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Government cost cutting will inflate market for IT outsourcing, BPO

State and local governments will increase spending on IT outsourcing and BPO by about 10.6% for the next five years, according to one study.

Spending on IT outsourcing and business process outsourcing (BPO) by state and local governments will grow from nearly $12 billion in 2006 to about $20 billion in 2011, according to a recent report.

The report from Reston, Va.-based INPUT -- an analyst company whose goal is to help companies land IT and other contracts from government agencies -- projects that governments at the state and local level will overcome fears about outsourcing IT, such as security and privacy concerns.

But agencies will also be getting smarter about negotiating service-level agreements (SLAs), according to the report's author, senior analyst Michelle Miller. That will allow them to guard against having to ask for services beyond their SLAs, for which companies could traditionally charge a hefty sum, she said.

"Cost is always a concern [for governments]. The reason they're looking to outsourcing is from a cost-savings perspective," Miller said. "But today, [governments] have a better understanding of what their needs are and [are] able to put that in service-level agreements."

Miller said the growth represents a combination of IT outsourcing and BPO; she could not identify separate growth figures for each of those markets, or for specific technologies within IT.

But the hottest sector for IT outsourcing will be in data centers, where state governments may increase the frequency with which they follow the trend in the private sector by consolidating several sites, Miller said. Hosting companies will also find more demand, as agencies take precautions to minimize potential damage from disasters like terrorist attacks by having applications and data backed up or hosted offsite, she said.

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