Study: State and Local IT Outsourcing to Reach $23 Billion

Continuing fiscal pressure and the aging government workforce are significant factors driving state and local IT outsourcing from approximately $10 billion in FY 2003 to over $23 billion by FY 2008, according to a report released by Input.

"The opportunity to outsource non-core government competencies in information technology is becoming increasingly attractive to state and local governments within the current economy," said James Krouse, manager of Input's state and local market analysis. "The growth will become dramatic as retirements outpace the ability of governments to staff important technical functional areas."

Real prospects of shortages in seasoned government IT workers and the necessity to replace outdated legacy systems, combined with the widest gap between state revenues and GDP for more than 20 years, will push the government outsourcing market to a compound annual growth rate of 17 percent over the next 5 years, said the report.

Medicaid and Welfare management, major program areas that have repetitive processes and recurring transactions, will lead service areas for outsourcing. Krouse explained, "Increasing costs driven by regulations such as compliance with the Health Insurance Portability and Accountability Act (HIPAA) have led officials to turn internal systems over to outside vendors."

"The increasing political receptivity of outsourcing has enabled government officials to move processes outside and to focus on core competencies in government administration," said Krouse. "Considering the inability of the state and local governments to replace the departing workforce, there is no longer necessarily a stigma of outsourcing equaling lost jobs."