ISG Provider Lens™ Private Hybrid Cloud - Data Center Services - Colocation Services — U.S. Public Sector 2024

Examining affordable, adaptive and secure options for SLED hybrid cloud and data center needs

ISG research indicates that U.S. public sector organizations, including state, local and educational (SLED) agencies, are using colocation, managed hosting and hybrid cloud managed services 20 to 30 percent more than they were in 2020. This means that SLED agencies need more help than ever with private/hybrid cloud and data center environments.

Several factors drive this growth, including the following:

• Rising Need for modernization and cost effectiveness: SLED agencies face increasing pressure to do more with less. Legacy IT systems are reaching their end-of-life, requiring updates. At the same time, tight budgets and staff shortages make significant on-premises upgrades challenging. Private and hybrid cloud solutions offer a way to modernize infrastructure and applications, often with a pay-as-you-go model that helps manage costs.
• Increased focus on security and compliance: Cybersecurity threats are a constant concern for SLED agencies. Cloud providers can offer robust security features and expertise, along with compliance  certifications that meet specific data privacy regulations. Hybrid cloud models allow these agencies to keep sensitive data on-premises while leveraging the cloud for other applications.
• Shift to remote work and digital services: The pandemic highlighted the need for flexible work arrangements and accessible online services for citizens. Cloud-based solutions enable remote work for government employees and provide a scalable platform for delivering online services, improving constituent engagement.
• Shift away from owned data centers.

Key changes in service use and value include the following:

• Hybrid rules: For several years, SLED agencies explored a broad mix of public and private cloud  alternatives. Hybrid cloud models, including colocation, allow SLED agencies to leverage the benefits of both public and private cloud environments for different workloads.
• Demand for coordinated management: The IT talent shortage among SLED agencies is a significant challenge. Managed service providers are filling the gap by offering expertise in monitoring, control and management of these complex cloud environments.

This shift toward private and hybrid cloud is not without its disruptions. SLED agencies need to navigate complex security considerations and ensure compliance with regulations specific to the public sector. In addition, the availability of significant U.S. federal grant money for the improvement of SLED IT, agency  operations, infrastructure and other components has made the sector an attractive target for service providers. The resulting influx of providers has made their identification, qualification and selection even more challenging for potential clients.

Even so, the overall trend suggests a continued rise in adoption as SLED agencies leverage the agility, scalability, and cost-effectiveness of these cloud and data center solutions.

This ISG Provider Lens™ report summarizes the key developments in three core aspects of private/hybrid cloud and data center services that SLED organizations value: managed services, managed hosting and colocation. Each is examined briefly below, with current market insights and provider evaluation in the respective quadrant sections of this report.

Managed Services for the U.S. Public Sector

As cloud use increases, so does the range and number of services and providers availed. ISG market analysis predicts an average annual increase of 10–15 percent in the use of managed cloud services among SLED organizations through at least 2027.

The key areas where SLED agencies seek value through private/hybrid cloud MSPs include the following:

• Skills: Public sector IT departments yet, and increasingly, lack the in-house expertise to efficiently manage complex cloud environments, creating a demand for MSPs.
• Cost optimization: While clouds offer scalability and potential cost savings, managing them efficiently requires expertise that MSPs can provide.
• Legacy IT limitations: Modernization efforts expose the limitations of legacy systems, prompting a need for assistance to upgrade and move the applications on these systems to the cloud.
• Security concerns: Cybersecurity threats are a constant worry, and MSPs offer advanced security solutions and monitoring.

SLED-experienced MSPs are seeking to differentiate and add value for clients in this sector through service adaptation and refinement. Four areas where ISG sees the greatest potential value for SLED clients are:

• Increased specialization: MSPs are tailoring services to meet public sector specific needs, including  compliance with regulations and security.
• As-a-service models: Subscription-based models for cloud management, security and other services are gaining traction.
• Integration with new technologies: Leading MSPs are integrating services design, development, delivery and support with AI and automation for enhanced cloud management and security.
• Contracting improvements: The MSPs with experience in this sector recognize SLED contracting challenges and are developing or expanding their expertise while partnering with SLED sourcing and procurement organizations.

Managed Hosting Services for the U.S. Public Sector

Managed hosting is often seen as a compromise between the outsourcing of infrastructure and software versus the use of colocation services (or own data center resources), especially when the associated software or data cannot be moved to other cloud alternatives.

Managed hosting offers several advantages over colocation for public sector agencies in specific situations, including:

• Alternative to limited IT expertise: Managed hosting is ideal when an agency lacks IT management and support resources. The hosting provider handles server maintenance, security updates and troubleshooting, enabling the agency to focus on core functionalities.
• Scalability management: As with most outsourced cloud services, managed hosting offers on-demand scalability. Agencies can readily adjust server capacity based on fluctuating demands, avoiding the upfront investment required to purchase additional servers for colocation.
• Predictable costs: Managed hosting typically has a fixed monthly fee, making budgeting easier compared with colocation, where costs can fluctuate based on resource use and bandwidth requirements.
• Security concerns: Managed service providers specialize in data security. They offer features such as 24/7 monitoring and intrusion detection, which might be a burden for agencies to implement and maintain in a colocation setup.

Colocation Services for the U.S. Public Sector

As agencies shift an increasing number of applications out of legacy data centers, most find that some cannot be moved to a private or hybrid cloud or even to managed hosting platforms. A need to retain significant control over some of the existing software and data, combined with a lack of IT skills or adequate budget for significant data center resources, pushes agencies to consider colocation as an alternative.

As a result, the U.S. public sector is experiencing a surge in colocation adoption, accelerated by factors such as data growth, digital transformation and cloud integration. This trend aligns with ISG’s overall colocation market growth, which projected a healthy CAGR of 6.7 percent.

Public sector agencies are increasingly finding colocation to be a compelling solution due to several key benefits:

• Enhanced security and compliance: Colocation providers offer robust security features in compliance with government data security standards such as the FedRAMP.
• Cost-effectiveness: Colocation eliminates upfront CapEx and enables economies of scale, allowing public agencies to pay only per use.
• Scalability and flexibility: Agencies can easily add or remove servers as their needs evolve, ensuring optimal resource utilization.
• Disaster recovery capabilities: Colocation facilities provide geographically dispersed locations and redundant power supplies, minimizing downtime from disruptions.
• Focus on core competencies: By offloading data center management, public agencies can dedicate  resources to core government functions.

ISG expects the demand for colocation services in the U.S. public sector to rise further. Colocation offers a secure and reliable foundation for government agencies to navigate increasing data volumes, evolving security concerns and cloud adoption, ultimately driving successful digital transformation initiatives.

What Qualities Define a Leader Among Providers?

As noted above, ISG sees an ever-increasing number and range of service providers attempting to serve the U.S. public sector client organizations. While all are likely to have substantial capabilities, not all can be considered Leaders.

ISG notes that the providers that are likely to progress and be considered as Leaders can meet the current needs of clients in the sector, as and where required. Leaders may not always have the broadest and deepest portfolio, but they have offerings that are most suitable for their current and expected needs. They may not have the largest market presence, but their own presence within markets, including that of client and partner organizations, enables the delivery of significant business value to both parties.

The U.S. public sector’s acceptance of hybrid and private cloud, along with the growing role of managed services, is set to continue. As organizations in the sector strive to modernize, improve service delivery and navigate the security landscape, the demand for managed services, hosting services and colocation services with sector-optimized offerings will only intensify.

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