Hybrid Clouds Aid U.S. Public Sector's IT Transformation
State and local agencies turn to service providers for urgent system modernization under budget, workforce limitations, ISG Provider Lens® report says
Many agencies in the U.S. public sector are turning to hybrid cloud managed services to replace outdated legacy systems amid budget and staffing constraints, according to a new research report published today by Information Services Group (ISG) (Nasdaq: III), a global AI-centered technology research and advisory firm.
The 2025 ISG Provider Lens® Private/Hybrid Cloud — Data Center Services report for the U.S. Public Sector finds that state, local and educational (SLED) organizations are focusing their technology investments on modernization, cybersecurity and hybrid clouds. The growth of the SLED IT market is slowing due to limited resources and recent changes in the federal government. Despite these hurdles, 90 percent of SLED agencies are expected to adopt hybrid cloud models.
"U.S. public agencies are looking for IT modernization projects with measurable outcomes, provided through AI-powered tools and automation," said Nathan Frey, ISG partner and lead, U.S. Public Sector. "They are relying on managed service providers to administer their IT assets and supply the skills necessary for digital transformation."
Legacy systems in the public sector, some of them decades old, burden agencies with high costs and inefficiencies while keeping them from meeting constituents' evolving service expectations, the report says. Most agencies want to replace outdated systems with secure, scalable cloud-based solutions but lack the in-house expertise to do this. Managed service providers facilitate infrastructure upgrades for better IT performance, security and compliance, along with specialized knowledge to ensure applications gain the benefits of hybrid cloud environments.
As they transition to complex, modern IT architectures, public agencies are also embracing automation and AI for IT operations (AIOps), ISG says. These capabilities can identify potential issues early, preventing major failures, and automate repetitive tasks. AIOps also helps organizations sift through the large volumes of data the public sector generates to glean actionable insights and make useful predictions.
Data management is becoming critical for SLED agencies as they seek to deliver better services and make more informed policy decisions, the report says. Comprehensive solutions from managed services providers, encompassing data storage, enhanced security and advanced analytics, allow organizations to organize and protect sensitive data.
To remain financially sustainable while advancing their IT capabilities, public-sector agencies are implementing FinOps tools from service providers to control cloud costs, the report says. Many are also taking advantage of pay-as-you-go service contracts that let them align their IT expenditures directly with usage. Emerging automation capabilities are also reducing operating costs by streamlining processes.
"Advanced cloud service models enable public agencies to improve operations despite significant, ongoing resource limitations," said Shashank Rajmane, senior manager and principal analyst, ISG Provider Lens Research, and author of the report. "Ultimately, technology improvements allow them to make government processes quicker and more intuitive for users, fostering greater engagement with citizens."
The report also explores other private and hybrid cloud trends in the U.S. public sector, including the impact of complex, evolving IT regulatory requirements and a growing urgency to eliminate data silos for better data sharing among agencies.
For more insights into the cloud challenges facing U.S. public-sector agencies, along with ISG's advice for addressing them, see the ISG Provider Lens® Focal Points briefing here.
The 2025 ISG Provider Lens® Private/Hybrid Cloud — Data Center Services report for the U.S. Public Sector evaluates the capabilities of 38 providers across three quadrants: Managed Services, Managed Hosting and Colocation Services.
The report names Rackspace Technology as a Leader in all three quadrants. It names Ensono, Kyndryl, NTT DATA and Unisys as Leaders in two quadrants each. Accenture, CGI, Equinix, HPE, IBM, Infosys, Iron Mountain and TierPoint are named as Leaders in one quadrant each.
In the area of customer experience, Persistent Systems is named the global ISG CX Star Performer for 2025 among private/hybrid cloud data center service providers. Persistent Systems earned the highest customer satisfaction scores in ISG's Voice of the Customer survey, part of the ISG Star of Excellence™ program, the premier quality recognition for the technology and business services industry.
A customized version of the report is available from Unisys.
The 2025 ISG Provider Lens® Private/Hybrid Cloud — Data Center Services report for the U.S. Public Sector is available to subscribers or for one-time purchase on this webpage.
About ISG Provider Lens® Research
The ISG Provider Lens® Quadrant research series is the only service provider evaluation of its kind to combine empirical, data-driven research and market analysis with the real-world experience and observations of ISG's global advisory team. Enterprises will find a wealth of detailed data and market analysis to help guide their selection of appropriate sourcing partners, while ISG advisors use the reports to validate their own market knowledge and make recommendations to ISG's enterprise clients. The research currently covers providers offering their services globally, across Europe, as well as in the U.S., Canada, Mexico, Brazil, the U.K., France, Benelux, Germany, Switzerland, the Nordics, Australia and Singapore/Malaysia, with additional markets to be added in the future. For more information about ISG Provider Lens research, please visit this webpage.
About ISG
ISG (Nasdaq: III) is a global AI-centered technology research and advisory firm. A trusted partner to more than 900 clients, including 75 of the world's top 100 enterprises, ISG is a long-time leader in technology and business services that is now at the forefront of leveraging AI to help organizations achieve operational excellence and faster growth. The firm, founded in 2006, is known for its proprietary market data, in-depth knowledge of provider ecosystems, and the expertise of its 1,600 professionals worldwide working together to help clients maximize the value of their technology investments.
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