Obsolescence Over Modernization Part II: Implementing Reforms That Can Break the Cycle

Federal information technology (IT) modernization is difficult for a number of reasons. In Part I of this two-part series, we discussed the complexities that make IT modernization so challenging, including institutional and structural impediments, budgetary constraints, and technological challenges that have slowed progress. Many agencies rely on outdated and inefficient IT systems that can increase costs, reduce efficiency, and pose significant cybersecurity risks. Yet, misaligned bureaucratic incentives, rigid acquisition frameworks, and ill-designed oversight make change difficult despite substantial evidence demonstrating the benefits of IT modernization, such as lower costs and enhanced services.

In Part II, we examine opportunities to expedite reform and facilitate IT modernization throughout the federal government. To succeed, institutional, budgetary, and procurement reforms must be implemented to overcome risk aversion and bureaucratic incentives that perpetuate legacy systems and unnecessarily restrict the adoption of next-generation technologies that are more capable of accomplishing the goals of federal agencies across the breadth of the government. Drawing from examples of effective reforms and lessons learned, we identify actionable reforms that can effectively advance federal efforts to modernize legacy systems. We propose a three-pronged approach that addresses the challenges agencies face in modernizing their IT infrastructure by instituting funding and budgetary reforms, procurement and contracting reforms, and workforce development and technical capacity building.

I. Funding and Budgetary Reforms

The first prong of our proposed approach focuses on funding and budgetary reforms. Federal IT modernization is an ongoing effort that requires long-range planning to be effective. As identified in Part I, bureaucratic actors respond rationally to their incentive structures. When budget-conscious “conservers” face annual funding uncertainty, they prefer to maintain the existing system in order to minimize risk. By contrast, ambitious “climbers” seek out high-visibility projects that can be executed within a single budget cycle, thereby elevating their status more quickly. These preferences reinforce the “use it or lose it” mentality that prioritizes annual expenditures over multi-year strategic reform efforts. When congressional appropriations become a cycle of continuing resolutions, it exacerbates this problem by freezing spending and prohibiting the initiation of new programs. These factors bias decisions toward short-term solutions that compound long-term costs, which is why modernization strategies must be accompanied by funding mechanisms that reward long-term strategic thinking while maintaining fiscal accountability in order for agencies to make effective, multi-year investments in IT infrastructure.

Two key mechanisms can address these institutional biases: reforming and expanding multi-year funding mechanisms like the Technology Modernization Fund (TMF) and implementing milestone-based accountability measures that enable strategic investments while retaining fiscal discipline.

The Modernizing Government Technology (MGT) Act of 2017 created the TMF as a more predictable and longer-term funding mechanism for replacing or updating agency legacy systems. The TMF also provides oversight and assistance to ensure funding goes to high-priority projects with the greatest impact. As of 2024, the TMF had invested over $1 billion in 63 projects at 34 agencies. By providing opportunities for multi-year funding repaid from realized savings and establishing milestones for the release of transfers, the TMF has the potential to incentivize modernization in a fiscally responsible manner while breaking the annual appropriations cycle that reinforces legacy system maintenance. Rather than providing agencies with large upfront budgets consumed by operations and maintenance, the TMF rewards actual progress in modernization, creating incentives for project managers to focus on deliverable outcomes rather than budget maximization.

Although not all projects have yielded their projected savings, the program has enabled some agencies to reduce costs and improve efficiency. The Department of Homeland Security’s Customs and Border Protection (CBP) provides a compelling example of how agencies can leverage the TMF effectively. Facing the challenge of a 30-year-old collection tool housed on the agency’s last remaining mainframe solution, CBP used TMF support to develop the Automated Commercial Environment Collections module, completely retiring the legacy Automated Commercial System.

This modernization delivered substantial operational improvements and cost savings. The new system saves CBP over $30 million annually in legacy system operations and maintenance costs while dramatically improving functionality. Beyond cost savings, the modernization eliminated time-consuming manual processes like stuffing and mailing envelopes, allowing CBP’s workforce to focus on higher-value customs enforcement and trade-protection activities.

Yet TMF struggles, as other agencies illustrate how institutional obstacles can persist even with improved funding mechanisms. Projects that failed to meet savings projections likely suffered from inadequate technical leadership, unrealistic cost estimates, or resistance from agency personnel invested in legacy systems. The mixed success rate of TMF initiatives shows the limitations of pursuing funding reform alone when trying to overcome the vendor dependencies and bureaucratic inertia identified in Part I. These initiatives must be coupled with procurement and organizational reforms that address underlying institutional dynamics.

Some reforms are already underway for TMF. Rep. Nancy Mace (R-S.C.) and co-sponsor, Rep. Gerry Connolly (D-Va.), recently reintroduced the MGT Reform Act. The legislation reauthorizes the TMF and protects its long-term legacy by requiring any agencies unable to recoup the initial investment in cost savings to repay the funds borrowed. This legislation, which would sunset in 2031, also creates a new tool—the Legacy Federal IT Inventory—to track the progress of modernization efforts more accurately.

Additionally, the Trump administration seeks to restructure financing for the TMF to ensure its longevity. Rather than rely on appropriations from Congress, which has proved challenging, the administration’s budget proposed funding the TMF by authorizing agencies (with the approval of the Office of Management and Budget) to send any unobligated balances from discretionary funds to the TMF. In other words, federal agencies’ unspent dollars can be used for the TMF.

II. Procurement and Contracting Reforms

Even improved funding mechanisms and increased accountability cannot overcome the challenges associated with federal acquisition processes that hinder IT modernization. The second prong of our reform approach addresses these institutional barriers through reforms to procurement and contracting that provide acquisition professionals with greater flexibility and tools that promote competition. Often, the procurement process itself can limit the ability to update legacy software systems. As discussed in Part I, vendor lock-in can pose significant challenges to federal agencies, as vendors are incentivized to maintain profitable legacy system contracts while agencies become dependent on proprietary approaches and platform integration. This phenomenon emerges not because of malicious vendor behavior, but because contracting officers lack the flexibility and tools to structure competitive procurements that preserve future options. Sunk cost thinking exacerbates the problem, making it more challenging for agencies to consider investments in newer technologies, such as cloud computing or agentic artificial intelligence (AI) models, when existing contracts appear to offer short-term certainty.

A 2021 procurement decision by the Department of Agriculture illustrates the cost-inflating effect of acquisition constraints, even when viable alternatives exist. The agency spent $112 million more to purchase Microsoft Office instead of Google Workspace—a decision based not on key performance parameters, but on the fear that the cost of switching infrastructure providers might be higher. This example illustrates the economic trap identified in Part I, where agencies can begin to make contract decisions based on fears about future costs rather than on competitive merit.

Finally, overreliance on a single vendor can create a single point of failure, thereby increasing security risks. Should that vendor experience a security breach or go out of business, the agency itself could be compromised. This was the case when Russian threat actors compromised network management company SolarWinds, whose Orion platform was used widely by both federal agencies and the private sector. Attackers hid malicious code within automatic system updates, leading to one of the most significant cybersecurity attacks in U.S. history. When agencies depend on a single vendor for critical infrastructure, compromising that vendor’s services poses a significant threat to the entire federal IT ecosystem.

Several reforms can be implemented to provide greater flexibility and promote long-term competition:

1. Encourage Competitive Contract Structures. Procurement policies should support multi-vendor and multi-cloud contract vehicles to prevent overreliance on a single provider.
2. Adopt Open Standards and APIs. Building systems on open standards and application programming interfaces (APIs) ensures different applications can communicate seamlessly regardless of the vendor. This modular architecture makes it easier to swap out components or migrate to a new provider.
3. Prioritize Open-Source Software. Utilizing open-source software reduces dependence on a single vendor, as no single company controls the code. This provides the government with greater transparency and the freedom to modify or host the software anywhere.
4. Design Loosely Coupled Systems. Agencies should transition away from monolithic systems toward “loosely coupled architecture,” which breaks large applications into smaller, independent services that are easier to update, migrate, or replace.
5. Develop a Clear Exit Strategy. Every new IT project should begin with a documented exit strategy that is maintained and updated throughout to minimize migration costs should another vendor prove more effective in achieving the agency’s mission.

Implementing these reforms requires overcoming the institutional resistance identified in Part I. This is addressed through the third prong of our proposed reform approach: developing the workforce capabilities necessary to reduce dependency on external contractors.

III. Workforce Development and Technical Capacity Building

Even with improved funding mechanisms and procurement reforms, agencies cannot effectively modernize without developing internal technical capabilities. The “conservers” and “climbers” within federal agencies often lack the technical expertise to evaluate vendor proposals effectively or manage complex IT projects. This knowledge gap perpetuates the consultant-heavy model that drives up costs while reducing agency control over critical systems.

Federal agencies must invest in building IT workforces capable of cloud engineering, agile development, and modern system architecture. This reduces dependence on external consultants for day-to-day operations while providing agencies with the technical literacy necessary to make informed procurement decisions. When agencies understand the technologies they are purchasing, they can better evaluate vendor proposals and design contracts that preserve competitive options.

The lack of internal technical capacity also undermines the procurement reforms outlined above. Agencies cannot effectively implement open standards or loosely coupled architecture without personnel who understand these concepts. Similarly, meaningful exit strategies require technical staff capable of evaluating the complexity and costs associated with migration. Without this expertise, agencies default to vendor recommendations that inevitably favor proprietary solutions and long-term service contracts.

Key workforce development priorities include:

1. Recruit and Retain Technical Talent. Federal agencies must compete with private-sector compensation packages to attract skilled IT professionals, particularly in emerging areas like AI, cloud architecture, and cybersecurity.
2. Enhance Technical Literacy at All Levels. Beyond hiring technical specialists, agencies need managers and procurement officials with a sufficient understanding of technology to make informed decisions and provide effective oversight.
3. Invest in Continuous Learning. Technology evolves rapidly, requiring ongoing training programs that keep federal IT staff current with industry best practices and emerging threats.
4. Strengthen CIO Authority. Chief information officers (CIOs) need sufficient organizational authority and budget control to implement modernization strategies and resist pressure from both internal “conservers” and external vendors seeking to maintain profitable relationships.

However, building internal capacity faces the same institutional obstacles identified in Part I. Career federal employees may resist changes that necessitate acquiring new skills. At the same time, contractors have incentives to maintain agency dependence on their services. Overcoming these barriers requires a sustained commitment to leadership and performance incentives that reward success in modernization rather than system uptime.

Conclusion

Often viewed as a technical challenge, federal IT modernization is much more than that. Effective solutions require dismantling of institutional structures that favor maintaining legacy systems over innovation. Despite the hundreds of billions spent on IT annually, agencies must rely on legacy systems due to misaligned incentives that reward risk aversion and budget maximization instead of strategic modernization.

Our three-pronged approach to reform addresses the institutional barriers outlined in Part I. Multi-year funding mechanisms, such as the reformed version of the TMF proposed by Rep. Mace, will counter the impulses of “conservers” to minimize short-term risk and compound long-term stagnation. Its milestone-based accountability mechanism will prevent “climbers” from pursuing high-visibility projects that yield little measurable modernization. Procurement reforms will release agencies from vendor lock-in, freeing them from expensive, proprietary relationships. Finally, workforce development will guarantee that agencies have sufficient in-house expertise to evaluate modernization approaches and manage transitions without consultants.

These three reforms are interdependent and mutually reinforcing. Funding mechanisms alone cannot overcome vendor dependencies without changes to procurement that promote competition and interoperability. Similarly, procurement reforms will fail without internal technical capacity to implement open standards and evaluate migration strategies. Agencies that lack technical expertise will continue to default to vendor recommendations regardless of available funding or procurement flexibility.

The current administration’s focus on government efficiency presents an unprecedented opportunity to implement comprehensive reform and enable IT modernization across the entire government. Policymakers must be aware that success requires sustained commitment that outlasts political transitions. True IT modernization projects will span multiple budget cycles and congressional sessions. Despite the difficulty and upfront costs, the alternative of relying on decades-old systems threatens both operational effectiveness and national security as competitors modernize their digital infrastructure.

Ultimately, effective IT modernization demands institutional transformation that aligns bureaucratic incentives with strategic objectives. Only by addressing the root causes of technological obsolescence can federal agencies deliver the efficient, secure, and cost-effective services American taxpayers deserve.