AI-Driven Demand Fuels Record Growth in Cloud and Technology Services Across Europe
Demand for technology services across Europe accelerated significantly in the first quarter of the year, signaling a decisive shift in how enterprises are prioritizing digital transformation. According to the latest industry report from Information Services Group (ISG), the surge is being driven primarily by growing demand for cloud-based infrastructure required to support large-scale artificial intelligence deployments.
This acceleration marks a turning point for the region. After a period shaped by macroeconomic uncertainty and cautious IT spending, European enterprises are now leaning aggressively into AI as a strategic lever for growth, efficiency, and competitive differentiation. The result is a rapidly expanding market for both infrastructure services and outsourcing solutions, as organizations reallocate budgets to fund AI-driven initiatives.
A Market Reaching New Highs
The latest data from the ISG Index, which tracks commercial outsourcing contracts with an annual contract value (ACV) of $5 million or more, illustrates the scale of this shift. In the first quarter alone, the combined market—spanning both managed services and cloud-based as-a-service offerings—reached a record $12.2 billion in ACV.
This represents a 30% year-on-year increase and a 12% rise compared to the previous quarter, which had already set a high watermark. Over the past seven quarters, the region has recorded double-digit growth in six instances, with an average annual growth rate of 22%—a clear indication of sustained momentum.
According to Anthony Drake, President of ISG’s EMEA region, the data reflects a broader transformation underway across European industries. Enterprises are no longer experimenting with AI at the margins; they are integrating it into core business operations.
This shift is also reshaping spending priorities. Organizations are increasingly focused on optimizing costs in traditional IT environments in order to free up capital for AI investments. As a result, infrastructure services—particularly those tied to cloud and compute capacity—are experiencing explosive growth, while managed services continue to expand at a more measured pace.
As-a-Service Segment Leads the Charge
The strongest growth in the first quarter came from the as-a-service (XaaS) segment, which saw ACV surge 52% year over year to reach $7.5 billion. This marks the fastest growth rate for the segment since 2021 and extends a streak of eight consecutive quarters of double-digit expansion. On average, the segment has grown by more than 36% annually during this period.
Sequentially, the XaaS market also posted a robust 17% increase compared to the fourth quarter of 2025, underscoring the accelerating demand trajectory.
Within this segment, the standout performer was infrastructure-as-a-service (IaaS), which grew by an extraordinary 72% to reach $6.1 billion. This represents its fastest quarterly growth in over seven years and highlights the central role of infrastructure in enabling AI workloads. From high-performance computing clusters to scalable storage systems, enterprises are investing heavily in the foundational technologies required to deploy and operate AI models at scale.
In contrast, software-as-a-service (SaaS) showed relatively modest growth, increasing by just 0.7% to $1.4 billion. This divergence reflects a shift in spending patterns, as organizations prioritize backend infrastructure over application-layer investments in order to support AI development and deployment.
Managed Services Show Steady Expansion
While the XaaS segment dominated growth, managed services also delivered a solid performance. ACV in this segment rose nearly 6% year over year to reach $4.7 billion, making it the second-best quarter on record for the region.
Notably, this marks only the second time that EMEA has achieved two consecutive quarters with managed services ACV exceeding $4 billion—a sign of consistent demand despite broader market shifts.
A total of 285 managed services contracts were signed during the quarter, representing a 2% increase compared to the previous year. Among these were three mega-deals, each valued at $100 million or more. While the number of such deals remained unchanged, their total value increased by 22%, indicating larger and more strategic engagements.
New scope ACV—a measure of fresh business rather than renewals—rose by 15% to $3.3 billion, reaching this level for only the second time in the region’s history. This suggests that enterprises are not only renewing existing contracts but also expanding into new areas of outsourcing and service delivery.
Diverging Trends Within Managed Services
A closer look at the managed services segment reveals a complex and evolving landscape. IT outsourcing (ITO), traditionally a major component of the market, declined by 16% to $2.9 billion. Most sub-segments within ITO experienced downturns, reflecting a broader shift away from legacy outsourcing models.
However, there were notable exceptions. Bundled infrastructure and application development and maintenance (ADM) services saw a dramatic increase of nearly 300%, while end-user computing (EUC) services grew by 60%. These gains suggest that organizations are selectively investing in areas that directly support digital transformation and AI integration.
Business process outsourcing (BPO) emerged as a major growth driver, with ACV soaring 145% year over year to $1.3 billion. While this surge partly reflects a weaker comparison base from the previous year, the segment also grew 25% sequentially, indicating genuine momentum.
Within BPO, several categories posted triple-digit growth, including human resources, facilities management, and industry-specific services. Meanwhile, call center services—the largest BPO category—remained relatively flat, with a modest increase of 0.7%.
Engineering, research, and development (ER&D) services also showed steady progress, rising 4% to $399 million.
Industry-Level Performance
Growth patterns varied significantly across industries. Telecommunications and retail emerged as standout sectors, with managed services ACV increasing by 192% and 105%, respectively. These industries are at the forefront of AI adoption, leveraging advanced analytics and automation to enhance customer experiences and operational efficiency.
Energy and transportation sectors also performed well, each posting growth of around 30%. These industries are increasingly adopting AI to optimize supply chains, improve asset management, and enhance predictive maintenance capabilities.
In contrast, the two largest sectors in the region—banking, financial services, and insurance (BFSI), and manufacturing—acted as a drag on overall growth. ACV in these sectors declined by 43% and 30%, respectively, reflecting ongoing cost pressures and more cautious investment strategies.
Regional Performance Across Europe
Geographically, performance across Europe was mixed. The United Kingdom, the region’s largest market, recorded its second consecutive quarter with ACV exceeding $1 billion, reaching $1.2 billion—a 6% year-on-year increase.
France also posted strong growth, with ACV rising 15% to $954 million. The Benelux region and Southern Europe, each with markets of approximately $400 million, grew by 22% and 8%, respectively.
However, not all regions experienced growth. The DACH region (Germany, Austria, and Switzerland) saw a 20% decline in ACV, marking its weakest performance in two years. The Nordics faced an even steeper drop, with ACV falling 33% to $359 million—its lowest level since late 2024.
These regional disparities highlight the uneven pace of AI adoption and digital transformation across different parts of Europe.
In parallel with its quarterly report, Information Services Group introduced the ISG AI Index, a new benchmark designed to measure the impact of artificial intelligence on the global technology and business services market.
Initial findings from the index reveal that IaaS has experienced the most significant impact from AI, with growth of 160% since the index’s inception. SaaS has grown by 53%, while managed services have seen only marginal growth of 0.3%.
Overall, the composite AI index has risen by 77% since December 2022, a period that coincides with the launch of ChatGPT and the beginning of the current wave of generative AI adoption.
Looking ahead, ISG has revised its global forecast for XaaS revenue growth upward to 25% for the year, reflecting continued strong demand for AI-related infrastructure and services. This represents a 400-basis-point increase from its earlier projection.
In contrast, the growth forecast for managed services remains unchanged at 2.1%, indicating a more stable but less dynamic segment.
These projections suggest that the market will continue to be shaped by AI-driven investment priorities. As enterprises allocate more resources to AI initiatives, demand for scalable infrastructure and cloud services is expected to remain strong, while traditional outsourcing models evolve more gradually.
The overarching theme emerging from the data is clear: artificial intelligence has become the primary driver of growth in the technology services market. While geopolitical uncertainties and economic challenges persist, the transformative potential of AI is proving to be a more powerful force shaping enterprise decision-making.
Organizations across Europe are not only adopting AI but are restructuring their IT strategies to support it. This includes investing in cloud infrastructure, rethinking outsourcing models, and prioritizing services that enable rapid deployment and scaling of AI solutions.
As a result, Europe is entering a new phase of digital transformation—one defined by the convergence of AI, cloud computing, and data-driven decision-making. And according to Information Services Group, the momentum behind this shift shows no signs of slowing down.
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