Asia Pacific’s technology services sector regained momentum in the third quarter of 2025 as artificial intelligence (AI) continues to fuel demand for cloud infrastructure.
The rebound, detailed in the latest ISG Index, highlights how digital transformation remains resilient even as macroeconomic and geopolitical headwinds weigh on managed services.
Cloud Growth Outpaces Economic Headwinds
The Information Services Group (ISG) reported that the region’s combined market for outsourcing and cloud-based “as-a-service” (XaaS) contracts grew 10 percent year on year to US$5.7 billion, marking Asia Pacific’s strongest quarter in 2025.
AI remains the driving force behind this momentum. Enterprises are scaling AI models, data analytics, and automation across their operations — a trend reflected in 14 percent growth in XaaS spending, reaching US$4.9 billion in the third quarter. This marks the fourth consecutive quarter of double-digit expansion.
Infrastructure-as-a-service (IaaS) rose 13 percent to US$4.3 billion, while software-as-a-service (SaaS) advanced 18 percent to US$563 million, underscoring how AI adoption continues to accelerate the migration to cloud-native platforms.
Managed Services Contracts Decline
In contrast, managed services spending fell 9 percent to US$849 million, with IT outsourcing (ITO) down 19 percent to US$536 million. The decline was particularly sharp in business process outsourcing (BPO), which plunged 63 percent to just US$55 million.
The number of large contracts also contracted, with only two “mega-deals” exceeding US$100 million signed during the quarter. However, smaller deals between US$5–10 million increased 39 percent, suggesting companies are taking a more cautious, incremental approach to technology investments.
Despite the slowdown, engineering, research and development (ER&D) services bucked the trend — surging 108 percent to US$259 million. Analysts view this as a signal that firms are prioritising innovation and product development even amid broader fiscal restraint.
Sector and Geographic Divergence
Industry performance varied widely. Media and telecommunications recorded a 253 percent rise in contract value, while retail climbed 140 percent, benefiting from rising AI adoption in customer analytics and e-commerce logistics. Banking, financial services and insurance (BFSI), however, saw steep declines alongside manufacturing.
Geographically, China led growth thanks to a major Neusoft automotive deal, with ACV up 400 percent year on year. India grew 7 percent, maintaining its momentum as a digital services powerhouse. Meanwhile, Australia and New Zealand fell 19 percent, and both Japan and South Korea saw declines of over 50 percent, reflecting weak local demand.
Nine-Month Overview: Cloud Dominance
For the first nine months of 2025, Asia Pacific’s combined market reached US$17 billion, up 6 percent. Nearly 90 percent of this total came from XaaS spending — a 14 percent rise to US$14.6 billion. Within that, IaaS climbed 13 percent to US$12.8 billion, and SaaS rose nearly 20 percent to US$1.7 billion.
Managed services, by contrast, fell 26 percent to US$2.5 billion, weighed down by a 27 percent drop in ITO and a 40 percent contraction in BPO. ER&D spending held steady at US$462 million, suggesting sustained interest in innovation-related outsourcing.
AI: The Region’s Long-Term Catalyst
According to Michael Gale, ISG’s partner and regional leader for Asia Pacific, AI continues to “power the market” by driving enterprises to invest in scalable, cloud-based environments. “Macroeconomic uncertainty is keeping managed services spending down, but the rise in smaller discretionary deals could signal a pivot in 2026,” he noted.
The firm’s global forecast for 2025 remains cautiously optimistic. ISG projects managed services revenue to grow 1.3 percent globally, led by the Americas, while XaaS spending is expected to jump 25 percent, bolstered by AI-driven demand for infrastructure and cloud computing.
In short, Asia Pacific’s technology sector is moving through a phase of strategic recalibration — less about expansion at any cost, more about efficiency, automation, and intelligence. AI may not just be fuelling the region’s rebound; it is defining the architecture of its future growth.
