Federal agencies are ramping up efforts to boost operational efficiency through digital transformation, yet a new Ernst & Young survey reveals persistent obstacles that threaten to stall progress. Released at the start of Fiscal Year 2026, the EY Government and Public Sector Federal Trends Report underscores how budget limitations, aging technology, and talent shortages are complicating modernization plans across the US government.
According to the survey of 131 senior leaders in finance, IT, and human resources, nearly nine in ten (89%) acknowledge significant hurdles to streamlining operations.
Top challenges include constrained funding (cited by 34%), obsolete IT systems (32%), and insufficient skilled staff (31%).
Despite these issues, every agency surveyed is pursuing efficiency measures this year.
Priorities center on strengthening cybersecurity defenses (44%), adopting tools such as artificial intelligence and machine learning (43%), and rolling out advanced data platforms (40%).
Digital transformation remains a core focus, but agencies appear stuck in a transitional phase.
While 81% of leaders rate their organizations highly for updating legacy systems, only 22% report that most IT infrastructure has completed its shift to modern platforms. Another 26% admit their setups are still predominantly outdated.
This gap highlights a broader “modernization limbo,” where pilot programs dominate but full-scale implementation lags.
Leaders estimate that moving an IT initiative from testing to widespread use often takes a year or longer, slowed by procurement delays and rising security demands.
AI stands out as a pivotal driver for greater efficiency and innovation.
An overwhelming 92% of respondents view the technology as essential for enhancing agency performance, and 88% see it as key to broader modernization goals.
Yet deployment is uneven: half of agencies have multiple AI projects fully operational, while 38% remain in pilot stages and 11% are still exploring options.
A striking 46% are focused on pinpointing practical use cases rather than scaling solutions.
The primary roadblocks to AI expansion include integrating new tools with legacy systems (48%) and a pronounced shortage of AI-trained personnel (44%).
Compounding these problems is weak oversight—only 38% of agencies maintain a cohesive, organization-wide governance framework for AI.
Without stronger policies, many initiatives risk remaining experimental rather than delivering tangible results.
EY Americas Government and Public Sector Federal Leader Paul Donato emphasized that technology upgrades alone cannot bridge the divide.
True advancement demands AI-compatible legacy environments, robust governance structures, and targeted investments in workforce development.
He described the core constraints as the “three S’s”: speed, skills, and scale. Agencies that successfully align these elements will shift from modest gains to transformative outcomes.
The research findings arrive amid ongoing pressures to deliver more with limited resources.
As federal organizations navigate post-appropriations realities, the report signals an urgent need to address human capital gaps and legacy burdens.
Bridging these divides could unlock AI’s full potential, accelerate digital transformation, and elevate operational efficiency across government. For the complete 2026 EY Federal Trends Report, detailed insights are available through EY’s resources on government modernization.