GAO REPORTS ON THE IRS July 22, 1999
--------------------------- 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. 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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