IRS Management: Formidable Challenges Confront IRS as It Attempts to
Modernize (Testimony, 07/22/1999, GAO/T-GGD/AIMD-99-255).

On the one-year anniversary of the IRS Restructuring and Reform Act of
1998, this testimony discusses the management challenges confronting IRS
as it modernizes its organization and reforms its culture. The IRS
Commissioner has painted a compelling picture of what he wants IRS to
become--a fully modernized agency providing top-quality service to
taxpayers. Given the reforms that are planned, it should surprise no one
that IRS--an agency with a long history of stovepipe management and a
culture driven by enforcement statistics--will be challenged to
accomplish so ambitious an agenda. In GAO's view, the modernization
effort has the potential to deliver better service to taxpayers. IRS'
agenda, however, is both ambitious and high risk. GAO has been impressed
by the Commissioner's leadership and commitment to change as well as
IRS' efforts so far. But sustained progress will depend on IRS' managers
successfully marshaling the agency's resources, both human and systems,
to deal with that challenging agenda.

--------------------------- Indexing Terms -----------------------------

 REPORTNUM:  T-GGD/AIMD-99-255
     TITLE:  IRS Management: Formidable Challenges Confront IRS as It
	     Attempts to Modernize
      DATE:  07/22/1999
   SUBJECT:  Performance measures
	     Personnel management
	     Federal agency reorganization
	     Information resources management
	     Reengineering (management)
	     Personnel evaluation
	     Tax administration systems
	     Customer service
	     Systems conversions
IDENTIFIER:  IRS Taxpayer Compliance Measurement Program
	     IRS Taxpayer Service and Treatment Improvement Program

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    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 10:00 a.m. EDT             IRS MANAGEMENT on Thursday
    July 22, 1999              Formidable Challenges Confront IRS as
    It Attempts to Modernize Statement of James R. White, Director Tax
    Policy and Administration Issues General Government Division
    GAO/T-GGD/AIMD-99-255 Statement IRS MANAGEMENT:  Formidable
    Challenges Confront IRS as It Attempts to Modernize Mr. Chairman
    and Members of the Subcommittee: I am pleased to be here today on
    the 1- year anniversary of the Internal Revenue Service (IRS)
    Restructuring and Reform Act of 1998 (Restructuring Act)1 to
    discuss management challenges that IRS faces in modernizing its
    organization and reforming its culture. As my testimony
    underscores, the challenges that the agency faces in implementing
    these reforms are no less significant than the value of the
    improvements that could be achieved. Depending on the outcome of
    IRS' efforts, enactment of the Restructuring Act may prove to be a
    significant turning point in the history of IRS. Its passage
    signaled Congress' strong concern that IRS had been
    overemphasizing revenue production and compliance at the expense
    of fairness and service to taxpayers. It also mandated changes to
    improve the situation. Among other things, the Restructuring Act
    required IRS to (1) adopt a new mission statement to place greater
    importance on serving the public and meeting taxpayer needs, (2)
    develop and implement a reorganization plan to include the
    establishment of new operating units serving particular groups of
    taxpayers having similar needs, (3) conduct training programs to
    ensure that managers and frontline employees are schooled in the
    importance of customer service and have the skills to provide it,
    and (4) carry out numerous specific actions to enhance taxpayers'
    rights. Commissioner Rossotti has embraced the spirit of the
    Restructuring Act and provided a compelling vision of what he
    wants IRS to become-a fully modernized agency providing top-
    quality service to taxpayers. The Commissioner has more than a
    vision, however. In addition to a new mission statement and
    supporting strategic goals,2 he has also outlined and begun to
    implement a modernization strategy that includes five
    interdependent components--what IRS has dubbed its "five levers of
    change." The five components are (1) revamped business practices,
    (2) organizational restructuring, (3) management roles with clear
    responsibility, (4) balanced measures of performance, and (5) new
    technology. If successfully implemented, the modernization
    strategy could 1 P.L. 105-206 (July 22, 1998). 2 IRS' new mission
    statement reads, "Provide America's taxpayers top quality service
    by helping them understand and meet their tax responsibilities and
    by applying the tax law with integrity and fairness to all." IRS'
    supporting strategic goals are to (1) provide top quality service
    to each taxpayer, (2) provide service to all taxpayers by applying
    the law with integrity and fairness, and (3) increase productivity
    by providing a quality work environment for its employees. Page 1
    GAO/T-GGD/AIMD-99-255 Statement IRS MANAGEMENT:  Formidable
    Challenges Confront IRS as It Attempts to Modernize fundamentally
    change IRS' culture to one that embraces customer service as a
    core organizational value. Given the reforms that are planned, it
    should surprise no one that IRS-an agency with a long history of
    stovepipe management and a culture driven by enforcement
    statistics-will be challenged to accomplish so ambitious an
    agenda. IRS has a poor track record for implementation, and many
    of its past efforts would be considered modest in comparison to
    the current modernization. My statement today is based on our past
    work and our ongoing reviews of IRS' reorganization process, its
    performance management system, and systems modernization efforts.
    My statement makes the following points. *  We agree with the
    Commissioner that the various components of IRS' modernization
    must be implemented in an integrated fashion. Simply restructuring
    the organization, for example, without concurrent revisions to
    work processes and related information systems, will do little to
    improve the quality of service being provided to taxpayers.
    However, successfully implementing such a comprehensive
    modernization strategy, while continuing the business of day-to-
    day tax administration, will push IRS managers and staff to their
    limits. Particularly important will be the capacity of middle
    managers to lead and manage comprehensive change. *  No matter how
    much IRS changes its organization, work processes, and information
    systems, its ability to fundamentally change the way it interacts
    with taxpayers hinges on its ability to ensure that employees
    demonstrate the desired attitudes and behaviors. A results-
    oriented approach to managing human capital has the potential to
    deliver such a result. To fully realize this potential, IRS must
    finish developing key organizational performance measures, deal
    with an employee evaluation process that is not currently aligned
    with IRS' new mission, and develop and deliver a comprehensive
    training program for both frontline staff and middle managers. *
    IRS continues to face formidable system modernization challenges.
    They include (1) completing the modernization blueprint that IRS
    issued in May 1997 to define, direct, and control future
    modernization efforts; (2) establishing the management and
    engineering capability to build and acquire modernized systems;
    and (3) investing in small, low-risk, cost- effective
    modernization increments. The key to effectively addressing these
    challenges is to ensure that long-standing modernization
    management and technical weaknesses are corrected before IRS
    invests Page 2
    GAO/T-GGD/AIMD-99-255 Statement IRS MANAGEMENT:  Formidable
    Challenges Confront IRS as It Attempts to Modernize large sums of
    modernization funds. IRS recently initiated appropriate first
    steps to address these weaknesses via its initial modernization
    expenditure plan that represents the first step in a long-term,
    multi-increment modernization. One great strength of IRS'
    modernization strategy is its comprehensive Ability to Manage and
    approach to change. If implemented in an integrated manner, the
    five Integrate the                     levers of change can
    fundamentally alter the way IRS interacts with taxpayers. However,
    this comprehensive approach also presents a major Interdependent
    challenge for IRS. Effectively implementing such a broad and
    complex set Change Efforts Is                 of interdependent
    changes will strain IRS managers and staff. Having to do Critical
    to IRS' Success so while continuing to operate the existing tax
    administration process will strain them even further. The
    Commissioner believes, and we agree, that to effect real change,
    IRS must address all five components of its change strategy
    concurrently because the components are interdependent. Simply
    restructuring IRS, without concurrent changes in processes for
    interacting with taxpayers and in the measures that are used to
    assess those interactions, will have little impact on service to
    taxpayers. Similarly, it makes little sense to design new work
    processes without providing employees with the tools they need to
    effectively implement the new processes. For example, IRS cannot
    provide top-quality service to taxpayers who have questions about
    their accounts unless employees can quickly access a modern
    information system that contains accurate and up-to-date
    information on taxpayers' accounts. Undertaking all of the work
    associated with business and systems modernization while
    continuing to process returns, maintain taxpayer accounts, and
    enforce the tax law will push IRS managers and staff to their
    limits. Accordingly, the Commissioner and his senior executives
    are attempting, among other things, to set priorities and adjust
    time frames. For example, in light of the provision in the
    Restructuring Act that specified a goal of having 80 percent of
    all returns filed electronically by 2007, the Commissioner
    adjusted the sequencing of information system development efforts
    by accelerating electronic filing elements. For IRS modernization
    to succeed, however, middle managers will also have to play a
    role. Because of the magnitude of the proposed changes, these
    managers will have to take responsibility for developing many of
    the details of change initiatives and pushing the initiatives down
    through the organization. Particularly important is the capacity
    of middle managers to Page 3
    GAO/T-GGD/AIMD-99-255 Statement IRS MANAGEMENT:  Formidable
    Challenges Confront IRS as It Attempts to Modernize lead and
    manage comprehensive change. I will talk more about management
    capacity later. IRS will also have tough choices to make in
    balancing "stay-in-business" needs with long-term improvements.
    For example, IRS will have to evaluate the trade-offs between
    changing existing information systems to support or enhance
    current operations and waiting for the new business processes and
    systems to be rolled out. Based on over a decade of work, we
    believe that a results-oriented, performance-based approach to
    management can provide IRS with the tools it needs to meet the
    formidable challenges inherent in its comprehensive approach to
    change. We are heartened by the fact that the modernization
    strategy outlined by the Commissioner is consistent with such an
    approach. As noted earlier, reorganizing IRS alone will not
    fundamentally change the way IRS interacts with taxpayers. Indeed,
    our case studies of leading organizations using performance and
    accountability management principles found that the organizations
    had varied structures, but similar results-oriented management
    strategies.3 By integrating results- oriented management into the
    day-to-day activities and culture of the organization and holding
    managers accountable for doing the same, IRS can help avoid the
    danger of its reforms becoming hollow, paper-filled exercises.
    Among other things, results-oriented management includes (1)
    building, maintaining, and marshaling the knowledge, skills, and
    abilities of employees (i.e., human capital) and (2) developing
    and effectively using information systems to achieve program
    results. As discussed in the next two sections, results-oriented
    management of its resources, both human capital and information
    systems, poses significant challenges for IRS. New business
    processes, organizational structure, and technology-alone Managing
    for          or together-will not significantly improve service to
    taxpayers without Performance Poses     corresponding improvements
    in how IRS manages and develops its human capital. A results-
    oriented approach to managing human capital-an Significant Human
    approach that aligns employee performance management and training
    with Capital Challenges    IRS' new mission statement, strategic
    goals, and performance measures- has the potential to deliver such
    improvements. However, to realize the potential, IRS needs to
    overcome three challenges. First, a key organizational performance
    measure, the rate of taxpayer compliance with the tax laws, has
    not been developed. Second, a new employee appraisal 3Numerous
    reports in recent years have discussed results-oriented management
    principles and implementation of the Government Performance and
    Results Act (P.L.103-62) by federal agencies. A major report
    addressing these issues was Effectively Implementing the
    Government Performance and Results Act (GAO/GGD-96-118, June
    1996). Page 4
    GAO/T-GGD/AIMD-99-255 Statement IRS MANAGEMENT:  Formidable
    Challenges Confront IRS as It Attempts to Modernize system aligned
    with the organizational measures is years away from complete
    implementation. And third, training that addresses the needs of
    different employee groups, such as middle managers, has not been
    developed. Performance measures can create powerful incentives to
    achieve the Performance Measures    cultural and behavioral
    changes that will be needed for IRS to effectively perform its new
    mission. IRS has begun implementing a new set of organizational
    performance measures that are to balance customer satisfaction,
    employee satisfaction, and business results. However, some
    measures have yet to be developed. Developing a business results
    measure of taxpayer compliance4 that can be balanced with customer
    satisfaction will be particularly important. As IRS has stated, in
    the absence of such compliance measures, "informed decisions on
    strategies to encourage voluntary compliance . . . will be
    impossible, and the historic tendency to fall back on enforcement
    revenue as a measure of performance may reoccur."5 In a hearing
    held by this Subcommittee almost 2 years ago, we highlighted our
    concerns about overreliance on enforcement revenue as a measure of
    performance.6 We concluded that such overreliance could create
    undesirable incentives for IRS auditors to recommend taxes that
    would be unlikely to withstand a taxpayer challenge, imposing an
    unfair and unnecessary burden on some taxpayers. In the past, IRS
    measured compliance through its Taxpayer Compliance Measurement
    Program (TCMP). Studies done under that program involved detailed
    audits of a statistically valid sample of tax returns. IRS
    discontinued these studies because of concerns about the
    additional burden placed on the taxpayers who were the subjects of
    the detailed audits. Since then, IRS has not identified a viable
    substitute for TCMP studies to assess overall compliance. Without
    a measure of taxpayer compliance, IRS cannot balance business
    results with customer satisfaction. Further, taxpayer compliance
    studies have been used to help IRS target audits on the most
    noncompliant taxpayers. Consequently, the lack of current
    compliance data could 4Taxpayer compliance is the extent to which
    taxpayers file required returns, correctly determine their tax
    liability, and pay the taxes they owe. 5Modernizing America's Tax
    Agency (IRS Publication 3349, Feb. 1999, pp.44-45). 6Tax
    Administration: Taxpayer Rights and Burdens During Audits of Their
    Tax Returns (GAO/T-GGD- 97-186, Sept. 26, 1997). Page 5
    GAO/T-GGD/AIMD-99-255 Statement IRS MANAGEMENT:  Formidable
    Challenges Confront IRS as It Attempts to Modernize actually
    decrease service to taxpayers. IRS is concerned that increasingly
    out-of-date information on compliance will result in more and more
    compliant taxpayers being hit with unnecessary audits. For both
    these reasons, we believe that IRS needs a strategy for ensuring
    the availability of statistically valid compliance data, while
    limiting the burden that collecting such data imposes on
    taxpayers. Because IRS' current employee evaluation process is not
    aligned with its Employee Evaluation    new mission and does not
    support the culture that IRS hopes to create, it Process
    must be revised. Last year, we reported that 75 percent of IRS'
    revenue agents, tax auditors, and revenue officers believed that
    tax enforcement results affected their evaluations-despite an IRS
    policy prohibiting the use of such results in evaluating employee
    performance.7 Our ongoing review of the two most recent
    evaluations received by these employees bears out such
    perceptions. In examining a random sample of their evaluations, we
    found a strong emphasis on compliance compared to customer
    service. Moreover, when supervisors made comments on customer
    service, they sometimes seemed to equate good customer relations
    with success in obtaining full payment in every case. To
    illustrate, when discussing customer relations skills, one manager
    wrote in an employee's evaluation "Over the last year, the Service
    is emphasizing that payments be obtained at the conclusion of the
    examination. It can truly be said that the agent has kept to this
    philosophy. The agent always seeks to obtain full payment of the
    deficiency, penalties, and interest. This shows a strong
    commitment to the Service programs." IRS says that it recognizes
    the problems with the current evaluation process and the important
    role that employees will have in modernizing the agency. IRS
    expects to change the evaluation process when it revamps its
    entire performance management system. Although IRS is on the right
    track, it will be years before a new evaluation process is fully
    operational. IRS cannot afford to wait that long. It is frontline
    employees-not their supervisors or other IRS managers-who have the
    most direct and potentially confrontational interactions with
    taxpayers. Continued reliance on an evaluation process that fails
    to adequately balance service to taxpayers with compliance
    potentially could undermine the success of the entire
    modernization effort. Although organizational structure and
    systems are important, it is the attitudes and behaviors of
    employees that will ultimately affect taxpayers. 7 IRS Personnel
    Administration: Use of Enforcement Statistics in Employee
    Evaluations (GAO/GGD-99- 11, Nov. 30, 1998). Page 6
    GAO/T-GGD/AIMD-99-255 Statement IRS MANAGEMENT:  Formidable
    Challenges Confront IRS as It Attempts to Modernize Fortunately,
    there are opportunities for reinforcing the importance of serving
    taxpayers within the current evaluation process. During our
    ongoing review of the existing evaluation process, we identified
    several features, such as narrative comments and field visits,
    that supervisors do not use systematically when evaluating their
    employees. These features could be used to greater advantage to
    reinforce the importance of customer service among enforcement
    employees. For example, the narrative portion of an employee's
    written evaluation provides supervisors with an opportunity to
    focus on employees' customer service skills and contributions.
    Also, field visits that are to be conducted as part of the
    employee evaluation process could provide excellent vehicles for
    supervisors to directly observe employee-taxpayer interactions and
    to provide coaching and feedback to employees. Training has proven
    to be an important tool for agencies that want to Training
    change their cultures. To have this kind of impact, IRS' training
    will have to be comprehensive both in its subject matter and in
    who receives it. Training will need to (1) cover the new
    organizational structure, new business processes, and new
    information systems; (2) cover performance measures and the use of
    such measures to manage IRS; (3) be provided to all employees from
    frontline staff to senior managers; and (4) be aligned with the
    performance management system and new mission. For training to
    have real impact, it will have to be continuously reinforced in
    the day-to- day work environment. IRS is still defining its
    modernization-related training requirements and assessing its
    ability to deliver those requirements, but the plans we've seen
    thus far address all four of the issues outlined above. However,
    implementing all of this will be neither cheap nor easy. After
    reorganization, most frontline employees and their immediate
    supervisors are to be in the same or similar jobs. Job-specific
    training will be important, however, because IRS is beginning to
    implement significant changes to its organization, processes, and
    information systems. For example, in lieu of hiring a large number
    of seasonal employees to handle the return processing workload
    during the annual filing season, IRS plans to increase the number
    of permanent employees and expand their job responsibilities to
    include compliance work that they can do after the filing season.
    Those employees will have to be cross-trained so that they can
    handle both their return processing and compliance
    responsibilities. Other employees who will have to be cross-
    trained to handle the responsibilities envisioned by IRS' plans
    include (1) managers who are to supervise groups that include
    persons doing audit work and persons doing collection work and (2)
    employees, referred to as "tax resolution representatives," who
    are Page 7
    GAO/T-GGD/AIMD-99-255 Statement IRS MANAGEMENT:  Formidable
    Challenges Confront IRS as It Attempts to Modernize to provide an
    array of services, including certain audit and collection
    services, to taxpayers visiting IRS walk-in sites. This kind of
    cross- functional expertise is consistent with IRS' efforts to
    provide top-quality customer service. It remains to be seen
    whether employees can effectively fill these kinds of cross-
    functional roles, but it is clear that training will be a critical
    factor in their success.  Another factor will be the way training
    is reinforced outside the classroom, for example, by supervisors
    acting as role models. As I mentioned earlier, the changes
    envisioned at IRS are so comprehensive that the agency's top
    leadership cannot work below a very strategic level. Fundamentally
    changing the way IRS interacts with taxpayers depends on the
    capacity of lower-level managers, from frontline supervisors up
    through the senior executive service, to do the detailed planning,
    leading, and managing necessary for successful IRS modernization.
    These lower level managers must be skilled in planning,
    performance measurement, and the use of performance information in
    decision-making. Our work has shown that ensuring that IRS has the
    capacity it needs in this area will be a challenge. For example,
    in January 1998, IRS established a central Taxpayer Service and
    Treatment Improvement Program to oversee implementation of
    numerous customer service improvement initiatives that were on the
    books at that time. By January 1999, IRS had set priorities and
    assigned accountability for their completion to specific
    executives. However, when we reviewed 19 of the initiatives that
    had progressed past the planning and design phase, we found that
    many were missing basic management information such as completion
    dates and performance measures.8 Such basic management information
    should allow IRS to track progress toward goals and provide a
    better basis for organizational and management decisions. To their
    credit, IRS executives have been responsive to our findings and
    now have draft guidance for implementing our recommendations. Our
    point today is that such guidance should not have been necessary.
    Generating and using basic management information needs to become
    routine for all levels of IRS management. 8 IRS Customer Service:
    Management Strategy Shows Promise But Could be Improved (GAO/GGD-
    99- 88, May 5, 1999). Page 8
    GAO/T-GGD/AIMD-99-255 Statement IRS MANAGEMENT:  Formidable
    Challenges Confront IRS as It Attempts to Modernize The challenges
    that IRS faces in modernizing its tax systems are IRS Continues to
    Face significant, and the stakes are high. IRS' well-publicized,
    failed prior Formidable Systems                attempts to
    leverage information technology in administering our nation's tax
    laws serve as an alert to the significant challenges that lie
    ahead. The Modernization                     key to effectively
    addressing these challenges is to ensure that long- Challenges
    standing modernization management and technical weaknesses are
    rectified before IRS begins investing large sums of money. In
    1995, we reported on the weaknesses that were the root causes of
    IRS' past modernization problems, recommended ways to correct
    them,9 and designated the modernization as a high-risk or
    "challenged" federal program.10 Since then, we have reviewed IRS'
    actions to address our recommendations and strengthen its
    modernization capability, such as the development of a
    modernization blueprint in May 1997, and we have made additional
    recommendations in light of IRS' actions.11 The good news is that
    IRS' executive team, under the direction of the Commissioner and
    Chief Information Officer, have initiated appropriate first steps
    to begin addressing system modernization management and technical
    weaknesses. Last month, we reported on IRS' initial modernization
    expenditure plan.12 We concluded that the initiatives defined in
    the plan were consistent with our past recommendations for
    establishing effective modernization management and engineering
    capabilities and incrementally acquiring architecturally sound
    system solutions to satisfy validated business needs.
    Additionally, we found that the plan satisfied legislated
    conditions for systems modernization. The initial expenditure plan
    defines modernization initiatives for a 5-month period ending in
    October 1999 and thus represents the first incremental step in a
    long-term, multi-increment modernization process. Once
    implemented, this initial expenditure plan alone will neither
    fully implement our past recommendations nor eliminate the systems
    modernization weaknesses and challenges that our recommendations
    are 9 Tax Systems Modernization: Management and Technical
    Weaknesses Must Be Corrected If Modernization Is To Succeed
    (GAO/AIMD-95-156, July 26, 1995). 10 High-Risk Series: An Overview
    (GAO/HR-95-1, Feb. 1995). 11 For example, see Tax Systems
    Modernization: Actions Underway But IRS Has Not Yet Corrected
    Management and Technical Weaknesses (GAO/AIMD-96-106, June 7,
    1996) and Tax Systems Modernization: Blueprint Is a Good Start But
    Not Yet Sufficiently Complete to Build or Acquire Systems
    (GAO/AIMD/GGD-98-54, Feb. 24, 1998). 12 Tax Systems Modernization:
    Results of IRS' Initial Expenditure Plan (GAO/AIMD/GGD-99-206,
    June 15, 1999). Page 9
    GAO/T-GGD/AIMD-99-255 Statement IRS MANAGEMENT:  Formidable
    Challenges Confront IRS as It Attempts to Modernize intended to
    effectively mitigate. IRS leadership says that it understands this
    and is committed to fully implementing our recommendations and
    effectively addressing the many challenges that lie ahead. Our
    recommendations and the challenges still confronting IRS fall into
    the following three groups, each of which is discussed below: (1)
    completing the modernization blueprint; (2) establishing project
    management and system/software engineering capability; and (3)
    investing in small, low- risk, cost-effective modernization
    increments. Until our recommendations are fully implemented, we
    will continue to designate IRS' tax systems modernization as a
    high-risk and "challenged" federal program. In response to our
    1995 recommendations,13 IRS issued, in May 1997, its Completing
    the             modernization blueprint, including about 3,600
    high-level business Modernization Blueprint    requirements, a
    target enterprise systems architecture that described in general
    terms the future systems environment needed to satisfy the
    business requirements, and a general sequencing plan for
    transitioning from IRS' current systems environment to its future
    systems environment. In September 1997 congressional briefings and
    in a subsequent report,14 we concluded that the blueprint provided
    a solid foundation from which to define the level of detail and
    precision needed to effectively and efficiently build a modernized
    system of interrelated systems. At the same time, we noted that
    the blueprint was not yet complete and did not provide enough
    detail for building or acquiring architecturally compliant
    systems. Additionally, because the blueprint was developed before
    the Restructuring Act and the Commissioner's organizational
    modernization, we reported in January 1999 that the blueprint
    needed to be validated in light of these organizational and
    business process changes. IRS has acknowledged these limitations
    and plans to complete the blueprint. In fact, its initial
    expenditure plan defines initiatives intended to validate business
    requirements and provide missing architecture precision and detail
    for ongoing system initiatives. Additionally, the initial
    expenditure plan provides for a revised modernization sequencing
    plan as well as the selection of enterprise architectural
    standards in such areas as data base management, security,
    communications, user interface, and client and server platforms.
    13 GAO/AIMD-95-156, July 26, 1995. 14 GAO/AIMD/GGD-98-54, Feb. 24,
    1998. Page 10
    GAO/T-GGD/AIMD-99-255 Statement IRS MANAGEMENT:  Formidable
    Challenges Confront IRS as It Attempts to Modernize Completing the
    modernization blueprint poses a formidable challenge for several
    reasons. *  First, IRS' organizational and business restructuring
    is ongoing, meaning that both completion of IRS' enterprise
    systems architecture and revision of its sequencing plan must be
    closely coupled with and validated against these restructuring
    efforts. Doing so will not be easy and will require an
    unprecedented integration of IRS' business and systems
    organizational cultures. To do less presents the risk that
    modernized systems will not effectively and efficiently support
    IRS' core mission needs. *  Second, IRS has a series of enterprise
    architectural decisions that need to be made before investing in
    modernized systems, beginning with architectural principles (e.g.,
    Will users be supported regardless of geographic location? Will
    IRS' existing investment in mainframe technology be preserved?),
    followed by logical architectural characteristics (e.g., What data
    structure will facilitate business process reengineering efforts?
    Should a geographic or a business process "tiered" architecture be
    adopted?), and culminating in how technology will be physically
    implemented (e.g., What operating system, hardware platforms, and
    database management system standard should be used?). The long-
    term implications of these interrelated enterprise architectural
    decisions are enormous. If properly made and effectively
    implemented, these decisions can guide and constrain the
    architectural makeup of a secure, interoperable, scalable, and
    maintainable future systems environment. If not, IRS will likely
    remain mired in its currently inefficient and ineffective
    stovepiped systems environment. *  Third, IRS must minimize the
    number of new system development and acquisition projects that it
    undertakes until it addresses the above key architectural
    decisions.  Otherwise, IRS will be forced to align certain system-
    unique architectures with its "to-be-completed" enterprise
    architecture. A case in point is IRS' ongoing Integrated Personnel
    System project, which is part of a Treasury-wide effort that will
    use an Oracle database management system running on a UNIX
    platform.15 Once IRS' enterprise architectural decisions have been
    made, IRS will have to integrate this personnel system with its
    systems developed or acquired according to its enterprise
    architecture.  Depending on the extent of compatibility, this
    could mean that IRS will have to incur the cost of 15 A UNIX
    platform consists of UNIX operating system software (originally
    developed at AT&T's Bell Laboratories and commercially available
    from various companies) and compatible hardware, which together
    support the operation of application software. Page 11
    GAO/T-GGD/AIMD-99-255 Statement IRS MANAGEMENT:  Formidable
    Challenges Confront IRS as It Attempts to Modernize additional
    hardware and software associated with integrating the different
    products. IRS has historically lacked disciplined and structured
    processes for Developing Project        managing information
    technology (IT) projects and internally developing Management and
    software-intensive systems. In 1995, we made recommendations to
    correct System/Software           these weaknesses,16 and, in
    response, IRS defined (as part of its 1997 Engineering Capability
    blueprint) a systems life cycle framework that described the
    "cradle-to- grave" processes for managing IT projects and building
    systems. At the same time, IRS stated its intention to rely more
    on contractors to build modernized systems, and thus become a
    system/software acquirer rather than an in-house system/software
    developer as it had been in the past. To this end, IRS also stated
    that it planned to "partner with" a Prime Systems Integration
    Services (PRIME) contractor in the acquisition and integration of
    modernized systems. In February 1998, we reported that although
    the systems life cycle overview provided a reasonable framework,
    it was not yet complete and did not provide the needed specificity
    to adequately build modernized systems.17 For example, IRS did not
    have detailed process definitions for any of the systems life
    cycle phases. In addition, organizational roles and authorities
    had not been adequately specified, making it unclear who does what
    in each systems life cycle process and phase. We also reported
    that IRS had not yet defined and implemented the mature software
    processes, including software acquisition processes, that would be
    essential for IRS to effectively manage contractors under its
    strategy for acquiring, rather than developing, software-intensive
    systems. IRS has since hired a PRIME contractor, and in
    association with the PRIME, has initiatives under way that are
    intended to establish the requisite management and engineering
    capability needed to effectively modernize its systems. In
    particular, IRS' initial expenditure plan provides for
    establishing "enterprise life cycle" or ELC management and
    engineering processes. ELC is to be an adaptation of the PRIME
    contractor's commercially available systems life cycle management
    approach and associated tools, incorporating needs that are unique
    to IRS, such as key life cycle decision points. IRS concluded that
    adapting the PRIME contractor's commercially available methodology
    to meet IRS' needs would be less costly and faster than completing
    the systems life cycle 16 GAO/AIMD-95-156, July 26, 1995. 17
    GAO/AIMD/GGD-98-54, Feb. 24, 1998. Page 12
    GAO/T-GGD/AIMD-99-255 Statement IRS MANAGEMENT:  Formidable
    Challenges Confront IRS as It Attempts to Modernize contained in
    its 1997 blueprint. We reviewed the PRIME contractor's
    commercially available methodology and found that it meets the
    requirements specified in the blueprint's systems life cycle
    overview and is consistent with the approaches that successful
    private and public sector organizations use to manage large IT
    projects. In addition, IRS' initial expenditure plan provides for
    institutionalizing mature software/system acquisition processes.
    That is, as part of the ELC, IRS intends to define and implement
    software development and acquisition processes in accordance with
    Software Engineering Institute capability maturity model
    requirements.18 Among this maturity model's requirements are
    disciplined and rigorous processes, procedures, and practices for
    effectively acquiring software-intensive systems through the use
    of contractors, including processes concerning requirements
    development and management, contractor solicitation and selection,
    contractor tracking and oversight, and evaluation of contractor
    delivered products. Significant challenges still confront IRS in
    institutionalizing project management and software/system
    engineering rigor and discipline and thus putting in place the
    capability needed to effectively modernize. For example, the ELC
    processes, procedures, practices, handbooks, models, methods, and
    tools need to be established, which means that the contractor's
    commercially available methodology must first be tailored to meet
    IRS' needs. Next, IRS has to implement the ELC on its IT projects,
    which requires training IRS personnel on how to use and apply the
    ELC. Further, IRS will need to establish structures and processes
    to ensure that IT projects comply with the ELC. Compounding these
    challenges is IRS' simultaneous need to ensure that it effectively
    manages the PRIME and other contractors involved in each of the
    ongoing modernization projects, pending completion and
    institutionalization of the ELC.  For example, we reported in June
    199919 that IRS had not yet defined the respective roles of the
    Service and its modernization contractors. Consequently, IRS
    undertook an effort to develop a Concept of Operations document
    that defines the roles, responsibilities, authorities, structure,
    and rules of engagement for the PRIME, IRS, and other IRS support
    contractors.  To ensure that this important task is completed
    before modernization begins, we 18 This model was developed by the
    Software Engineering Institute at Carnegie Mellon University to
    evaluate an organization's software development or acquisition
    capability. 19 GAO/AIMD/GGD-99-206, June 15, 1999. Page 13
    GAO/T-GGD/AIMD-99-255 Statement IRS MANAGEMENT:  Formidable
    Challenges Confront IRS as It Attempts to Modernize recommended in
    our June report that IRS report on its progress in completing this
    task in its next modernization expenditure plan. To minimize the
    risk of IRS investing in systems before our Incrementally
    Investing in    recommendations were fully implemented, we have
    recommended every Modernized Systems            year since June
    1996 that Congress limit IRS' IT spending to certain cost-
    effective categories, such as small, low-risk, and cost-effective
    efforts that can be delivered in a relatively short time frame.20
    In IRS' fiscal year 1997, 1998, and 1999 appropriations, Congress
    limited IRS' IT spending to efforts consistent with these
    categories.21 Such an incremental approach to investing in
    modernized systems is used by leading public and private sector
    organizations. In addition, the Clinger-Cohen Act22 and Office of
    Management and Budget (OMB) policy23 endorse this approach to
    funding large system development investments. Using this approach,
    organizations take large, complex modernization efforts and break
    them into projects and subprojects that are narrow in scope and
    brief in duration.24 This enables organizations to determine
    whether a project delivers promised benefits within cost and risk
    limitations and allows them to correct problems before significant
    dollars are expended, which in turn mitigates the risk of program
    failure.25 Consistent with our recommendation for incremental
    investment, IRS has adopted a modernization investment strategy
    under which it is to first develop and implement the management
    and engineering capability to build modernized systems and then
    incrementally invest in manageable, discrete system initiatives
    that are to be specified in its revised sequencing plan. IRS'
    commitment to incremental investment management is the initial
    step. The real challenge is translating commitment into everyday
    practice. To do so, IRS must define structures and processes for
    project selection, control, and evaluation that specify, among
    other things, who is responsible and accountable for making
    investment decisions, the criteria 20 GAO/AIMD-96-106, June 7,
    1996. 21 P.L. 104-208, Sept. 30, 1996; P.L. 105-61, Oct. 10, 1997;
    and P.L. 105-277, Oct. 21, 1998. 22 P.L. 104-106, Feb. 10, 1996.
    23 Evaluating Information Technology Investments, A Practical
    Guide (Executive Office of the President, OMB, Nov. 1995) and OMB
    Memorandum M-97-02, Funding Information Systems Investments (Oct.
    1996), referred to as the "Raines Rules." 24 GAO Executive Guide:
    Improving Mission Performance Through Strategic Information
    Management and Technology, Learning From Leading Organizations
    (GAO/AIMD-94-115, May 1994). 25 Assessing Risks and Returns: A
    Guide for Evaluating Federal Agencies' IT Investment Decision-
    making (GAO/AIMD-10.1.13, Feb. 1997). Page 14
    GAO/T-GGD/AIMD-99-255 Statement IRS MANAGEMENT:  Formidable
    Challenges Confront IRS as It Attempts to Modernize that will be
    used to make decisions, the analysis and information upon which to
    base decisions, and the tools and methods to be used in performing
    the analysis and generating the information. IRS will also need to
    ensure that these structures and processes are institutionalized
    through training and enforcement. Central to IRS' incremental
    investment management strategy will be the need to break large
    system projects into a sequence of incremental builds that is
    economically justified on the basis of a compelling business case.
    Additionally, IRS will need to track and monitor whether each
    increment is producing promised benefits and meeting cost and
    schedule baselines and ensure that this information is reliably
    reported to executive decisionmakers. By doing so, organizations
    can address variances from expectations incrementally, before
    significant dollars are expended. To this end, we recommended in
    our June 1999 report26 on IRS' initial expenditure plan that IRS
    fully disclose in future expenditure plans its progress against
    incremental goals, deliverables, and benefit expectations. As it
    has with each of our recommendations aimed at mitigating the
    systems modernization challenges that it faces, IRS has agreed to
    do so. In summary, the modernization effort under way at IRS has
    the potential to deliver improved service to taxpayers. IRS'
    agenda, though, is both ambitious and high-risk. We have been
    impressed by the Commissioner's leadership and commitment to
    change as well as IRS' efforts to date. However, sustainable
    improvement in service to taxpayers will depend on IRS' managers
    successfully marshaling the agency's resources, both human and
    systems, to deal with that challenging agenda. Mr. Chairman, this
    concludes my prepared statement. I would be happy to answer any
    questions you or other Members of the Subcommittee might have.
    Contact and Acknowledgments For future contacts regarding this
    testimony, please contact James R. White at (202) 512-9110.
    Individuals making key contributions to this testimony included
    Randolph Hite, David Attianese, Deborah Junod, Gary Mountjoy,
    Agnes Spruill, and Lorne Dold. 26GAO/AIMD/GGD-99-206, June 15,
    1999. Page 15
    GAO/T-GGD/AIMD-99-255 Page 16    GAO/T-GGD/AIMD-99-255 Ordering
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