In Q2 2025, Australia and New Zealand saw a steep decline in IT and business services spending, dropping 33 percent compared to the same quarter last year. This dip reflects a broader regional slowdown fueled by macroeconomic uncertainty. Despite the hesitation, the larger Asia Pacific outsourcing market, which includes AWS, Microsoft Azure, Google Cloud, and managed services, remained strong, reaching 4.7 billion US dollars in annual contract value. That said, it was still 12 percent lower than the previous quarter.
Cloud and AI: The Resilient Core
Even as overall IT services spending slowed, investment in cloud-based services, everything-as-a-service or XaaS, continued to grow. XaaS spending rose 16 percent year over year to 3.9 billion US dollars, despite a 15 percent dip from the previous quarter.
Here’s how it breaks down:
- Infrastructure-as-a-service (IaaS) grew 17 percent, totaling 3.4 billion US dollars.
- Software-as-a-service (SaaS) expanded 13 percent, reaching 500 million US dollars.
This growth is largely driven by AI adoption, which requires powerful platforms, tools, data storage, and processing capabilities to operate effectively at scale.
Managed Services Take a Hit, But Show Signs of Recovery
Managed services shrank to 823 million US dollars in annual contract value, a 40 percent drop from Q1. Still, that number is six percent higher than the same time last year.
Breakdown by area:
- IT outsourcing declined 46 percent to 539 million US dollars.
- Application development and management dropped over 30 percent.
- Business process outsourcing (BPO) services fell 34 percent to 133 million US dollars, with customer engagement and facilities management being the exceptions.
- Engineering and R&D services declined 15 percent, reaching 152 million US dollars.
Only 69 managed services contracts were awarded in the quarter, marking an 18 percent decrease.
Sector Wins and Losses
A few sectors managed to show growth despite the overall downturn:
- Banking, financial services, and insurance rose 1.4 percent
- Travel, transportation, leisure, and retail saw double-digit growth, although from smaller starting points
All other industries experienced double-digit declines.
Expert Views: AI Sparks Hope
Michael Gale, a partner at ISG APAC, sees AI as a positive force. He notes that rising AI investment is fueling demand for cloud resources as companies chase the computing and storage power needed for AI workloads. Gale expects managed services could see a rebound in the second half of 2025.
ISG projects modest managed services growth of about 1.3 percent for the full year. This reflects more stable tariffs and tighter control on discretionary budgets. Meanwhile, XaaS growth forecasts have climbed to 21 percent, driven by AI-related momentum.
Global Context: AI Outpaces Uncertainty
Gartner agrees with ISG’s outlook. It projects global IT spending to hit 5.43 trillion US dollars in 2025, rising 7.9 percent thanks to the push from AI. While some companies are pressing pause on new spending due to geopolitical and economic uncertainty, they are still investing in AI-focused infrastructure. Spending on AI-optimized servers is expected to triple compared to conventional hardware by 2027.
Gartner’s John-David Lovelock explains that companies are not cutting budgets, they are simply delaying them. Hardware and infrastructure are taking the brunt of this pause, while recurring cloud and managed services spending continues steadily.
What This Really Means
This slowdown isn’t about slashing budgets. It’s a strategic pause. Companies are holding off on new projects but continuing the ones that matter.
AI is the anchor keeping cloud demand strong.
Managed services are finding their footing again.
Sectors with AI and cloud relevance are resisting the downturn.
Bottom Line
The IT services market in Australia and New Zealand is facing real pressure. But the growing demand for cloud and AI is providing a much-needed cushion. Growth in IaaS and SaaS, combined with gains in banking, travel, and retail, suggests the slowdown isn’t a stop. It’s a shift. And if the AI momentum continues, we could see a turnaround by the end of the year.
