Amid growing budget constraints and a shortage of skilled personnel, many U.S. public sector agencies are actively shifting away from legacy IT systems and adopting hybrid cloud managed services, as highlighted in the newly released 2025 ISG Provider Lens Private/Hybrid Cloud Data Center Services report by Information Services Group (ISG).

According to ISG, state, local, and education (SLED) organizations are investing in IT modernization, cybersecurity, and scalable hybrid cloud solutions to meet increasing demands. Although the pace of growth in the SLED IT market is slowing due to limited resources and shifts in federal policies ISG projects that 90% of these agencies will adopt hybrid cloud models moving forward.

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“Public agencies are prioritizing IT modernization efforts that produce measurable results using AI tools and automation,” said Nathan Frey, ISG Partner and U.S. Public Sector Lead.

To overcome outdated infrastructure, many agencies are turning to managed service providers (MSPs). These providers play a critical role by managing IT assets, delivering automation tools, and offering expertise in digital transformation. As legacy systems grow increasingly costly and inefficient, agencies are recognizing the need for secure, scalable, and compliant cloud-based replacements.

Moreover, public agencies are adopting AIOps (AI for IT operations) to enhance system reliability and minimize downtime. These tools not only automate routine processes but also identify potential issues before they escalate. Additionally, AIOps allows agencies to derive valuable insights from vast amounts of public sector data, improving service delivery and predictive decision-making.

Data management is also becoming a priority for agencies aiming to make informed policy choices. MSPs are stepping in with end-to-end solutions that offer secure storage, advanced analytics, and enhanced data governance to protect sensitive public information.

At the same time, public agencies are seeking financially sustainable models. Many are leveraging FinOps tools to manage cloud expenses more effectively, opting for pay-as-you-go contracts that align IT spend with actual usage. Automation, meanwhile, continues to drive down operational costs.

“Despite limited resources, next-gen cloud services are enabling public agencies to modernize faster and engage better with citizens,” added Shashank Rajmane, Senior Analyst at ISG.

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The report evaluates 38 providers across three key service areas Managed Services, Managed Hosting, and Colocation. Notably, Rackspace Technology earned the “Leader” title in all three categories, with Ensono, Kyndryl, NTT DATA, and Unisys excelling in two each. Persistent Systems was also recognized for best customer experience globally.

FAQs

1. What are hybrid cloud managed services?

Hybrid cloud managed services combine public and private cloud infrastructures, managed by third-party providers. They enable organizations to scale securely, optimize performance, and maintain compliance all while reducing internal IT workload.

2. Why is IT modernization important for the public sector?

IT modernization helps public sector agencies replace outdated systems, reduce costs, improve service delivery, and meet rising citizen expectations using advanced technologies like AI, automation, and hybrid cloud platforms.

3. How do managed service providers support IT modernization?

Managed service providers offer the infrastructure, automation tools, security, and expertise that public agencies often lack in-house. They enable smooth cloud transitions and ongoing support for digital transformation initiatives.

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