Executive Summary: ISG Provider Lens™ Microsoft AI and Cloud Ecosystem - Australia 2025

The individual quadrant reports are available at:

ISG Provider Lens™ Microsoft AI and Cloud Ecosystem - AI Services for the Microsoft Clouds - Australia 2025

ISG Provider Lens™ Microsoft AI and Cloud Ecosystem - Managed Services for Azure - Australia 2025

ISG Provider Lens™ Microsoft AI and Cloud Ecosystem - Microsoft 365 Services - Australia 2025

ISG Provider Lens™ Microsoft AI and Cloud Ecosystem - Power Platform Services - Australia 2025

Australian firms seek controlled costs, better security and increased business value from cloud investments

Australia is a mature, highly competitive market with a large number of well-established Microsoft-certified service providers, both local and global. However, as market dynamics continue to evolve, customer demands and expectations are changing, which affects service delivery requirements.

Australia’s IT spending is poised for increased growth in 2025 after several years of conservative tech spending among
organisations worried about macroeconomic uncertainty (both local and global) and pressures on revenue growth and margins. The uptick in tech spending for 2025, especially the spending related to the Microsoft AI and Cloud ecosystem, is mainly driven by investments in cybersecurity, cloud-enabled (and AI-fuelled) innovation and digital transformation and infrastructure modernisation, particularly hardware/device refresh initiatives as Windows 10 approaches the end of life. Australian enterprises continue to seek opportunities to increase visibility, predictability and control over cloud costs,  driving ongoing demand for solutions and services that target increased utilisation, measurable business outcomes and value delivery, cost optimisation and governance and end-to-end security on Microsoft Cloud.

Business and technology trends are driving Microsoft to evolve its product set and forcing providers to keep pace with their service offerings around the Microsoft 365 Services suite and the Modern Workplace, Managed Services for Azure, Power Platform and AI services.

Major business trends impacting the Microsoft AI and Cloud ecosystem in Australia include:

● A sharpened focus on measurable business outcomes: Ongoing macroeconomic uncertainty and the persistent threat of inflation have driven Australian firms to prioritise projects that facilitate controlled business growth while supporting cost management. This shift has increased the demand for incremental value delivery, accelerators, industry-specific solutions and the near-constant justification of spending.

Large IT services firms in Australia are facing increased pressure to transition from an IT- and technology-centric approach to a customerand value-centric model. Achieving this requires consistently aligning their services and
capabilities with clear, measurable business outcomes. However, the transition represents a significant shift in  capabilities, skills, mindset and positioning, and many services firms find it challenging to adapt.

● Prioritisation of EX, productivity and retention: Rising labour costs, a nationwide skills shortage and constantly shifting hybrid work dynamics are driving initiatives to increase employee retention and improve EX, sharpening a focus on employee productivity and improved collaboration as key requirements. This includes efforts to deliver improved usability, enhanced collaboration and productivity, all centred around Microsoft Teams, SharePoint and
OneDrive, especially in remote and hybrid work environments.

The growing relevance of remote work and the need for organisations to collaborate internally and with clients are driving the use of Microsoft platforms such as Teams and Viva. In fact, a growing number of service providers are positioning Viva as central to customers’ EX initiatives, and nearly all services providers are responding to customer demand by offering services to help them tap into existing data to deliver enhanced workplace experiences. By supporting data mesh, a modern, distributed architecture for analytical data management, Microsoft is empowering employees to work productively from anywhere while remaining fully connected. Microsoft Mesh also provides an immersive space for people to meet and collaborate.

Additionally, firms have steadily shifted their views of AI from a primary buzz around replacing humans to a strategic focus on augmenting human productivity. Implementing and maintaining effective business agility and responsiveness require accelerating what humans do rather than replacing them. In the Microsoft space, intelligent, conversational AI is increasingly used to augment human abilities in various tasks.

● Managing and optimising cloud spend and decreasing time to value: Margin pressures are driving increased oversight of IT projects, leading to project delays and reduced scope in some cases and fuelling demand for improved cost management, visibility and optimisation. Cloud-based pay-as-you-go models promise to eliminate unnecessary infrastructure costs while ensuring connectivity and access. However, benefiting from these capabilities requires cost optimisation and predictability. Hence, there is a growing demand for FinOps and related services, including increased insight and guidance around cloud and Microsoft portfolio operational efficiency and ROI and, in some cases, consolidation initiatives to better leverage Microsoft 365 subscriptions. For instance, Copilot for Microsoft 365 has 
elevated the desire to learn more about Microsoft level E1, E3 and E5 licensing, what the clients are consuming and the value of data analytics to help address the challenges clients are facing in their respective environments. This focus on value is also driving demand for tailored solutions that address industry-specific challenges, pushing service providers towards delivering more industry-focused solutions, blueprints and accelerators. Microsoft’s focus on vertical clouds, such as Cloud for Retail, Healthcare and Financial Services, resonates with clients that need embedded compliance, data security and operational workflows. 

● Improving business agility and responsiveness: Rising concerns over global supply chain disruptions,  exacerbated by the threat of tariffs, are fuelling projects aimed at increasing process automation, enhancing visibility and ensuring business continuity. It is also driving demand for tailored delivery models as clients seek more flexible models that balance budgets, priorities and timelines without compromising project outcomes. Furthermore, it is accelerating cloud adoption and pushing service providers to offer capabilities to help organisations embrace and transition to a microservicesbased architecture, allowing for better workload isolation and on-demand scaling of
specific services.

● Delivering tangible business value from digital transformation initiatives: Both enterprises and government organisations remain focused on digital transformation, but these initiatives are rapidly evolving into AI-led business transformation underpinned by cloud-based digital capabilities. Even with this evolution, firms continue to seek
opportunities to better identify and deliver measurable business value.

● Increasing the effectiveness of sustainability efforts: Clients are increasingly looking for solutions that will
enable them to measure, manage and reduce their carbon footprints. AI-driven insights and reporting tools are becoming essential for achieving these sustainability goals.

The above business trends are among the key drivers of a changing technology and services landscape, directly impacting the Microsoft AI and Cloud Ecosystem in Australia.

The following section outlines key technology trends among Australian firms, their impact on the Microsoft Ecosystem and the role of service providers.

● Prioritising cybersecurity, compliance and governance initiatives: This includes addressing cybersecurity threats, optimising existing threat detection capabilities, improving data governance and enabling effective business continuity processes and approaches. Firms are increasingly prioritising security capabilities within the Microsoft 365 suite to address rising cyberthreats. While ISG expects AI to help strengthen cyber resilience, organisations should actively adopt AI for analysis and cybersecurity to keep their systems and data safe from cyberattacks.

The growth in hybrid cloud deployments, combined with the focus on cybersecurity, has led to an emphasis on unified security management, compliance and risk mitigation. This focus is increasingly reflected in Microsoft’s security and compliance offerings, including Azure Security Center and compliance certifications to protect sensitive data and ensure adherence to regulatory requirements.

The emphasis on cybersecurity is also driving increased demand for solutions such as Microsoft Sentinel and Microsoft 365 Defender. However, firms will look to service providers to help them effectively enhance their security posture and provide advanced capabilities, including encryption, access controls, threat hunting and compliance frameworks.

● Accelerating cloud adoption and modernising infrastructure: In Australia, both enterprises and government
organisations are accelerating cloud implementations, accompanied by increased investments in digital transformation
to deliver rapid and measurable results. However, digital initiatives are increasingly being subsumed within broader AI-centric initiatives, further driving the adoption of multicloud strategies. This shift impacts application sourcing strategies, IT spending plans and the need for specialised skills. Significantly, it also raises business expectations regarding time to value, responsiveness, agility and the pace of technology-driven innovation. In response, organisations continue embracing cloudfirst strategies and migrating increasingly complex workloads and applications to cloud platforms, as the majority of workloads viable for a lift and shift approach have already been addressed. This typically entails hybrid and multicloud approaches to balance flexibility, security, scalability and cost-efficiency.

ISG expects a massive spike in device refresh initiatives in 2025, with Windows 10 reaching its end of life on October 14, 2025. Microsoft is framing this transition as an opportunity for organisations to adopt Windows 11 and the Copilot+PC, which are AI-enabled through upgraded processors.

● Moving AI from pilot to production to scale: Microsoft continues to evolve its AI development and  implementation strategy across Azure. This is not surprising as the combination of generative AI (GenAI), agentic AI, ML- and AI-enabled capabilities in core tech-enabled functions, including business applications and productivity tools,
cybersecurity, supply chain visibility and optimisation, sustainability, disaster recovery, infrastructure management, is poised for massive growth over the next 2-3 years.

The rapid adoption of GenAI, powered by Azure OpenAI Service and tools such as Copilot in Microsoft 365 and Dynamics 365, for instance, is already reshaping how organisations approach employee productivity and business
innovation. However, most Australian firms remain in the AI pilot phase, engaging service providers for guidance on AI use cases, often spanning industries, products and services within the Microsoft portfolio. Service providers, in turn, are actively seeking opportunities to differentiate through services to optimise AIrelated implementation and uptake.

To effectively scale AI initiatives, firms need guidance on how best to leverage AI services, especially Copilot, within the Microsoft Cloud Ecosystem to increase productivity, enhance business processes, improve operations and drive innovation. Beyond Copilot, firms are also seeking support to make effective use of AI-powered capabilities in  Dynamics 365, Power Platform and Azure AI to automate workflows, improve customer engagement through  personalised experiences, implement effective content creation and enhance decision-making. Additionally, firms are seeking guidance on where, when and how to use AI in areas such as predictive analytics, including forecasting demand, optimising supply chains and predicting customer behaviour.

● Improving data governance: Any uptick in AI usage directly necessitates enhanced data governance. In fact, one of the early benefits of the excitement surrounding GenAI initiatives is firms’ increasingly clear understanding of the importance of data governance and the need for a strong data foundation. In the past, data governance focused primarily on structured data within databases and data warehouses. However, the scope is now expanding to encompass unstructured data from Microsoft applications such as SharePoint, OneDrive, Teams and Outlook.

There is also a growing emphasis on responsible AI, driven by concerns regarding data privacy, security and the protection of brand credibility. AI initiatives, solutions and embedded capabilities within Microsoft products inevitably provide access to various types of data, raising concerns related to data privacy, ethical usage, bias and potential misuse. As a result, firms will increasingly turn to service providers for guidance on the functionalities and implications of these technologies to maintain robust security measures and ensure compliance with various standards.

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