Strong Cloud Demand Fuels Q1 Double-Digit Growth in Asia Pacific’s IT and Business Services Market, ISG Index™ Finds

The Asia Pacific IT and business services market has entered a new era of bifurcation, with cloud-centric growth outpacing declines in traditional outsourcing, according to the latest ISG Index™ Q1 2025 report. While the region’s combined IT services market expanded 10% year-over-year to $5.3 billion in annual contract value (ACV), the divide between cloud-driven innovation and struggling managed services underscores a market reshaped by digital transformation and macroeconomic uncertainty.

The Cloud Surge: XaaS Dominates

The as-a-service (XaaS) segment, fueled by cloud infrastructure and software adoption, grew 19% to $4.5 billion in Q1. Infrastructure-as-a-Service (IaaS) accounted for the bulk of this, rising 18% to $3.95 billion, while Software-as-a-Service (SaaS) surged 30% to $556 million. Enterprises are prioritizing cloud migration and AI integration to cut costs and boost productivity, with over $18 billion in project awards over the past year signaling sustained demand.

This momentum is reflected in stock performance. . These firms have capitalized on demand for hybrid cloud solutions and AI tools, though their valuations remain tied to macroeconomic conditions.

Managed Services in Freefall

The managed services segment, however, faced its worst quarter since Q3 2023, with ACV plummeting 26% to $778 million. The decline was driven by a 14% drop in contract volume, including a 26% collapse in smaller deals ($5–$9 million). IT outsourcing (ITO) fell 16%, though pockets of strength in application development (ADM) and multi-tower infrastructure (up 88%) highlight fragmented demand. Business process outsourcing (BPO) and engineering services (ER&D) saw steeper declines, down 31% and 54%, respectively.

Sector and Geographic Fault Lines

Industry performance was uneven:
- Media/Telecoms: Triple-digit growth, likely tied to 5G rollouts and digital content platforms.
- Manufacturing: Held steady at 7% growth, driven by supply chain modernization.
- Financial Services: The largest vertical slumped 28%, reflecting caution in discretionary spending.

Geographically, the divide was stark:
- Japan and India: Double-digit growth fueled by domestic IT modernization and global outsourcing demand.
- Australia/New Zealand: The region’s largest market contracted 35%, signaling broader economic slowdown.
- Southeast Asia and China: Collapsed over 70%, with China’s regulatory crackdowns and Southeast Asia’s trade-dependent economies under pressure.

2025 Outlook: Tariffs and Trade Shape Trajectories

ISG forecasts two scenarios for 2025:
1. Base Case (Tariff Stabilization):
- XaaS grows 18%, while managed services eke out 1.3% growth as delayed projects restart.
2. Bearish Scenario (Prolonged Tariffs):
- XaaS growth moderates to 15%, and managed services contract 2.4%, as trade tensions escalate.

Investment Implications

The data underscores a critical split for investors:
- Cloud and AI Leaders: Companies like Alibaba Cloud and TCS are positioned to benefit from ongoing digital transformation, though geopolitical risks (e.g., U.S. tariffs) could disrupt supply chains.
- Managed Services: Investors should avoid pure-play outsourcing firms in regions like Australia unless they pivot to cloud integration.
- Sector Plays: Telecom/media and manufacturing IT spenders offer safer bets, while financial services remain vulnerable to macroeconomic headwinds.

Conclusion

Asia Pacific’s IT market is at a crossroads. While cloud services and AI adoption provide a resilient growth engine, traditional managed services face structural challenges amid cost-cutting and regulatory uncertainty. The region’s fate hinges on trade policy outcomes: a stabilization of tariffs could unlock pent-up demand, while prolonged disputes risk prolonging the market’s bifurcation.

For investors, the path forward is clear—allocate to firms leveraging cloud and AI innovation, but remain vigilant about geographic exposure. The ISG Index shows that the Asia Pacific IT market isn’t just evolving—it’s splitting into winners and losers, and the divergence is only accelerating.