PAC Blog

The European IT services market maintained its steady growth trend in 2019. Despite the increasingly gloomy economic outlook, the widening scope of digital transformation initiatives across all industry sectors kept investment in IT-related consulting, systems integration, and operations services ticking over.

Our expectations for the market had been more cautious for 2019, on the back of two years that had seen a slight acceleration in growth, from +3.4% in 2017 to +4.4% in 2018. This had been driven by strong investment in project services (over 5% growth in both years) and public IaaS/PaaS (buoyant growth, albeit with relatively small volumes).

We expect European market growth to be broadly in line with our forecast from July 2019 of an increase of +3.9%, with some countries doing slightly better than expected (Italy, Netherlands) and others slightly worse (Germany, UK). The public sector remains an important focus for many suppliers, and this market performed better than expected in some countries (Germany, Netherlands), but not in others (Spain; UK, due to an election-related slowdown in the second half). IT services investment in the German banking market suffered as a result of the problems faced by the country’s leading retail banks, while the market in the Netherlands performed better than expected. Manufacturing remained below our expectations in Germany but exceeded them in Italy. The French market developed as expected, with limited impact from the global environment. Europe remains a hugely diverse marketplace!

But what about 2020? Overall, we expect a slight slowdown in growth to 3.7%, with a noticeable deceleration in most countries (and in particular in Germany, with growth falling to below 3% in 2020), balanced by an acceleration in the UK (post-election and post-Brexit, following three years of uncertainty).

Excluding public IaaS/PaaS (a market that will continue to be dominated by the small group of hyperscalers), growth will fall to 2.4% – disappointing for an industry that has been spoiled by solid growth rates for decades, but a reasonably healthy level considering the overall challenging economic (and political!) environment. Besides manufacturing (incl. automotive, but also further sub-sectors such as mechanical and plant engineering), the transport industry (in particular logistics) will be among the most affected sectors.

Growth will slow down in the project services business (consulting and systems integration), with a more selective attitude and longer decision cycles. We do not expect any substantial easing off in the upward trajectory of rates as skills will continue to be scarce. The pace of transformation will remain strong thanks to multiple drivers (most of them combined) as we will see below: cloud transformation and digitalization (of the front end, of the back office, of industrial processes, etc.), enabled by new technologies and concepts such as analytics, AI and automation, agile and DevOps, etc. In fact, most companies have no choice: if they want to survive in the new economy, they need to automate their processes and transform their business. For example, as the automotive industry has come under pressure from new regulations (fuel consumption, emissions, etc.) and a challenging market and competitive environment (e.g. China), it has to invest in new technologies and concepts such as e-mobility, car sharing, autonomous driving.

Investment in application management will benefit from the economic environment. Besides the ongoing trend towards transformational AM (relating to cloud migration and application consolidation), there is a revival of cost-cutting AM – with increasing automation and offshore services. While the traditional infrastructure market remains flat, the growth of the hyperscalers will remain close to 30%. In addition to the historical leaders AWS and Azure, Google has been increasingly positioning itself as a strong challenger. Last but not least, the increasingly sophisticated threat landscape will ensure that security remains a fast-growing market.

These are the trends that we believe will have the greatest impact on the market in 2020:

• Platform-based industrial value networks will spread
• Edge and 5G enable real-time IT locations
• IT/OT integration leads to OT data platforms
• Enterprise applications move into the public cloud
• Next-gen app platforms embrace digital innovations
• AI-empowered business applications
• RPA and automation on the edge of AI
• Cloud-based services revolutionize application development and deployment
• Managed security services accompany the digital change
• Agile and DevOps boost flexibility