AI-Fueled Cloud Demand Drives Record XaaS Growth While Managed Services Show Gradual Recovery in Asia Pacific
The latest findings from Information Services Group (ISG) reveal a significant shift in the Asia Pacific technology services landscape, with artificial intelligence (AI) emerging as the primary catalyst for growth. According to the most recent ISG Index, the region recorded double-digit expansion in the first quarter, driven largely by surging demand for cloud-based infrastructure and software services. While managed services showed signs of stabilization after a prolonged downturn, it was the as-a-service (XaaS) segment—particularly infrastructure-as-a-service (IaaS)—that powered the market forward.
AI and Cloud Drive Market Expansion
Asia Pacific continues to solidify its position as a cloud-first region, where enterprises are prioritizing digital transformation initiatives and rapidly integrating AI into their operational frameworks. This convergence of cloud computing and AI adoption has created strong momentum for infrastructure and software services, as organizations invest heavily in scalable, flexible platforms capable of supporting advanced analytics, machine learning, and generative AI workloads.
The ISG Index, which tracks commercial outsourcing contracts with an annual contract value (ACV) of at least $5 million, reported that the combined market for managed services and XaaS reached $7.1 billion in the first quarter. This represents a 16 percent year-over-year increase and a 15 percent rise compared to the previous quarter. Notably, this marks only the third instance of double-digit growth in the region over the past two years, underscoring the significance of the current surge.
XaaS Segment Hits Record Highs
The XaaS segment emerged as the dominant growth engine, with spending climbing 18 percent year over year to a record $6.3 billion. This growth reflects the accelerating shift toward consumption-based IT models, where enterprises prefer on-demand access to infrastructure and software rather than investing in traditional on-premises systems.
Within XaaS, IaaS led the charge, expanding 19 percent to reach $5.6 billion. This surge is closely tied to the increasing computational demands of AI applications, which require robust, scalable infrastructure to handle large datasets and complex processing tasks. Cloud providers are benefiting from this trend as organizations migrate workloads to hyperscale environments optimized for AI.
Software-as-a-service (SaaS) also demonstrated strong performance, growing 15 percent to a record $675 million. SaaS platforms are playing a critical role in enabling enterprises to deploy AI-driven applications quickly and efficiently, from customer relationship management to enterprise resource planning and analytics.
Despite these gains, Asia Pacific’s XaaS growth has been somewhat more measured compared to other global regions such as the Americas and EMEA, where adoption rates have been even more aggressive. Over the past 18 months, the region has averaged quarterly growth of approximately 13.5 percent, indicating steady but not explosive expansion.
Managed Services Show Modest Recovery
In contrast to the robust performance of XaaS, the managed services segment experienced only modest growth. ACV for managed services rose 1.9 percent year over year to $791 million, marking a recovery from four consecutive quarters of decline. During that period, the segment had suffered an average quarterly drop of 23 percent, making the current rebound a կարևոր turning point.
However, when compared to the fourth quarter of 2025, managed services spending actually declined by 8 percent, highlighting ongoing volatility in this segment. Enterprises appear to be adopting a cautious approach, focusing on cost optimization and reallocating budgets toward AI and cloud investments.
Within managed services, performance varied significantly across subsegments. IT outsourcing (ITO) saw a sharp decline of 32 percent, falling to $409 million. This drop reflects a broader shift away from traditional outsourcing models toward more flexible, cloud-based solutions. Business process outsourcing (BPO) also declined, down 14 percent to $133 million, indicating reduced demand for conventional process management services.
In contrast, engineering services experienced a remarkable surge, rising to $249 million from just $22 million in the prior year. This growth highlights increasing demand for specialized technical expertise, particularly in areas such as product development, digital engineering, and AI integration.
Deal Activity and Market Dynamics
The first quarter saw a total of 61 managed services contracts awarded, representing a 7 percent increase compared to the same period last year. However, deal volume declined by 6 percent compared to the previous quarter, suggesting some slowdown in contract activity.
One notable trend is the rise in smaller deals, particularly those valued between $5 million and $9 million. These contracts increased by 19 percent year over year, indicating that enterprises are favoring incremental, targeted engagements rather than large, multi-year outsourcing agreements. This shift aligns with the broader move toward agility and flexibility in IT spending.
Michael Gale, regional leader for ISG Asia Pacific, emphasized that the region remains firmly rooted in a cloud-first strategy, with AI acting as a key driver of demand. While managed services have shown signs of recovery, he noted that the segment has yet to return to the $1 billion quarterly run rate observed multiple times in 2024.
Industry-Specific Trends
Growth patterns varied significantly across industries. Among smaller sectors, transportation, healthcare, and business services recorded dramatic increases in managed services spending, each growing by more than 100 percent year over year. These industries are increasingly adopting digital technologies to improve efficiency, enhance customer experiences, and comply with regulatory requirements.
Among larger verticals, the banking, financial services, and insurance (BFSI) sector posted modest growth of 4 percent, reflecting steady investment in digital transformation and risk management capabilities. Manufacturing remained flat, indicating a more cautious approach to spending, while telecommunications experienced a steep decline of 60 percent, suggesting reduced investment in outsourcing within that sector.
Regional Variations Across Asia Pacific
Geographically, the Asia Pacific market exhibited a mixed performance. Smaller markets such as Southeast Asia, China, and Korea recorded triple-digit growth in managed services spending, highlighting their तेजी adoption of digital technologies and increasing investment in IT services.
However, larger markets weighed on overall performance. India saw a 9 percent decline, while Australia-New Zealand experienced a 33 percent drop. Japan recorded the most significant decline among major markets, falling 54 percent year over year. These decreases suggest that mature markets may be undergoing a period of recalibration as enterprises reassess their IT strategies and prioritize AI investments.
Launch of the ISG AI Index
In a move that underscores the growing importance of AI, ISG recently introduced the ISG AI Index, a new benchmark designed to measure the تأثير of AI on the global technology and business services sector. Initial findings reveal that IaaS has experienced the most significant impact from AI, with growth of 160 percent since the index’s inception.
SaaS has also benefited substantially, rising 53 percent, while managed services has seen only marginal growth of 0.3 percent. Overall, the composite ISG AI Index has increased by 77 percent since December 2022, a period that coincides with the emergence of the modern AI era following the launch of ChatGPT.
These findings highlight the केंद्रीय role of AI in reshaping the technology services market, driving demand for scalable infrastructure and software platforms while reshaping traditional service models.
Updated Global Forecast for 2026
Reflecting the strong momentum in XaaS, ISG has revised its global forecast for 2026, increasing its projected growth rate for the segment to 25 percent—an upward revision of 400 basis points from its earlier estimate. This adjustment underscores confidence in the استمرار of AI-driven demand for cloud services.
At the same time, ISG has maintained its forecast for managed services growth at 2.1 percent for the year. This steady outlook reflects the expectation that enterprises will continue to focus on cost optimization, using savings from managed services to fund investments in AI and digital transformation.
Strategic Implications
The latest ISG Index findings point to a clear in the Asia Pacific technology services market. As AI becomes a central pillar of enterprise strategy, organizations are reallocating resources toward cloud infrastructure and software platforms that can support advanced capabilities. This shift is redefining the competitive landscape, creating new opportunities for service providers while challenging traditional outsourcing models.
For enterprises, the message is clear: success in the AI era requires a digital foundation built on scalable, cloud-based systems. For service providers, the challenge lies in adapting to changing ग्राहक demands, offering innovative solutions that combine infrastructure, software, and AI capabilities.
The first quarter’s double-digit growth in Asia Pacific’s technology services market marks a pivotal moment in the region’s digital transformation journey. Driven by AI and cloud adoption, the XaaS segment is setting new records, while managed services begins to stabilize after a period of decline.
As organizations continue to embrace AI and modernize their IT environments, the demand for flexible, scalable services is expected to grow. With its cloud-first orientation and increasing in AI, Asia Pacific is well positioned to remain a key driver of global technology services growth in the years ahead.
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