Report: State and local outsourcing to grow 75 percent by 2010

Spurred by the need to replace outdated systems and to offset anticipated future government IT workforce shortages, state and local governments are expected to increase their spending on IT outsourcing from $10 billion in fiscal 2005 to $18 billion by fiscal 2010, according to a report released today by market research firm Input.

Aging IT systems and the nearing-retirement-age workforce will be major factors that drive growth as much as 75 percent over the next five years, according to Input Inc., Reston, Va.

Spending should continue with moderate growth in fiscal 2006, after which pronounced growth will materialize as economic and workforce factors serve to outweigh the political pressure and risk aversion of governments. At that point, state and local governments will outsource more work.

Outsourcing recently generated significant political debate that temporarily stalled its growth at the state and local level. However, Input reports that trend is changing.

"Although this market remains volatile, improvements in the state governments' financial positions have eased pressures [that politicize] contract decisions," said James Krouse, manager of state and local market analysis at Input. This lets agencies "be more aggressive with their spending, particularly on the outsourcing of technical applications and systems."

Outsourcing requirements for applications management, platform operations and desktop services will increase rapidly and will be the catalyst for much of the growth, according to the report. However, lingering fears of relinquishing control of system operations to vendors will cause more comprehensive outsourcing efforts, such as business process outsourcing, to grow less significantly, the report states.