Artificial intelligence is fundamentally restructuring technology procurement across the Asia Pacific region, driving the combined market for outsourcing and cloud services to a historic high. According to the latest ISG Index™ report, third-quarter annual contract value (ACV) for the combined market surged 80 percent year on year to reach a record US $10.0 billion. This milestone marks the first time quarterly spending in the region has hit the $10 billion threshold. The growth is heavily concentrated in cloud-based "as-a-service" (XaaS) models, which the company suggests are being utilized to meet the massive computing requirements of AI. This shift indicates a strategic pivot where enterprises are prioritizing scalable infrastructure and software over traditional, legacy service models to support their evolving generative AI and machine learning workloads.
XaaS and IaaS Surge Amid AI Infrastructure Demand
The primary engine behind this record growth is the XaaS segment, which saw a 92 percent year-on-year increase to reach US $9.0 billion. This represents the highest growth rate for the segment since 2018. Within this category, Infrastructure-as-a-Service (IaaS) experienced a massive expansion, with ACV essentially doubling—up 99 percent—to a record US $8.3 billion. This spike suggests that enterprises are aggressively locking down the cloud compute capacity necessary to power AI applications. Simultaneously, Software-as-a-Service (SaaS) ACV rose 37 percent to US $681 million, as the company notes software services are becoming a primary method for employees to interact with AI technologies.
While cloud spending is accelerating, traditional managed services grew more modestly at 16 percent, reaching just over US $1.0 billion. Within managed services, IT outsourcing (ITO) climbed 41 percent to US $785 million, helping to offset a decline in application development and maintenance (ADM) services. Notably, Business Process Outsourcing (BPO) saw a massive 281 percent increase to US $209 million, fueled by a fivefold growth in industry-specific services. Conversely, Engineering, Research and Development (ER&D) services fell by 82 percent to US $52 million, a decline the report attributes to the impact of AI on demand for traditional software engineering services.
Sectoral Divergence and Regional Growth Drivers
The impact of AI-driven spending is not uniform across all industries or geographies. The banking, financial services, and insurance (BFSI) sector led the charge with a triple-digit increase of 107 percent in ACV. Manufacturing also showed signs of recovery, rising 11 percent and ending a five-quarter decline. However, the telecommunications sector struggled, recording a 53 percent drop in ACV, marking its third consecutive quarter of contraction.
Geographically, growth was driven by smaller markets rather than established hubs. Southeast Asia grew by 16 percent, and the Korean market saw a tenfold increase compared to the previous year. In contrast, the largest regional market, Australia and New Zealand, remained flat, while India saw a 10 percent decline. Looking ahead, ISG has significantly adjusted its outlook, raising its full-year growth forecast for cloud-based XaaS to 60 percent, up from the 30 percent projected last quarter. Within that forecast, IaaS is expected to grow by 80 percent, while SaaS is projected to grow by 12.5 percent.
Key Takeaways
- Combined Asia Pacific technology services spending reached a record US $10.0 billion in Q3, an 80 percent year-on-year increase.
- Infrastructure-as-a-Service (IaaS) ACV nearly doubled, rising 99 percent to a record US $8.3 billion.
- Business Process Outsourcing (BPO) skyrocketed by 281 percent, driven by a 5X growth in industry-specific services.
TechInsyte's Take
In our view, the data from the ISG Index™ signals a profound structural shift in how enterprise IT budgets are being allocated in the Asia Pacific. We are witnessing a "flight to scale," where the immediate necessity of AI compute power is cannibalizing traditional service categories. The 82 percent collapse in ER&D services is particularly telling; it suggests that AI is not just an additive technology but a disruptive force that is actively devaluing traditional software engineering labor. Furthermore, the massive 99 percent jump in IaaS compared to the more modest 37 percent rise in SaaS indicates that the current phase of the AI cycle is focused heavily on the "plumbing"—the raw computational power and infrastructure—rather than the application layer. For CIOs, this implies a period of intense capital reallocation toward cloud providers to secure the capacity required for AI experimentation and deployment.
Questions & Answers
How is AI specifically impacting traditional software engineering services?
The report indicates that AI is impacting demand for Engineering, Research and Development (ER&D) services, which saw an 82 percent decline in ACV to US $52 million during the third quarter.
Which specific cloud sub-sector is driving the majority of XaaS growth?
Infrastructure-as-a-Service (IaaS) is the primary driver, with ACV increasing 99 percent to reach a record US $8.3 billion, significantly outpacing the 37 percent growth seen in SaaS.
What does the growth in BPO suggest about enterprise AI strategy?
The 281 percent surge in Business Process Outsourcing (BPO), driven by 5X growth in industry-specific services, suggests that enterprises are increasingly looking to specialized, industry-aligned services to integrate AI into their business processes.
How has the growth forecast for cloud-based XaaS changed?
ISG has significantly raised its full-year growth forecast for cloud-based XaaS to 60 percent, doubling its previous projection of 30 percent from the last quarter.
Source: ISG
