Market researcher predicts outsourcing growth

State and local governments will outsource more than $23 billion worth of their information technology needs by fiscal year 2008 as fiscal pressures and aging workforces combine to limit the in-house resources governments can devote to IT, according to a report by market watcher Input.

Outsourcing accounted for some $10 billion in IT contracting in fiscal year 2003, the report said — a 50 percent jump from the previous year.

With the economy recovering slowly and elections looming, 2004 will not see anywhere near that kind of growth, according to James Krouse, Input's manager of state and local market analysis. However, a big jump is expected in 2005 as the economy improves.

Outsourcing noncore government functions is prompted by a combination of expected retirements of experienced government IT workers over the next few years, and the biggest gap between state revenues and gross domestic product in more than 20 years, he said.

"Many of these outsourcing contracts are for three years and longer," Krouse pointed out, "so in the near-term, with the way their budgets are, governments see a big advantage to locking in the certainty of these outsourcing costs over those periods."

Services such as Medicaid and welfare management will likely lead the outsourcing surge as state and local officials try to comply with new regulations such as the Health Insurance Portability and Accountability Act (HIPAA), Krouse said.

Historical political resistance is eroding as people see more evidence of outsourcing's successes over the last few years, he said.

Brian Robinson is a freelance journalist based in Portland, Ore. He can be reached at hullite@mindspring.com.