Hybrid Clouds Aid U.S. Public Sector’s IT Transformation – ISG - September 4, 2025

Many agencies in the U.S. public sector are turning to hybrid cloud managed services to replace outdated legacy systems amid budget and staffing constraints, according to a new research report published today by Information Services Group (ISG), a global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.

Shashank Rajmane, senior manager and principal analyst, ISG

“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 Most agencies want to replace outdated systems with secure, scalable cloud-based solutions but lack the in-house expertise to do this.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.”

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