U.S. public sector agencies are increasingly adopting hybrid cloud managed services to modernize outdated IT systems while grappling with budget and workforce constraints, according to the 2025 ISG Provider Lens® Private/Hybrid Cloud — Data Center Services report. These solutions enable state, local, and educational (SLED) organizations to enhance efficiency, cybersecurity, and citizen services through AI-driven tools and automation.
90% of SLED agencies expected to adopt hybrid cloud models.
Rackspace Technology leads in all three ISG report quadrants.
Ensono, Kyndryl, NTT DATA, Unisys lead in two quadrants each.
Hybrid clouds address legacy system inefficiencies and costs.
AI and automation enhance IT operations and data management.
FinOps tools help agencies control cloud costs effectively.
Legacy IT systems, some decades old, burden public sector agencies with high costs and inefficiencies, hindering their ability to meet modern service expectations. “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. Hybrid cloud managed services offer scalable, secure solutions, enabling agencies to replace outdated infrastructure despite limited in-house expertise.
Public agencies are embracing AI for IT operations (AIOps) to proactively identify issues, prevent failures, and automate repetitive tasks. AIOps also enables agencies to analyze vast datasets for actionable insights and predictive decision-making. “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. These capabilities streamline processes and enhance service delivery for constituents.
The elimination of data silos is a growing priority for SLED agencies to facilitate better data sharing and informed policy decisions. Hybrid cloud solutions, supported by managed service providers, offer comprehensive data storage, enhanced security, and advanced analytics. These tools help agencies organize and protect sensitive data, ensuring compliance with complex IT regulations while improving inter-agency collaboration.
To maintain financial sustainability, agencies are adopting FinOps tools to optimize cloud costs and pay-as-you-go contracts to align IT expenditures with usage. Emerging automation capabilities further reduce operating costs by streamlining processes. These strategies enable agencies to modernize IT infrastructure while managing budget constraints effectively, ensuring long-term scalability and efficiency.
The 2025 ISG Provider Lens® report underscores the transformative role of hybrid cloud managed services in the U.S. public sector. By leveraging AI, automation, and expert providers like Rackspace Technology, Ensono, and Kyndryl, SLED agencies can overcome resource limitations, modernize IT systems, and deliver intuitive, citizen-focused services.
ISG 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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