Executive Summary: ISG Provider Lens™ Private Hybrid Cloud - Data Center Services - U.S. Public Sector 2025
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Market is shifting to delivering measurable modernization outcomes through AI-powered tools and automation
The U.S. state, local and education (SLED) IT infrastructure services market is projected to grow approximately to $150 billion by the end of 2025, with expectations to reach over $170 billion by 2028, with a moderately flat growth rate when compared to last year, mainly due to budget constraints and the changes brought in by the new government. High-impact services in modernization, cybersecurity and hybrid cloud technologies will drive spending as agencies will need to replace their legacy IT infrastructure. Hybrid cloud infrastructure managed services are gaining traction, as 90 percent of SLED agencies are expected to adopt hybrid cloud models, highlighting their importance in the U.S. public sector organizations.
Meanwhile, the U.S. public sector faces continuous budget limitations that significantly restrict its capacity to modernize IT infrastructure and adopt advanced managed services. These financial constraints often force state and local agencies to continue operating outdated legacy systems, which are expensive to maintain and introduce additional complexity and risk. Despite recent increases in federal infrastructure funding, such as allocations to the Technology Modernization Fund, spending as a share of GDP remains below historical levels, underscoring ongoing fiscal pressures. These budgetary realities slow the pace of modernization and make it difficult for agencies to attract and retain skilled IT professionals, further complicating efforts to manage sophisticated systems and implement robust security measures. As a result, agencies are frequently compelled to prioritize essential services at the expense of critical IT upgrades, exacerbating the technology gap and increasing operational risks. Along with this, they need to rely on external help in the form of infrastructure managed service providers that help them not only manage their IT assets but also fill the skill gaps needed for digital transformation engagements.
Heavy reliance on aging legacy systems poses a significant obstacle for public sector IT infrastructure management. These longestablished systems, often decades old, are not only expensive to operate and maintain but also hinder integration with newer technologies and the adoption of modern managed services processes. A report by the Government Accountability Office (GAO) has repeatedly highlighted the billions of dollars spent annually on maintaining outdated federal IT systems. Modernization efforts are complex and costly, requiring significant upfront investment and specialized expertise that is often scarce within the public sector workforce. This inertia can stifle innovation and hinder the agility required to respond effectively to evolving citizen needs and technological advancements.
Legacy infrastructures often lack the inherent security features of contemporary systems, making them more susceptible to cyberattacks. Therefore, setting up security guardrails is a paramount challenge for the U.S. public sector clients, as they need to manage and protect vast amounts of sensitive data, ranging from citizen information to national security data.
It is a continuous and resource-intensive endeavor. Data breaches in the public sector can have severe consequences, eroding public trust and potentially compromising national security. Furthermore, navigating complex and evolving compliance and regulatory requirements, such as the Federal Information Security Modernization Act (FISMA) and the
National Institute of Standards and Technology (NIST) frameworks, adds significant layers of difficulty to IT management. These regulations mandate stringent security controls, continuous monitoring and detailed reporting,
requiring substantial resources and expertise to implement and maintain compliance.
Finally, the prevalence of data silos and interoperability issues across different government agencies poses a significant hurdle to efficient IT infrastructure management. The existence of disparate systems and isolated data repositories hinders the ability to gain a comprehensive view of government operations, impedes effective data sharing between agencies and complicates the implementation of unified IT solutions. Integrating these diverse systems and ensuring seamless data flow is often a technically complex and politically challenging undertaking, requiring significant inter-agency collaboration and resource allocation. Unlocking the value of government data through improved interoperability could lead to significant efficiencies and better citizen services, but this needs to be approved by political leaders. Overcoming these data silos is crucial for enabling data-driven decisionmaking and improving overall government effectiveness.
A majority of service providers have advanced by offering modular pricing models, on-demand engineering services and outcome-based contracting, indicating that success is now tied to agility and packaged transformation capabilities instead of scale. Providers are investing selectively in assets that enhance hybrid operations automation, regulatory
compliance alignment and vertical-specific modernization intellectual property. As larger providers rationalize business units or align with global partners, some public sector clients seek explicit assurance on service continuity and long-term support. The competitive field is also seeing more pronounced moves toward industry-specific solutions, modular
consumption models and innovation in automation and self-service.
Some of the key trends observed are:
Replacement or modernization of legacy IT systems: The public sector is prioritizing the modernization of outdated IT systems that often lead to high costs and inefficiencies. This transformation involves replacing legacy
systems with advanced, secure and scalable cloud-based solutions. Managed service providers (MSPs) play a pivotal role in this effort, as they bring specialized knowledge in cloud migration, ensuring that applications are modernized to leverage the benefits of hybrid cloud environments. Additionally, MSPs facilitate infrastructure upgrades that enhance overall IT performance, security and compliance, thereby promoting a more agile and responsive public sector capable of meeting contemporary challenges.
Focus on automation and AIOps: As the complexity of modern IT environments escalates, the adoption of automation and AI for IT operations (AIOps) is on the rise. These tools are instrumental in proactively managing IT challenges by identifying potential issues before they escalate and automating repetitive tasks that consume valuable time and resources. AIOps also has strong capabilities in sifting through massive volumes of data generated by the U.S. public sector IT, extracting actionable insights and making predictions that enhance decision-making processes. This ultimately leads to resource optimization and improves incident response times, enabling agencies to function more effectively and efficiently.
Prioritizing cost optimization: Budget constraints remain a significant hurdle for U.S. public sector agencies, making cost optimization a critical focus. Managed services providers offer an effective strategy for achieving more prudent IT spending through efficient resource management practices and FinOps processes. The implementation of payas- you-go cloud models allows SLED agencies to align their IT expenditures directly with usage, minimizing waste and maximizing value. Additionally, automation reduces operational costs by streamlining processes and improving
workforce efficiency. By employing these strategies, U.S. public sector entities can remain financially sustainable while advancing their technological capabilities.
Need for efficient data management and analytics: The capability to manage data effectively and harness its analytical insights is becoming crucial for U.S. public sector agencies seeking to enhance their service delivery and
make informed decisions. Managed service providers are offering comprehensive solutions that facilitate data storage, enhance security and provide robust analytics capabilities. These solutions enable agencies to organize and protect sensitive data, while extracting valuable insights that drive policy and operational improvements. By leveraging data analytics, these SLED organizations can better meet the needs of their constituents, improving overall service quality and responsiveness.
Heavy emphasis on improving citizen experience: Enhancing the citizen experience is a major impetus behind public sector IT investments. As citizens increasingly expect seamless and user-friendly digital interactions, modern IT infrastructure and managed services become essential for delivering accessible online services. These investments aim to streamline service delivery, making processes quicker and more intuitive for users. By utilizing advanced technologies and ensuring high performance, SLED agencies can foster greater engagement with citizens, ensuring
their needs are met efficiently and effectively, thereby improving satisfaction and trust in government services.
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