AI and cloud spend offers relief in IT services slowdown

IT and business services spending in Australia and New Zealand services was down 33 percent, in the second quarter of 2025, although strong demand for artificial intelligence (AI) and cloud services suggests a rebound.

This reflects a broader regional downturn, as spending slowed with enterprises remaining cautious in the face of uncertain macro conditions, according to the latest state-of-the-industry report from Information Services Group, a global AI-centered technology research and advisory firm. 

The Asia Pacific ISG Index measures commercial outsourcing contracts with annual contract value (ACV) of US$5 million or more, showed the combined markets, of cloud-based everything-as-a-service (XaaS) and managed services slightly declined to US$4.7 billion, compared to the same period last year.  

The market fell 12 per cent compared with the first quarter of the year, and this was the first time the APAC market pulled back since the second quarter of last year. 

Fueled by interest in AI, demand for cloud-based services remained robust, up 16 per cent year on year, to US$3.9 billion, even as demand slowed 15 per cent from the first quarter.  

Although managed services slumped 40 per cent, to US $823 million, compared to the first quarter, that was a rise of 6 per cent. 

Within the XaaS segment, infrastructure-as-a-service (IaaS) ACV advanced 17 per cent, at US$3.4 billion, while software-as-a-service (SaaS) ACV grew 13 per cent, to US$500 million. 

In managed services, IT outsourcing (ITO) ACV fell 46 per cent, to US$539 billion, with even the largest and fastest-growing service area, application development and management (ADM), down more than 30 per cent.  

Business process outsourcing (BPO) also experienced a weak quarter, down 34 per cent, to US$133 million, with only customer engagement and facilities management services showing growth.  

Engineering, research and development (ER&D) services didn’t fare much better, down 15 per cent, to US$152 million. 

During the quarter, 69 managed services contracts were awarded, down 18 percent year on year. 

Among industries, one of the region’s largest industries for sourcing: banking, financial services and insurance was up 1.4 percent. Travel, transportation and leisure, along with retail, both saw double-digit growth off smaller bases. All other sectors were down by double digits. 

ISG APAC partner and regional leader Michael Gale said, the only bright spot right now is AI. 

“Which has companies investing in cloud services to take advantage of the massive computing power needed to run AI at scale,” he said. “Given the quarter-over-quarter improvement we saw in managed services, we hope to see a turnaround in the overall market during the second half.” 

For the full year, ISG maintains its forecast of 1.3 percent revenue growth for managed services, reflecting a stabilising tariff environment but also continued weakness in discretionary spending.  

At the same time, ISG is raising its previous growth forecast for cloud-based XaaS by 300 basis points, to 21 percent, based on continuing strong demand for AI-driven transformation. 

ISG’s forecast corresponds with Gartner’s worldwide IT spending projection, which is expected to total US$5.43 trillion in 2025, an increase of 7.9 per cent from 2024, largely attributed to ongoing AI and generative AI digitisation initiatives 

Gartner noted there is a business pause on net-new spending due to a spike in global uncertainty, this is subsumed by ongoing AI initiatives, said Gartner distinguished vp analyst John-David Lovelock.  

“For instance, both software and services spending growth in 2025 is expected to slow down due to this ‘uncertainty pause,’ but spending in AI-related infrastructure, such as data centre systems, continues to surge,” he said. 

“Data centers are experiencing a surge driven by GenAI, with spending on AI optimised servers, which was virtually nonexistent in 2021, expected to triple that of traditional servers by 2027,” said Lovelock. 

Much like ISG’s research, Gartner belives starting early in the second quarter of 2025, there has been an “uncertainty pause,” encompassing a strategic suspension of net-new spending across various sectors, including IT.  

This pause is driven by heightened economic uncertainty and geopolitical risks. In response, the global corporate sector is exercising increased caution, as organizations seek to mitigate adverse impacts from these multifaceted challenges. 

The same Gartner survey found that 61 per cent of enterprises started 2025 in a better position than at the same time last year, but only 24 per cent expect to end the year ahead of their 2025 plans. This sentiment was consistent across all sectors to varying degrees 

“This pause does not stem from budget cuts, as budgets remain fully allocated,” said Lovelock. “Rather, it is a strategic decision to delay new expenditures.  

The IT hardware and infrastructure sectors are particularly affected due to price increases and supply chain disruptions. In contrast, ongoing or recurring spending, such as cloud and managed services, is maintaining greater stability.” 

Economic (41 per cent) and geopolitical (32 per cent) shocks present the greatest risk according to business leaders.  

Gartner said leaders believe they can handle pressure from customers, competition and regulation successfully.