Demand for IT and Mission-Support Services in Public-Sector Expected to Grow Five Percent Annually Through 2013

It's estimated that total U.S. public-sector spending on externally provided information technology (IT) and mission-support services will grow roughly five percent in the next five years, up from $66 billion in 2007 to approximately $90 billion in 2013. The increase reflects the public-sector's efforts to grapple with constrained budgets, under-funded mandates and the brain drain associated with the coming wave of retiring baby boomers.

While the U.S. public sector is collectively the second largest consumer of externally provided IT and mission-support services -- following the U.S. financial services industry -- certain segments such as state and local governments have lagged in the adoption of alternative service delivery models such as outsourcing. But times are changing and public-sector entities will have to change with them to meet mounting challenges, according to EquaTerra's 2Q08 Public Sector Information Technology (IT), Business and Mission Support Service Provider Pulse Survey, a survey of leading service providers and its own client-facing advisors. It's the first survey the business advisory firm has conducted focusing on all segments of the U.S. public-sector industry, including civilian, defense, healthcare, education and non-profit.

"Outsourcing is a broad term that covers a variety of options," said Glenn Davidson, managing director of EquaTerra's public-sector practice. "For example, several federal agencies already provide the day-to-day HR, financial management and IT services used by other governmental agencies. Sometimes similar services are provided via a public-private partnership and then there is direct outsourcing to third parties. No matter what the flavor, outsourcing can often provide fast, affordable access to much needed technology upgrades and business process improvements."

Taking a closer look at alternative ways to deliver core services is warranted because adhering to legacy operating models -- where all the work is performed internally on a unit-by-unit basis -- is costly, inefficient and rapidly becoming untenable, according to Stan Lepeak, managing director of research for EquaTerra. "Most public-sector managers are struggling to get the job done with outdated technology, cumbersome business processes and loss of institutional know-how as senior staff retires. Many see outsourcing as the most viable way to cope."

That attitude is reflected in increased public-sector demand for third-party services. Nearly half of the service providers polled in EquaTerra's Pulse indicated current market conditions are driving increased demand, despite the predictable pre-election slow down in anticipation of reallocation of government spending. Top-line finds:

• Demand up -- Thirty percent of the survey respondents said their 2Q pipelines were up quarter over quarter, while 63 percent reported 2Q pipelines held steady quarter to quarter. (Pipeline forecasts are indicative of deals that typically close over the next two to three quarters.)
• Demand predicted to stay strong -- Service providers were optimistic going forward, with 41 percent indicating they expect third-quarter demand to increase. Service providers operating in the healthcare segment of the public sector registered the highest levels of current pipeline and future demand growth.
• Highest demand for -- Project-based work, versus outsourcing, remains the preferred means to engage third-party service providers. Projects that deliver a near-term reduction in operating costs are also moving forward at an accelerated pace.
• Cost reduction key driver -- Forty-six percent of the service providers polled said the key driver in public-sector outsourcing efforts was cost reduction or avoidance, followed by process improvement and transformation (25 percent).
• Top-three functional areas -- Identified as mission-support services (46 percent), IT (29 percent) and HR (10 percent).
• Hottest emerging services -- Service providers offered a range of opinions. Overall IT modernization, including adoption of a ‘software-as-service model' and other ways to address migration from legacy IT systems. Services that helped public-sector entities deal with issues stemming from an aging workforce, including HR recruitment efforts and IT investments to automate various work tasks.