Europe’s Technology Services Market Hits Record High in Q4 2025, Driven by AI and Cloud Demand
**LONDON** – The demand for technology services across Europe surged in the fourth quarter of 2025, culminating in the region’s strongest quarterly performance of the year. This robust growth, detailed in the latest report from Information Services Group (ISG), signals a dynamic shift in the European tech landscape, with Artificial Intelligence (AI) and cloud-based services at the forefront.
The EMEA ISG Index™, which tracks commercial outsourcing contracts valued at $5 million or more annually, revealed that the combined market for managed services and as-a-service offerings reached a record $10.9 billion in ACV for Q4 2025. This represents a significant 27% increase year-over-year and marks the eighth consecutive quarter of growth for the region’s combined market, averaging a notable 16% over that period.
“Europe delivered a stellar finish to 2025, propelled by accelerating, AI-driven demand for cloud services and a resurgence in managed services,” commented Anthony Drake, president of ISG EMEA. “We also observed a substantial uptick in engineering services tied to AI initiatives, with overall deal sizes expanding. While full-year managed services ACV remained relatively flat, the strong Q4 performance indicates a stabilization and a growing sense of confidence heading into 2026.”
**Quarterly Performance Breakdown**
Managed services saw a significant upswing in Q4 2025, with ACV climbing 19% year-on-year to $4.6 billion. This also marked a 21% sequential increase from the third quarter. The quarter saw 298 managed services contracts awarded, the highest volume of the year, representing a 2% rise from the previous year. Notably, the number of “mega deals” – contracts valued at $100 million or more – increased to three, up from one in the prior year. Both new-scope and restructured contracts experienced double-digit ACV growth.
Digging deeper into managed services, IT outsourcing (ITO) grew 12% year-on-year to $3.1 billion. Business process outsourcing (BPO) also demonstrated strong momentum, rising 25% to $1.1 billion. Engineering and research and development (ER&D) services exhibited explosive growth, soaring 90% to $379 million, underscoring the increasing integration of R&D with service delivery.
Across various industries, managed services spending saw broad-based increases. Transportation, retail/consumer products, and healthcare/life sciences all recorded triple-digit percentage growth. However, traditionally dominant sectors such as banking, financial services, and insurance (BFSI) experienced a 5% decline. Manufacturing saw a significant drop of 42%, and the telecom sector contracted by 30%, suggesting a strategic reallocation of resources or evolving priorities within these industries.
Geographically, most European markets witnessed rising ACV in Q4, with France being the exception. The DACH region (Germany, Austria, Switzerland), Europe’s largest sourcing market, surged by 38% to $1 billion. The Nordics followed with a 26% increase to $591 million. The UK also performed well, growing 2.5% to exceed $1 billion in ACV, narrowly trailing DACH. France, however, saw a 22% decrease, bringing its ACV to $570 million.
The cloud-based as-a-service (XaaS) segment experienced phenomenal growth, soaring 34% year-on-year to $6.3 billion. This represents the seventh consecutive quarter of double-digit growth in this segment, with an average of 34% over that period.
Within XaaS, Infrastructure-as-a-Service (IaaS) demonstrated impressive gains, jumping 46% to $5.0 billion, driven by significant cloud transformation projects and burgeoning AI adoption. Software-as-a-Service (SaaS) also contributed to the growth, albeit at a more moderate pace, with a 3% increase to $1.3 billion.
**Full-Year 2025 Review**
For the entirety of 2025, the combined market ACV grew 17% to a record $38.9 billion, largely fueled by sustained demand for cloud services. The region’s growth rate in 2025 was its strongest since 2021, slightly surpassing the 14% growth recorded in 2024.
Managed services ACV for the full year experienced a slight dip of 1.4% to $16.7 billion. A total of 1,063 managed services contracts were awarded in 2025, a 10% decrease from the previous year. The number of mega deals fell from 13 in 2024 to 11 in 2025, with the ACV of these deals declining by 29% to $1.5 billion.
While most industries saw growth in managed services ACV over the year, key sectors such as BFSI (-11%), manufacturing (-2.6%), and media and telecom (-37%) registered declines.
Geographically, the UK, the region’s largest market, saw a 14% decrease in ACV for the year, totaling $3.9 billion. DACH also experienced a decline of 15% to $3.7 billion. In contrast, France showed robust growth, advancing 25% to $2.6 billion, and the Nordics climbed an impressive 34% to $2.2 billion.
The XaaS market achieved a record $22.2 billion in full-year ACV, marking a substantial 37% growth. This rate is second only to the 44% growth recorded in 2018 and represents a significant acceleration from the 21.5% growth seen in 2024. XaaS now constitutes 57% of the region’s combined ACV, up from 49% in the previous year. Within XaaS, IaaS saw a 43% surge to $16.8 billion, driven by cloud and AI initiatives, while SaaS grew by 19% to $5.4 billion.
**Global Outlook for 2026**
Looking ahead to 2026, ISG forecasts a 2.1% revenue growth for managed services. The cloud-based software and services (XaaS) segment is projected to experience a more significant 20% revenue growth. This strong outlook for XaaS is underpinned by ongoing cloud migration, widespread AI adoption, sustained investment in cybersecurity, and a shift towards platform-led consumption models.
“As we transition into 2026, the market faces a landscape characterized by both considerable opportunities and notable constraints,” stated Steve Hall, Chief AI Officer and ISG Index lead. “From a macroeconomic standpoint, businesses are navigating policy uncertainties related to tariffs, leadership transitions within central banks, and prevailing economic headwinds across Europe and the Asia Pacific. While these factors are not halting investment, they are influencing strategic decision-making, leading to a preference for more measured, phased commitments over large, irreversible ventures.”
Hall added, “Concurrently, AI is reshaping demand at a pace that outstrips the current adaptation of managed services economics. AI continues to fuel accelerated growth in cloud, infrastructure, and platforms, while simultaneously exerting pressure on traditional labor-based pricing models and margin structures within managed services.”
The ISG Index™ serves as a definitive source of market intelligence for the global technology and business services industry, providing consistent data and trend analysis for financial analysts, enterprise buyers, service providers, and media for 93 consecutive quarters.
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