Growth Slows In IT Outsourcing By Local And State Governments - InformationWeek

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IT Leadership // IT Strategy

Growth Slows In IT Outsourcing By Local And State Governments

Debate over offshore outsourcing limits states and municipalities from hiring outsourcers despite needs caused by aging workforce and legacy systems.

Blame it on the media and politicians.

State and local government saw a tiny uptick in money spent on IT outsourcing this year, reaching $11.3 billion, according to the government IT market-research firm Input in a report issued Tuesday.

Public confusion over the terms outsourcing and offshore outsourcing, the latter receiving wide coverage in the media, fueled fierce political debate during the November election, Input says. The fear of significant job loss to businesses overseas caused more than 30 states to introduce legislation within the past year to restrict or prohibit state and local government contract work from being performed outside of U.S. borders. Although the elections are over and the economy continues to improve, Input foresees these political debates lasting another one or two years.

Annualized growth rates in government IT outsourcing expenditures will be a mere 3% a year through 2009 when spending by state and local governments for outsourcing will hit $17.7 billion, Input estimates. "Retiring government employees, as well as archaic government legacy systems, are undeniable factors in the state outsourcing market," James Krouse, Input manager of state and local market analysis, said in a statement accompanying the report. "The increasing demand for outsourcing in the coming years will be borne out of necessity, which politics will be unable to refute."

According to the report, outsourcing sectors such as IT platform operations, applications services, applications management, and desktop services will grow rapidly during the next five years, driving much of the total market growth. Business-process outsourcing won't experience the rate of growth originally forecasted because of the continued political debate about turning over complete operational control to outside contractors.

"Outsourcing has long spurred political debates because of the fear of job loss and relinquishing control of internal systems," Krouse said. "With the government facing [a] workforce shortage, there isn't as much of a stigma associated with it now. Optimism that government workforces could be repopulated by fiscal year 2008 is unrealistic. Students entering the workforce now are drawn to the high-tech advanced applications and pay scales that the private sector provides."

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