Business Systems Modernization: Internal Revenue Service Needs to
Further Strengthen Program Management (12-FEB-04, GAO-04-438T).  
                                                                 
The Internal Revenue Service (IRS) has been grappling with	 
modernizing its computer systems for many years. IRS's current	 
program, commonly referred to as Business Systems Modernization  
(BSM), began in fiscal year 1999; about $1.4 billion has been	 
reported spent on it to date. While progress has been made, the  
program continues to face significant challenges and risks. In	 
recognition of these risks, IRS and a contractor recently	 
completed several comprehensive assessments of BSM, including one
of its Customer Account Data Engine (CADE) project, which is to  
modernize the agency's outdated data management system. At the	 
request of the Subcommittee on Oversight, House Committee on Ways
and Means, GAO's testimony will summarize (1) GAO's prior	 
findings and recommendations, along with those of the recent	 
assessments; and (2) actions IRS has taken or plans to take to	 
address these issues.						 
-------------------------Indexing Terms------------------------- 
REPORTNUM:   GAO-04-438T					        
    ACCNO:   A09269						        
  TITLE:     Business Systems Modernization: Internal Revenue Service 
Needs to Further Strengthen Program Management			 
     DATE:   02/12/2004 
  SUBJECT:   Computers						 
	     Cost overruns					 
	     Program management 				 
	     Schedule slippages 				 
	     Strategic information systems planning		 
	     Systems conversions				 
	     Tax administration systems 			 
	     IRS Business Systems Modernization 		 
	     Program						 
                                                                 
	     IRS Customer Account Data Engine Project		 

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GAO-04-438T

United States General Accounting Office

GAO Testimony

Before the Subcommittee on Oversight, Committee on Ways and Means, House
of Representatives

For Release on Delivery

Expected at 9:00 a.m. EST

Thursday, February 12, 2004	BUSINESS SYSTEMS MODERNIZATION

    Internal Revenue Service Needs to Further Strengthen Program Management

Statement of Robert F. Dacey Director, Information Security Issues

GAO-04-438T

February 12, 2004

BUSINESS SYSTEMS MODERNIZATION

Internal Revenue Service Needs to Further Strengthen Program Management

Prior GAO reviews have disclosed numerous modernization management control
deficiencies that have contributed to reported cost overruns and schedule
delays. The table below illustrates the degree to which costs and
completion dates for ongoing projects have grown from their initial
estimates. Reasons for such delays include inadequate definition of
systems requirements, increases in project scope, and underestimation of
project complexity. These impair IRS's ability to make future systems
investment decisions and delay delivery of benefits to taxpayers. GAO has
made a series of recommendations focusing on stronger program
management-and limiting modernization activities until such management
practices were in place.

IRS BSM Project Cost/Schedule Variance Summarya

Highlights of GAO-04-438T, testimony before the Subcommittee on Oversight,
House Committee on Ways and Means

The Internal Revenue Service (IRS) has been grappling with modernizing its
computer systems for many years. IRS's current program, commonly referred
to as Business Systems Modernization (BSM), began in fiscal year 1999;
about $1.4 billion has been reported spent on it to date. While progress
has been made, the program continues to face significant challenges and
risks.

In recognition of these risks, IRS and a contractor recently completed
several comprehensive assessments of BSM, including one of its Customer
Account Data Engine (CADE) project, which is to modernize the agency's
outdated data management system.

At the request of the Subcommittee

                              Cost       Revised Schedule  
                          variance estimated      variance       Revised 
                                   cost                        estimated 
          Project    (in           (in           (in       completion    
                     thousands)    thousands)    months)   date          
        Modernized                                                       
          e-File                                              3/31/04
          Rel. 1                                      +4.5 (initial      
                          +$17,057       $46,303           operationb)   

4/30/05 e-Services +86,236 130,281 +18 (full deploymentc) Customer Account
6/30/05d Data Engine Rel. 1 +36,760 97,905 +30d (full deployment)
Custodial Accounting Project TBDd Rel. 1 +72,058 119,219 TBDd (full
deployment)

on Oversight, House Committee on Ways and Means, GAO's testimony will
summarize (1) GAO's prior findings and recommendations, along with those
of the recent assessments; and (2) actions IRS has taken or plans to take
to address these issues.

www.gao.gov/cgi-bin/getrpt?GAO-04-438T.

To view the full product, including the scope and methodology, click on
the link above. For more information, contact Robert F. Dacey at (202)
512-3317 or [email protected].

Integrated
Financial System TBDd
Rel. 1 +53,916 153,786 TBDd (full deployment)
Customer Account
Management
Rel. 1 TBDe TBDe TBDe TBDe

Source: GAO analysis of IRS data.

a Projects ongoing as of 9/30/03.
b Initial operation refers to the point at which a project is authorized
to begin enterprisewide deployment.
c Full deployment refers to the point at which enterprisewide deployment
has been completed and a project is transitioned to
operations and support.
d Project schedules for the Customer Account Data Engine, the Custodial
Accounting Project, and the Integrated Financial System
are currently under review.
e To be determined. Work on the Customer Account Management project was
suspended following the completion of preliminary
design activities. No further work is planned until at least fiscal year
2005.

IRS has made important progress in implementing management controls,
establishing infrastructure, delivering certain business applications, and
balancing the pace of the program with the agency's ability to manage it.
Nevertheless, IRS needs to further strengthen BSM program management,
including fully implementing modernization management controls in such
areas as cost and schedule estimating.

The recent BSM assessments identified many weaknesses, consistent with
prior GAO findings, that contributed to the cost overruns and schedule
delays, and offered recommendations to address them. IRS has responded by
identifying 46 discrete issues to be resolved; according to the agency, 27
of these have been completed. Commitment of appropriate resources, top
management attention, and continuing oversight by Congress and others are
critical to the success of BSM.

Mr. Chairman and Members of the Subcommittee:

I am pleased to be here today to discuss the Internal Revenue Service's
(IRS) actions to modernize its computer systems. Although updated through
the years, IRS's set of computer systems is based on an architecture that
dates from the 1960s. This architecture has inhibited IRS's ability to
effectively and efficiently perform its mission of providing service to
taxpayers and enforcing the nation's tax laws. However, IRS's attempts to
modernize its computer systems and underlying architecture now span three
decades. Given the long history of continuing delays and design
difficulties, we previously designated IRS's modernization program as a
high-risk area in 1995.1 It remains so today.2

IRS's current multibillion-dollar effort, known as the Business Systems
Modernization (BSM) program, was initiated in fiscal year 1999. IRS
contracted with Computer Sciences Corporation (CSC) as the prime
contractor to assist with designing, developing, and integrating a new set
of information systems that were intended to replace IRS's aging business
and tax processing systems. To date, about $1.7 billion has been
appropriated for the program, including about $388 million for fiscal year

3

2004.

To facilitate congressional oversight of this program, annual
appropriations laws since fiscal year 1998 have mandated that
modernization funds not be available until IRS submits to the
congressional appropriations committees for approval a modernization
expenditure plan that satisfies six legislative conditions, including that
it be reviewed by us.4 We are currently reviewing the fiscal year 2004 BSM

1U.S. General Accounting Office, High-Risk Series: An Overview,
GAO/HR-95-1 (Washington, D.C.: February 1995).

2U.S. General Accounting Office, High-Risk Series: An Update, GAO-03-119
(Washington, D.C.: January 2003).

3P.L. 108-199, Div. F, Title II, Jan. 23, 2004. IRS uses the appropriated
totals to cover contractor costs related to the BSM program. IRS funds
internal costs for managing BSM with another appropriation. These costs
are not tracked separately for BSM-related activities.

4The other five legislative conditions are that the expenditure plan (1)
meets Office of Management and Budget's (OMB) capital planning and
investment control review requirements; (2) complies with IRS's enterprise
architecture; (3) conforms with IRS's enterprise life cycle methodology;
(4) is approved by IRS, Treasury, and OMB; and (5) complies with federal
acquisition rules, requirements, guidelines, and system acquisition
management practices.

expenditure plan. During our past reviews of such plans, we have noted
numerous modernization management control deficiencies and made
recommendations to correct them. Although IRS has made progress in
implementing our recommendations, BSM continues to face significant
challenges and serious risks. Recognizing these risks, IRS and CSC
recently completed several in-depth and more comprehensive assessments on
the health of the BSM program, including an independent technical
assessment of the Customer Account Data Engine (CADE) project, a project
critical to the success of BSM. IRS has developed an action plan to
address the assessments' recommendations, and has begun to act on it.

In my testimony today I will summarize our prior findings and
recommendations and those of the recently completed program assessments. I
will also discuss the actions IRS reports it has taken or plans to take to
address issues raised by these assessments.

In preparing this testimony, we relied on our prior reports and testimony
on IRS's systems modernization activities and BSM expenditure plans. We
also reviewed and analyzed information contained in the BSM expenditure
plan for fiscal year 2004; Carnegie Mellon University Software Engineering
Institute's (SEI) independent technical assessment of CADE; reports on the
BSM program by the Treasury Inspector General for Tax Administration and
the IRS Oversight Board; and IRS briefing materials (1) analyzing the root
causes of BSM project cost increases and schedule delays, (2) independent
reviews of CSC's business processes and IRS's procurement practices, and
(3) IRS's action plan to address issues identified by the reviews. We did
not independently validate planned projects' cost estimates or confirm,
through system and project management documentation, the validity of
IRS-provided information on the projects' content and progress. Our work
was performed during the past month, in accordance with generally accepted
government auditing standards.

Background 	The tax administration system that collects about $2 trillion
in revenues each year is critically dependent on a collection of obsolete
computer systems developed by the IRS over the last 40 years. IRS
envisions a future in which its tax processing environment will be
virtually paper-free, and up-to-date taxpayer information will be readily
available to IRS employees to respond to taxpayer inquiries. To accomplish
this, IRS embarked on its ambitious BSM program. BSM involves the
development and delivery of a number of modernized business, data, and
core infrastructure projects that are intended to provide improved and
expanded service to taxpayers

  IRS Has Made Improvements, But Systems Modernization Program Remains High-Risk

as well as IRS internal business efficiencies. Recognizing the long-term
commitment needed to solve the problem of obsolete computer systems,
Congress set up a special BSM account in fiscal year 1998 to fund IRS's
systems modernization efforts.

IRS initiated CADE as part of BSM, to modernize the agency's outdated and
inefficient data management system.5 IRS also sees this project as the
corporate data source enabling future customer service and financial
management applications. CADE is therefore IRS's linchpin modernization
project. In light of the projects that depend on CADE, as well as the many
interrelationships that are to exist among CADE and IRS's modernized
applications and among CADE and current IRS applications, the agency must
manage this critical project effectively. Without CADE, the business
systems modernization program cannot succeed.

IRS's attempts to modernize its aging computer systems span several
decades. This long history of continuing delays and design difficulties
led to our designating IRS's Tax Systems Modernization program, BSM's
predecessor, as a high-risk area in 1995.6 During the mid-1990s we
reported on several technical and management weaknesses associated with
Tax Systems Modernization, a program that began in the 1980s. These
weaknesses related to incomplete or inadequate strategic information
management practices; immature software development capability; incomplete
systems architecture, integration planning, system testing, and test
planning practices; and the lack of an effective organizational structure
to consistently manage and control systems modernization organizationwide.
We made a series of recommendations for correcting these weaknesses and
limiting modernization activities until they were corrected.7 IRS
subsequently discontinued the program after the agency had spent about $4
billion without receiving expected benefits. In fiscal

5The current system-referred to by IRS as the master files-contains
taxpayer account and return data. There are master files for individuals,
businesses, and employer retirement plans. A nonmaster file for taxpayer
data also exists that cannot be stored in the other master files due to
data format and space limitations.

6GAO/HR-95-1.

7U.S. General Accounting Office, Tax Systems Modernization: Management and
Technical Weaknesses Must Be Corrected If Modernization Is to Succeed,
GAO/AIMD-95-156 (Washington, D.C.: July 26, 1995) and Tax Systems
Modernization: Blueprint Is a Good Start, But Not Yet Sufficiently
Complete to Build or Acquire Systems, GAO/AIMD/GGD-98-54 (Washington,
D.C.: Feb. 24, 1998).

year 1999, IRS launched the BSM program. IRS contracted with CSC as its
prime systems integration services contractor for systems modernization,
helping it design new systems and identify other contractors to develop
software and perform other tasks.

In our reviews of IRS's BSM expenditure plans, we have identified numerous
deficiencies in the BSM program, including a continuation of the
weaknesses noted above. Also, a consistent challenge for IRS has been to
make sure that the pace of systems acquisition projects does not exceed
the agency's ability to manage them. In May and November 2000, we reported
that projects were in fact getting ahead of the modernization management
capacity that needed to be in place to manage them effectively.8 In
February 2002 we reported that such an imbalance was due to IRS's first
priority and emphasis being on getting the newer, more modern systems-with
their anticipated benefits to taxpayers-up and running.9 In so doing,
however, management controls had not been given equal attention and thus
had not kept pace. This emphasis on new systems added significant cost,
schedule, and performance risks that escalate as a program advances.
Moreover, these risks increased as IRS moved forward because of
interdependencies among projects, and the complexity of associated
workload activities to be performed increased dramatically as more systems
projects were built and deployed.

In addition, we identified other deficiencies in the BSM program,
including the need to establish processes that meet the level 2
requirements of the SEI's Software Acquisition Capability Maturity
Model,10 and to improve modernization management controls and
capabilities, such as those related to configuration management, risk
management, enterprise

8U.S. General Accounting Office, Tax Systems Modernization: Results of
Review of IRS' March 7, 2000, Expenditure Plan, GAO/AIMD-00-175
(Washington, D.C.: May 24, 2000) and Tax Systems Modernization: Results of
Review of IRS' August 2000 Interim Spending Plan, GAO-01-91 (Washington,
D.C.: Nov. 8, 2000).

9U.S. General Accounting Office, Business Systems Modernization: IRS Needs
to Better Balance Management Capacity with Systems Acquisition Workload,
GAO-02-356 (Washington, D.C.: Feb. 28, 2002).

10Carnegie Mellon University's Software Engineering Institute has
developed criteria, known as the Software Acquisition Capability Maturity
Model, for determining organizations' software acquisition
management effectiveness or maturity. A Level 2 organization has
established its basic project management processes in the following key
process areas: acquisition planning, solicitation, requirements
development and management, project management, contract tracking and
oversight, evaluation, and transition to support.

architecture implementation, human capital strategic management,
integrated program scheduling, and cost and schedule estimating.

In response to our recommendations, IRS has made important progress.
First, significant progress has been made in establishing the
modernization management controls needed to effectively acquire and
implement information technology systems. For example, IRS has

o  invested incrementally in its modernization projects;

o  	defined a systems life cycle management methodology, which IRS refers
to as the Enterprise Life Cycle;

o  	developed and is using a modernization blueprint, commonly called an
enterprise architecture, to guide and constrain its modernization
projects; and

o  	established processes that meet the level 2 requirements of the SEI's
Software Acquisition Capability Maturity Model.

Second, IRS has made progress in establishing the infrastructure systems
on which future business applications will run. For example, IRS has
delivered elements of the Security and Technology Infrastructure Release
to provide the hardware, software, and security solutions for
modernization projects. IRS has also built an enterprise integration and
test environment that provides the environment and tools for multiple
vendors associated with a release to perform integration and testing
activities.

Third, it has delivered certain business applications that are producing
benefits today. These applications include

o  	Customer Communications 2001, to improve telephone call management,
call routing, and customer self-service applications;

o  	Customer Relationship Management Examination, to provide off-theshelf
software to IRS revenue agents to allow them to accurately compute complex
corporate transactions; and

o  	Internet Refund/Fact of Filing, to improve customer self-service by
providing to taxpayers via the Internet instant refund status information
and instructions for resolving refund problems.

Fourth, IRS took steps to align the pace of the program with the maturity
of IRS's controls and management capacity, including reassessing its
portfolio of planned projects.

Nevertheless, IRS continued to face challenges to fully develop and
implement its modernization management capacity. Last June we reported
that IRS had not yet fully implemented a strategic approach to ensuring
that it has sufficient human capital resources for implementing BSM, nor
had it fully implemented management controls in such areas as
configuration management, estimating costs and schedules, and employing
performance-based contracting methods.11 We made several recommendations
to address those issues. Our analysis has shown that weak management
controls contributed directly to the cost, schedule, and/or performance
shortfalls experienced by most projects. Given that the tasks associated
with those projects that are moving beyond design and into development are
by their nature more complex and risky and that IRS's fiscal year 2004 BSM
expenditure plan supports progress toward the later phases of key projects
and continued development of other projects, systems modernization
projects likely will encounter additional cost and schedule shortfalls.
IRS will need to continue to assess the balance between the pace of the
program and the agency's ability to manage it.

Based on IRS's expenditure plans, BSM projects have consistently cost more
and taken longer to complete than originally estimated. Table 1 shows the
life cycle variance in cost and schedule estimates for completed and
ongoing BSM projects. These variances are based on a comparison of IRS's
initial and revised cost and schedule estimates to complete initial
operation12 or full deployment13 of the projects.

  Projects Continue to
  Incur Cost Increases
  and Schedule Delays

11U.S. General Accounting Office, Business Systems Modernization: IRS Has
Made Significant Progress in Improving Its Management Controls, but Risks
Remain, GAO-03-768 (Washington, D.C.: June 27, 2003)

12Initial operation refers to the point at which a project is authorized
to begin enterprisewide deployment.

13Full deployment refers to the point at which enterprisewide deployment
has been completed and a project is transitioned to operations and
support.

Table 1: IRS BSM Project Cost/Schedule Variance Summary Project

  Cost variance (in thousands) Reported/revised estimated cost (in thousands)

                                                Schedule variance (in months)

Reported/revised estimated completion date

                      Completed Projects Ongoing Projectsa

        Security and Technology       +$7,553 $41,287  +5       1/31/02       
             Infrastructure                               
               Release 1                                  (initial operation) 
      Customer Communications 2001    +5,310  46,420   +9       2/26/02       
                                                            (full deployment) 
    Customer Relationship Management  -1,938   7,375   +3       9/30/02       
                  Exam                                    
                                                            (full deployment) 
Human Resources Connect Release 1   +200   10,200    0      12/31/02       
                                                          (initial operation) 
     Internet Refund/Fact of Filing   +12,923 26,432  +14       9/26/03       
                                                            (full deployment) 

      Modernized e-File Release 1    +17,057 46,303  +4.5       3/31/04       
                                                          (initial operation) 
              e-Services             +86,236 130,281  +18       4/30/05       
                                                            (full deployment) 
            CADE Release 1           +36,760 97,905  +30b      6/30/05b       
                                                            (full deployment) 
      Integrated Financial System    +53,916 153,786 TBDb        TBDb         
               Release 1                                  
                                                            (full deployment) 
     Custodial Accounting Project    +72,058 119,219 TBDb        TBDb         
               Release 1                                  
                                                            (full deployment) 
      Customer Account Management     TBDc    TBDc   TBDc        TBDc         
               Release 1                                  

Source: GAO analysis of data contained in IRS's BSM expenditure plans.

aProjects ongoing as of 9/30/03.

bProject schedules for CADE, the Integrated Financial System, and the
Custodial Accounting Project are currently under review.

cTo be determined. Work on the Customer Account Management project was
suspended following the completion of preliminary design activities. No
further work is planned until at least fiscal year 2005.

As the table indicates, the cost and schedule estimates for full
deployment of the e-Services project have increased by just over $86
million and 18 months, respectively. In addition, the estimated cost for
the full deployment of CADE release 1 has increased by almost $37 million,
and project completion has been delayed by 30 months. In addition to the
modernization management control deficiencies discussed above, our work
has shown that the increases and delays were caused, in part, by

o  	inadequate definitions of systems requirements. As a result,
additional requirements have been incorporated into ongoing projects.

o  	increases in project scope. For example, the e-Services project has
changed significantly since the original design. The scope was

broadened by IRS to provide additional benefits to internal and external
customers.

o  	cost and schedule estimating deficiencies. IRS has lacked the
capability to effectively develop reliable cost and schedule estimates.

o  	underestimating project complexity. This factor has contributed
directly to the significant delays in the CADE release 1 schedule.

o  	competing demands of projects for test facilities. Testing
infrastructure capacity is insufficient to accommodate multiple projects
when testing schedules overlap.

o  	project interdependencies. Delays with one project have had a
cascading effect and have caused delays in related projects.

These schedule delays and cost overruns impair IRS's ability to make
appropriate decisions about investing in new projects, delay delivery of
benefits to taxpayers, and postpone resolution of material weaknesses
affecting other program areas.

Producing reliable estimates of expected costs and schedules is essential
to determining a project's cost-effectiveness. In addition, it is critical
for budgeting, management, and oversight. Without this information, the
likelihood of poor investment decisions is increased.

Schedule slippages delay the provision of modernized systems' direct
benefits to the public. For example, slippages in CADE will delay IRS's
ability to provide faster refunds and respond to taxpayer inquiries on a
timely basis.

Delays in the delivery of modernized systems also affect the remediation
of material internal management weaknesses. For example, IRS has reported
a material weakness associated with the design of the master files. CADE
is to build the modernized database foundation that will replace the
master files. Continuing schedule delays will place resolution of this
material weakness further out into the future. In addition, the Custodial
Accounting Project is intended to address a financial material weakness
and permit the tracking from submission to disbursement of all revenues
received from individual taxpayers. This release has yet to be
implemented, and a revised schedule has not yet been determined. Finally,
the Integrated Financial System is intended to address financial
management weaknesses. When IRS submitted its fiscal year 2003 BSM

  Internal and Independent Assessments of BSM Have Identified Significant
  Weaknesses and Risks

expenditure plan, release 1 of the Integrated Financial System was
scheduled for delivery on October 1, 2003. However, it has yet to be
implemented, and additional cost increases are expected.

Given the continued cost overruns and schedule delays experienced by these
BSM projects, IRS and CSC launched internal and independent assessments
during 2003 of the health of BSM as whole, as well as CADE. Table 2
describes these assessments.

Table 2: BSM Assessments Undertaken During 2003

Organization conducting Subject assessment Purpose

Root cause analysis IRS 	To review data from historical documents and
interviews to determine root causes for schedule delays and cost increases

PRIME review Bain and Company 	To identify root causes of breakdown in
CSC's business processes and engagement model and provide recommended
solutions

            IRS Office of Acquisition Solutions, To assess the efficiency and 
                                            Inc. 
              Procurement                            effectiveness of the IRS 
               Assessment                            procurement organization 
                                                     structure, employment of 
                                                                         best 
                                                 practices, management and    
                                                    administration, staffing, 
                                                                       and to 
                                                           briefly review BSM 
                                                                  contracting 

CADE assessment SEI 	To provide an independent technical assessment of
CADE program history and the feasibility of future plans

Source: IRS

The IRS root cause analysis, PRIME review, and the Office of Procurement
assessment revealed several significant weaknesses that have driven
project cost overruns and schedule delays, and also provided a number of
actionable recommendations for IRS and CSC to address the identified
weaknesses and reduce the risk to BSM. Deficiencies identified are
consistent with our prior findings and include

o  poorly defined requirements,

o  low program productivity levels,

o  project scope creep,

o  IRS/PRIME role confusion,

o  immature management processes,

o  ineffective integration across IRS, and

o  insufficient applications and technology engineering.

As noted, CADE release 1 has experienced significant reported cost
overruns and schedule delays throughout its life cycle, and has yet to be
delivered. SEI's independent technical assessment of CADE pointed to four
primary factors that have caused the project to get off track and resulted
in such severe cost and schedule impairments: (1) the complexity of CADE
release 1 was not fully understood; (2) the initial business rules engine
effort stalled; (3) both IRS and PRIME technical and program management
were ineffective in key areas, including significant breakdowns in
developing and managing CADE requirements; and (4) the initially
contentious relationship between IRS and PRIME hindered communications.
SEI also warned that CADE runs the risk of further trouble with later
releases due to unexplored/unknown requirements; security and privacy
issues that have not been properly evaluated (e.g., online transactions
are different from the way IRS does business today); dependence on an
unproven business rules engine14 software product; and the critical,
expensive, and lengthy business rules harvesting15 effort that has not yet
been started. SEI offered several recommendations to address current CADE
issues and reduce project risk in the future.

14A business rules engine translates business rules, or processing
criteria (e.g., income tax refunds of $x or more are held for
administrative review), into executable computer code which processes
transactions related to a tax form, and selects and executes correct rules
based on the tax year and tax form.

15Business rules harvesting refers to the process of extracting, defining,
and documenting tax processing criteria from a variety of sources,
including IRS subject matter experts, legacy system source code, the tax
code, and various other paper documents.

  IRS Is Acting to Resolve Issues Identified in the BSM Assessments

Based on these assessments, IRS identified a total of 46 specific issues
for resolution in the following six areas, and developed a BSM action plan
comprising individual action plans to address each issue:

o  	Organization and Roles. Immediate steps are needed to clarify
IRS/PRIME roles and responsibilities and clearly define decisionmaking
authorities.

o  	Key Skills & Strengthening the Team. Strengthened skills and
capabilities are needed in such key areas as project management and
systems engineering.

o  	Technology-Architecture & Engineering. More focus is needed to improve
current systems architecture integration.

o  	Technology-Software Development Productivity & Quality. Improvements
in product quality and productivity are essential to strengthening
software delivery performance.

o  	Acquisition. Contracting and procurement practices require major
streamlining to improve overall contract management.

o  	CADE. Delivery of CADE release 1 will require aggressive focus and
attention, and a business rules engine solution requires additional
evaluation.

These 46 issue action plans were assigned completion dates and an IRS or
PRIME owner was assigned to take the lead in implementing each plan. IRS
and PRIME each also assigned a senior-level executive to drive the
execution of the issue action plans, identify and help mitigate
implementation hindrances or roadblocks, and ensure successful completion
of all planned actions. To assess the efficacy of the BSM action plan,
MITRE was tasked with conducting an independent analysis and provided
feedback to IRS on the effectiveness of the specific issue action plans to
address the associated findings/recommendations and correct any problems
found.

IRS has reported making steady progress with implementing the BSM action
plan. According to the IRS BSM program office, as of late January 2004, 27
of the 46 issue action plans have been completed. Examples of completed
actions include (1) making business owners and program directors
accountable for project success; (2) assigning teams to investigate and
resolve problem areas on key projects such as CADE, the

Integrated Financial System, and e-Services; (3) aligning critical
engineering talent to the most critical projects; (4) increasing the
frequency of CADE program reviews; and (5) issuing a firm fixed-price
contracting policy.

Significant further work remains to complete implementation of the
remaining 19 open issue action tasks. Bain & Company-which conducted the
independent review of PRIME-has been hired to facilitate the
implementation of various issue action plans within the Organization and
Roles challenge area, while IRS has also contracted with SEI to conduct
further periodic reviews of the CADE project.

Additionally, the IRS Oversight Board recently issued a report16 on its
own independent analysis of the BSM program, which made several
observations and recommendations that are consistent with those discussed
here. IRS has conducted an analysis of this report to reconcile the
board's recommendations with those that are currently being addressed in
the BSM action plan. As a result, IRS plans to open two additional issues
and action plans to address (1) rationalizing and streamlining oversight
of the BSM program, and (2) determining and maintaining a manageable
portfolio of projects. IRS expects to complete the majority of the BSM
action plan by end of April of this year, and fully implement any
remaining open actions by the end of the calendar year.

Further, during 2003, the Treasury Inspector General for Tax
Administration performed several reviews related to management of the BSM
program and for specific BSM projects. These reviews identified several
issues, including those related to compliance with the defined management
and project development processes, full implementation of disciplined
project testing processes and procedures, IRS's cost and schedule
estimation process, and contract management. IRS management reaffirmed
their commitment to fully implement key management and project development
processes.

Concluding IRS's multibillion-dollar BSM program is critical to agency's
successful transformation of its manual, paper-intensive business
operations andObservations fulfilling its restructuring activities. The
agency has made important

16IRS Oversight Board Special Report, Independent Analysis of IRS Business
Systems Modernization, December 2003.

progress in establishing long-overdue modernization management
capabilities and in acquiring foundational system infrastructure and some
applications that have benefited the agency and the public. However, our
reviews, those of the Treasury inspector general, and the recently
completed internal and independent assessments of the BSM program clearly
demonstrate that significant challenges and serious risks remain. IRS
acknowledges this and is acting to address them.

To successfully address these challenges and risks and to modernize its
systems, IRS needs to continue to strengthen BSM program management by
continuing efforts to

o  	balance the scope and pace of the program with the agency's capacity
to handle the workload, and

o  	institutionalize the management processes and controls necessary to
resolve the deficiencies identified by the reviews and assessments.

Commitment of appropriate resources and top management attention are
critical to resolving the identified deficiencies. In addition, continuing
oversight by the Congress, OMB, and others, as well as ongoing independent
assessments of the program, can assist IRS in strengthening the BSM
program.

Meeting these challenges and improving performance are essential if IRS
and the PRIME contractor are to successfully deliver the BSM program and
ensure that BSM does not suffer the same fate as previous IRS
modernization efforts.

Mr. Chairman, this concludes my statement. I would be pleased to respond
to any questions that you or other members of the subcommittee may have at
this time.

Contacts and For information about this testimony, please contact me at
(202) 512-3317 or by e-mail at [email protected]. Individuals making key
contributions to Acknowledgments this testimony include Bernard R.
Anderson, Michael P. Fruitman, Timothy D. Hopkins, and Gregory C.
Wilshusen.

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