Asia Pacific's Tech Services Sector Rebounds in Q3, as AI Drives Cloud Demand, ISG Index Shows
Enterprises in Asia
Pacific continued to spend on cloud services to support AI but pulled back on
managed services in the third quarter in the face of economic uncertainty,
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 Asia Pacific 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 cloud-based XaaS and managed services) was up 10 percent versus
the prior year, to US $5.7 billion—the best growth quarter this year. The
double-digit growth in Q3 represents a rebound from the second quarter, when
the combined market was down 1 percent.
To scale AI across their
organizations, enterprises are turning to the cloud, with as-a-service (XaaS)
spending up 14 percent, to US $4.9 billion, in the third quarter. It was the
fourth straight quarter the XaaS market has seen double-digit growth in Asia
Pacific, with Q3’s growth rate accelerating by 110 basis points from the second
quarter.
Within the XaaS segment,
infrastructure-as-a-service (IaaS) ACV advanced 13 percent, at US $4.3 billion,
while software-as-a-service (SaaS) ACV grew 18 percent, to US $563 million.
Spending on managed
services, on the other hand, was down 9 percent in the third quarter, to US
$849 million. A total of 58 managed services contracts were awarded in the
quarter, down 6.5 percent from the prior year, including two mega-deals valued
at more than $100 million annually. However, the number of contracts in the
smallest band ISG measures—US $5 million to US $10 million—advanced 39 percent,
a sharp reversal from the first two quarters of 2025 when this category was
down versus the prior year.
Within managed services,
IT outsourcing (ITO) ACV fell 19 percent, to US $536 million, with the region’s
largest and fastest-growing ITO area, application development and management
(ADM), up less than 1 percent. Business process outsourcing (BPO) also had a
weak quarter, down 63 percent, to US $55 million. Engineering, research and
development (ER&D) services advanced 108 percent, to US $259 million.
Among industries, only
media and telecommunications (up 253 percent) and retail (up 140 percent)
delivered positive results; spending in all other sectors was down
significantly.
Geographically, China
benefited from the Neusoft automotive mega-deal, with ACV up more than 400
percent from the prior year off a small base. India was up 7 percent, while the
region’s largest managed services market, Australia-New Zealand, was down 19
percent. Japan and South Korea both declined more than 50 percent.
“AI is the engine that
continues to power the Asia Pacific market, with cloud spending keeping the
market afloat,” said Michael Gale, partner and regional leader, ISG Asia
Pacific. “Macroeconomic and geopolitical uncertainty is keeping managed
services spending down, but the uptick in small deals we saw in the third
quarter could signal a pivot to more discretionary spending going forward.”
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