State and local governments and educational institutions are adopting phased hybrid cloud strategies to modernize critical systems and support secure artificial intelligence (AI) deployments, according to an Information Services Group (ISG) report released on July 15.
The “2026 ISG Provider Lens Private/Hybrid Cloud – Data Center Services report for the U.S. Public Sector” found that agencies and educational institutions are moving away from wholesale cloud migrations in favor of staged modernization efforts designed to reduce operational risk.
Organizations are upgrading legacy systems that support payroll, health care administration, public safety, education, and citizen services while keeping essential operations running, ISG said in a press release.
“Wholesale cloud migration is no longer the standard strategy of agencies that need to modernize IT,” said Nathan Frey, ISG partner and public sector lead.
“There is a growing emphasis on ensuring continuity, accountability and long-term operational value,” Frey added. “Hybrid operating models allow agencies to update essential systems while maintaining the stability required for critical public services.”
Public sector organizations are also using private and hybrid infrastructure to expand AI initiatives involving sensitive workloads, according to the report. Those environments can give agencies greater control over data sovereignty, auditability, security, and operational oversight as they apply AI to education, citizen services, and public safety.
“Successful modernization requires balancing new infrastructure capabilities with the strict governance and operational discipline expected in public sector environments,” said Shashank Rajmane, ISG principal analyst and lead author of the report. “Service providers that combine hybrid cloud expertise with security guardrails and measurable operational outcomes for AI workloads are well positioned to meet these evolving requirements.”
Budget constraints and limited IT staffing are also driving demand for automation-led managed services. Agencies are looking to reduce manual work, improve system reliability, accelerate incident resolution, and preserve human oversight for critical decisions.
The report found that public sector customers increasingly expect transparent pricing and integrated financial operations, or FinOps, capabilities. Those tools can help agencies track cloud spending, forecast costs, and strengthen accountability for long-term technology investments.
ISG assessed providers across three quadrants: AI-ready infrastructure managed services, managed cloud hosting and resilient infrastructure services, and sustainable colocation services.
According to the press release, NTT DATA was named a leader in all three categories. CGI, Kyndryl, Rackspace Technology, and Unisys were named leaders in two categories. Accenture, Digital Realty, Equinix, HPE, IBM, Iron Mountain, TCS, and TierPoint were named leaders in one category.
ISG said the full report is available to subscribers or through a one-time purchase.
