS now accounts for 57 percent of the region's combined ACV, up from 49 percent in 2024.
Within this segment, IaaS jumped 43 percent, to US $16.8 billion, fueled by cloud and AI demand, while SaaS rose 19 percent, to US $5.4 billion.
2026 Global Forecast
For the full year, ISG is forecasting 2.1 percent revenue growth for managed services, and 20 percent revenue growth for cloud-based software and services (XaaS), the latter supported by continuing cloud migration, AI adoption, cybersecurity investment and platform-led consumption.
"As we look ahead to 2026, the market enters the year with both opportunity and constraint," said Steve Hall, chief AI officer and ISG Index lead. "From a macro perspective, enterprises are navigating policy uncertainty around tariffs, a leadership transition at the Federal Reserve and economic headwinds in Europe and Asia Pacific. These factors are not stopping investment, but they are shaping behavior—favoring more deliberate, phased commitments over large, irreversible bets.
"At the same time, AI is reshaping demand faster than managed services economics are adapting. AI continues to accelerate growth in cloud, infrastructure and platforms, while putting pressure on traditional labor-based pricing and margin structures in managed services."
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 93 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 4Q25 Global ISG Index results were presented during a webcast on January 15. 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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