Public sector modernization: Why the cost of waiting is now greater than the cost of change

The biggest risk facing state and local governments is waiting too long to modernize. In a previous blog, I explored five trends shaping state and local government as AI, cloud and data change the way agencies fulfil their mission. Here, I explore one trend in greater depth: why the cost of delaying modernization now outweighs the cost of change.

For more than two decades, modernization has remained one of the most persistent challenges in state and local government technology. It ranked fourth on NASCIO’s 2026 State CIO Top Priorities, a report that reflects input from all 51 state and territory CIOs, and has appeared in the top 10 for 20 consecutive years. For many agencies, it has remained something to pursue when budgets align, resources become available or the next legislative cycle begins.

But that equation has fundamentally changed. The question is no longer whether agencies should modernize, but whether they can afford not to.

The truth is that it costs more to keep old systems running than to upgrade them. And modernization is not as expensive as before —agencies no longer have to undertake decade-long, high-risk replacement projects to deliver meaningful outcomes. When you factor in growing cybersecurity risks, rising public expectations and the groundwork needed for AI, the numbers make even more sense.  

The modernization equation has changed

State and local governments are now spending an estimated $160 billion on IT in 2026. And most of that money is spent on keeping legacy systems running rather than investing in new capabilities.

According to GovExec research, 51% of government organizations focus primarily on sustaining legacy systems rather than implementing new technologies — and 30% lack confidence in their IT infrastructure’s ability to adapt or scale to evolving needs.

Many state and local agencies continue to run mission-critical programs on technology that was built decades ago. The problem is that platforms and systems for departments such as unemployment insurance, Medicaid, tax administration, permitting, court systems or child welfare were never designed to support today's expectations for cybersecurity, data sharing, accessibility or AI.

The reality is that legacy platforms become more difficult to secure, more expensive to maintain and increasingly disconnected from emerging technologies. Agencies that delay modernization will struggle to adopt AI because their data and systems simply are not prepared.

Modernization is already delivering results

This example illustrates what’s possible with modernization: During the COVID-19 pandemic, one state faced an unprecedented surge in unemployment insurance claims. Ironically, at the time citizens needed government services the most, in-person interactions were no longer possible. The state had to rethink how to deliver services and how to operate. Rather than simply launching a digital portal, it redesigned business processes, modernized its data foundation and introduced new digital capabilities. Within 90 days, the percentage of people who gave up before completing their unemployment insurance application dropped from nearly 100% to less than 4%. The agency kept improving its processes and systems over the next few years, and became one of the state's best examples of successful modernization.

Today, some states and departments are making significant progress. For example, Departments of Motor Vehicles in several states have expanded online licensing and digital identity capabilities, while transportation agencies are increasingly using connected infrastructure and data to support planning and operations. In other states, revenue agencies have simplified tax filing and strengthened fraud detection, and health and human services organizations have modernized eligibility and case management systems.

These examples reflect a growing movement across government, demonstrating that meaningful modernization is achievable regardless of mission or function. And when agencies modernize, citizens benefit.

Modernization in government is different — and so are the solutions

Government agencies operate under a unique set of constraints that private sector organizations rarely face. Banks, retailers and insurance companies can redesign services, retire products or temporarily suspend operations while implementing major changes. Governments cannot stop issuing driver's licenses, processing tax payments or administering Medicaid while systems are upgrading. Mission-critical services must continue every day.

State and local agencies face unique challenges:

• Public accountability
  Every investment must withstand public scrutiny, legislative oversight and regulatory compliance while balancing the needs of taxpayers.
• Complex procurement and budget cycles
  Funding is often tied to annual or biennial appropriations, making long-term planning more difficult than in industries with greater financial flexibility.
• Legacy systems support essential services
  Many agencies depend on applications that have evolved over decades and support highly specialized programs. Replacing them requires careful planning without interrupting essential operations.

And, as in the private sector, workforce and organizational change management is key. Introducing new tools can be valuable, but employees also need new skills, new ways of working and confidence that changes support the agency's mission.

These aren’t excuses — they are realities that require a modernization approach built specifically for government. And they also explain why 98% of state and local government leaders say they will rely on external resources and partners to implement AI, recognizing that the expertise required to bridge legacy environments and modern capabilities doesn’t exist entirely in-house.

Cloud, AI and APIs are redefining modernization

While the constraints on public sector agencies are real, the modernization landscape has changed dramatically, even compared to five years ago.

Cloud-native platforms allow agencies to modernize incrementally instead of replacing entire systems at once. NASCIO research found that more than 88% of state agencies are now actively expediting cloud adoption, and 60% have already incorporated cloud into their operations. Thirteen states also report that the need to analyze data, modernize systems and enhance continuity of operations have become the top drivers of cloud planning — shifting away from “Should we use cloud?” to “How do we use it most effectively?”

AI-assisted development can help agencies analyze legacy applications, automate testing, generate documentation and simplify modernization planning, while APIs make it easier for systems to exchange information securely, reduce duplication and enable agencies to work together more effectively.

Together, these capabilities reduce much of the cost, complexity and risk traditionally associated with modernization. But technology alone isn’t enough. Modernization should also encompass operating models, governance, workforce development, data management, security and change management — all aligned with measurable mission outcomes. When people, processes and technology evolve together, modernization delivers lasting value.

Setting the record straight: Common modernization misconceptions

Several misconceptions continue to slow modernization efforts across state and local governments. Let’s address these one by one.

Misconception: Modernization requires one massive, multiyear project.

Reality: Today's modernization is modular. Agencies can modernize one application, one business process or one data domain at a time while continuing to deliver essential services. Early successes help build confidence, demonstrate value and support future investments. Alaska’s 700-application cloud migration and Colorado’s multiyear data center project both followed this incremental playbook.

Misconception: Modernization is too expensive.

Reality: Maintaining aging systems often costs more than modernizing them. Hidden expenses include technical debt, growing cybersecurity risks, workforce shortages, rising maintenance costs and operational inefficiencies. Iowa’s projected half-billion in savings and Pennsylvania’s $37 million in documented savings tell a different story. State Scoop confirms that budget-constrained states are increasingly finding that modernization is the path to fiscal sustainability, not a threat to it.

Misconception: Modernization will disrupt mission-critical services.

Reality: Modern approaches emphasize phased implementation, cloud-native architectures and modular delivery. Agencies can continue operating while gradually replacing or modernizing systems, avoiding the disruption associated with traditional "rip-and-replace" initiatives. Alaska’s migration of over 700 applications occurred without interrupting a single resident-facing service.

Where to focus: Three priorities for agencies

For agencies starting their modernization journey, here are three priorities to focus on:

1. Build a trusted data foundation
   AI, analytics and connected services all depend on accurate, governed and accessible data. StateScoop research found that roughly 6 in 10 agency leaders say the number of data sources they rely on has grown by 20% or more over the past three years, while IT budgets have simultaneously shrunk. Modern applications cannot deliver meaningful value if they sit on fragmented, inconsistent information.
2. Prioritize services that have the greatest impact on the public
   Modernizing high-volume programs with clear, measurable outcomes creates visible improvements and builds organizational momentum.
3. Establish a modernization operating model
   Governance, cloud strategy, cybersecurity, workforce development and change management should be planned together rather than treated as separate initiatives. Technology succeeds when the organization evolves alongside it.

For agencies already well underway, here are three steps shift from implementation to maturity:

1. Continue modernizing business processes, not just applications.
2. Strengthen data governance so information can be shared securely across departments.
3. Make change management a continuous discipline by helping employees understand how modernization supports the agency's mission and equips them for new ways of working.

For state and local governments, the opportunity has never been greater. Today's technologies make modernization more practical, incremental and less disruptive than before. The question is no longer whether agencies can afford to modernize — it's whether they can afford to wait.

Also read:

• Rethinking public sector cloud strategy for the AI era
• Medicaid modernization: Four priorities for state directors

Learn why agencies choose NTT DATA:

• NTT DATA Selected to Modernize the Commonwealth of Virginia's Cloud Services Environment
• NTT DATA Selected to Empower Public Cloud Services for the State of Texas

Learn more at https://www.nttdata.com/en-us/industries/public-sector-and-education.