In the first quarter of 2025, Europe’s business and IT services sector saw a resurgence in demand, driven largely by exceptional growth in the as-a-service (XaaS) segment, according to the latest EMEA ISG Index from Information Services Group (ISG), a global technology research and advisory firm.
Annual contract value (ACV) for the XaaS segment surged to a record US $4.7 billion in Q1, up 34% year-over-year and 3% over the previous quarter. This marks the fourth consecutive quarter of double-digit annual growth for the cloud-based services category, underscoring its increasing dominance in the European technology landscape. The XaaS performance was a critical contributor to the overall combined market ACV – spanning managed services and cloud services – which reached a new peak of $9.1 billion, up 23% from the same period in 2024.
The infrastructure-as-a-service (IaaS) category accounted for the lion’s share of the growth, rising 36% year-over-year to $3.4 billion. Software-as-a-service (SaaS) followed with a 30% increase to $1.3 billion. While XaaS growth decelerated slightly from the previous quarter – falling more than 700 basis points – it remained resilient amid shifting macroeconomic conditions and continues to gain traction as enterprises prioritize cloud migration and operational agility.
“Europe is still concentrating on digital transformation, adopting cloud and AI to increase innovation, speed to market, and reduce costs,” said Steve Hall, President of ISG EMEA. “XaaS is clearly the engine behind this push, offering scalable, consumption-based models that help organizations modernize IT without significant upfront investment.”
Potential Headwinds Ahead
XaaS adoption has become integral to business continuity and competitive advantage across multiple sectors. The ability to scale services on demand, shift from capital to operational expenditure, and implement AI-driven efficiencies is fueling interest among companies looking to navigate economic volatility and regulatory complexity.
Despite these strengths, Mr. Hall warned of potential headwinds ahead. Uncertainties around global trade policy, particularly new U.S. tariffs and potential retaliatory measures, are expected to prolong decision cycles and delay discretionary investments. ISG’s forecast for 2025 presents two potential outcomes: in a stable trade environment, XaaS growth is projected to continue at 18%, consistent with previous estimates. However, if protectionist measures and geopolitical tensions persist, XaaS growth could moderate to 15%.
Still, even in the more conservative scenario, XaaS would remain a stronghold. The segment’s steady expansion reflects growing trust in cloud infrastructure and platform services as enablers of business resilience and innovation, according to ISG. As organizations across Europe seek to optimize IT costs while enhancing digital capabilities, XaaS models are expected to remain a cornerstone of enterprise technology strategies throughout 2025 and beyond.
