Taming the IRS

Todd Grams has one of the most taxing assignments in government. As chief information officer at the Internal Revenue Service, he must rescue the latest multibillion-dollar effort to overhaul the agency's computer systems. Many CIOs have wrestled with the IRS, but none has had Todd Grams' combination of grim determination and federal management experience. He plans to win.

The current troubled effort to modernize began in December 1998, when the IRS launched an ambitious 15-year plan to change the way it does business. In the late 1990s, the agency reeled from charges of employee abuse and mismanagement. In congressional testimony and in the press, citizens told of tax collectors descending on the sick or the dying, threatening to take people to the cleaners if they didn't cough up for the Tax Man. Even more than usual, the agency was Public Enemy No. 1.

The 1998 plan was supposed to salvage the agency's reputation, turning the IRS into a modern, customer-friendly organization. It would replace its aged technology with fresh computers and networks to support a new storefront of sorts, sporting a toll-free help desk for questions and a slick Web site to let taxpayers file electronically. The technology would wire together an IRS reorganized from a vast, chaotic bureaucracy into four friendly, customer-focused business units. The old Tax Man was turning in his brass knuckles for velvet gloves.

But Murphy's Law prevailed. Today, the IRS Business Systems Modernization project is more than a quarter-billion dollars over budget. Its key component, renovation of the master database of taxpayer records, is more than three years behind schedule. Five other modernization-related components also are late and busting their budgets. The General Accounting Office and the independent IRS Oversight Board have written blistering assessments, pinning the breakdown on bureaucratic intransigence and managerial ineptitude. Key players in the project describe relations between the IRS and its main modernization contractor as caustic.

In February, modernization hit a wall. IRS Commissioner Mark Everson barred modernization contractor Computer Sciences Corp., a systems integration and outsourcing firm based in El Segundo, Calif., from working on two additional components of the project. Everson took action after CSC disclosed it wouldn't meet the deadline for a new electronic ledger and accounting system. Recognizing it has bitten off more than it can chew, the IRS has scaled back the number of projects in the modernization portfolio for next year, reducing spending by about 37 percent, Grams says.

Officials have struggled to figure out what has gone wrong with the overhaul, which was expected to cost $8 billion when completed. Now, Grams says, "It's time to start doing this right." And he just might pull it off. No stranger to the IRS, he served as chief financial officer for three years before taking the top technology job in June 2003.

Grams also has battled other federal behemoths, chiefly the Veterans Affairs Department, where he oversaw a $45 billion budget as assistant secretary for management-a role that included serving as CFO and procurement chief. He's a government lifer, having climbed through the ranks from GS-7 budget analyst at the Commerce Department fresh out of college in 1980. The IRS has chewed up would-be saviors from the private sector and other levels of government. But in Grams, it faces a federal management insider.

If Grams fails, the outcome could be dire. "The existing [tax] systems will become impossible to maintain, and at that point, the ability to administer our country's tax system will be in grave danger," the oversight board warned in December 2003."Such a risk to our national security is unacceptable."

Road to Breakdown

How did yet another wave of reform wind up on the rocks at the IRS? According to agency executives, CSC and others involved in the project, there are clear reasons, and they serve as warning signals for other government agencies mounting multibillion-dollar change projects-many of which also are coming undone.

Efforts to transform the IRS go back more than 20 years to the Carter administration's first attempt to replace agency computers, some of which were built in the 1960s. The IRS has tried twice-unsuccessfully-to replace the systems. But until the late 1990s, it never had attempted to restructure its business units at the same time. When Charles Rossotti took over as IRS commissioner in 1997, he made a two-pronged modernization his chief focus.

Rather than simply replace computers, Rossotti, a co-founder of one-time technology heavyweight American Management Systems Inc., wanted to change the culture and mind-set of the IRS. He restructured the agency, which had been built along regional lines, into business units focused on discrete groups of customers-individual taxpayers, small and large corporations and tax-exempt organizations. Rossotti and a cadre of senior executives mapped out the plan in what is commonly called "the blueprint," an all-encompassing architecture for a new IRS. It also would guide the technology upgrade, led by CSC.

But many things went wrong. CSC took responsibility for leading both change efforts. But it never married the softer business reorganization with the nuts-and-bolts task of replacing computers. In effect, the business overhaul went down one track, the technology project down another. One group spoke managementese, the other technospeak. Things fell apart as the right and the left hands failed to work together.

IRS officials recognized only too late that CSC lacked sufficient experience in business transformation, says Joyce Doria, a senior partner with Booz Allen Hamilton, the consulting firm the IRS hired to help develop the blueprint. As CIO Grams politely puts it, "This is not one of CSC's core competencies."

So why was CSC handed a job it couldn't do? That's one of the biggest unanswered questions in the IRS mess. It's likely that neither the government nor the company realized that replacing technology and old business practices require different sets of expertise and that CSC didn't have both.

What's more, the IRS had its own problems. Many front-line business unit managers-who ultimately would use the new technology-had little to no contact with CSC employees and their subcontractors, the people building the systems. As a result, CSC sometimes built programs and devices that managers didn't want or felt they couldn't use. Often the requirements for systems were rigid and technologically focused. "Build us a system that looks like this," IRS managers ordered, rather than telling CSC, "We need to accomplish the following tasks. Build something that makes it happen." Technical requirements also changed midstream, CSC executives say, causing more delays.

At the same time, CSC rushed some jobs, says Larry Levitan, the chairman of the oversight board's modernization committee. The company built some systems before their requirements were fleshed out in contracts. This was antithetical to the Rossotti blueprint, which prized planning above all else.

It didn't help that IRS officials were issuing some requirements haphazardly, but Levitan says CSC leaders never stopped them, either. "Their biggest failure is that they allowed the IRS to perform badly," Levitan says. "They should have yelled, 'Stop! No! We can't do it that way.' " The mayhem ensued for years because Computer Sciences "didn't have the balls to step up and say no," Levitan concludes.

Though phrasing it less colorfully, Grams concurs with that assessment and thinks CSC knows what it did wrong. The company "has recognized that one of their roles in the past would be to step up and tell us not to do something. . . . That's what we hired their expertise for. . . . That is a role that they have not filled aggressively enough."

For their part, CSC executives sound contrite. Computer Sciences has had problems accomplishing elements of modernization, say Paul Cofoni, CSC's head of federal business, and Michael Laphen, the company's president. But the blame can't be laid solely at the company's doorstep, they insist.

Modernization Mutiny

Modernization's biggest problems could have been remedied if IRS employees and managers had pitched in with the contractor team, Cofoni and Laphen contend, but front-line business managers rarely expressed much interest in CSC's work. The oversight board concurs, calling the managers' aloofness "inadequate business unit ownership." Grams, who says some managers did take active roles, admits that in other instances it "was a mistake" to assume that because IRS employees were good at tax administration they'd take quickly to project management. Grams' predecessors had problems, too. He is the third CIO in as many years.

IRS employees likely were skeptical that modernization really could work, having seen previous attempts fail, says Michael Dolan, former IRS deputy commissioner and Rossotti's right hand in writing the blueprint. Not all employees hated the idea of change, but they knew better than anyone that new technology had failed twice to make the IRS a stronger organization, Dolan says. So many employees clung to outmoded systems that, though cumbersome and rejiggered numerous times to keep up with changes in the U.S. Tax Code, at least got the job done. Laphen argues that intransigence crippled modernization.

CSC had no access to what he calls the "domain knowledge" of the IRS. In other words, seasoned career employees, the only people who knew how to make the Rube Goldberg systems work, didn't share their secrets with the CSC team. To hear Laphen tell it, CSC had taken command of a ship only to find the crew had mutinied. Those who knew how to kick and jimmy the boilers and switches sat on their hands.

In some cases, Cofoni says, CSC employees ceased working in the middle of a system upgrade when they came upon some previously undocumented modification made by IRS employees, perhaps years ago. Many were work-arounds to comply with new changes to tax laws. Whenever the company found them, data codes had to be rewritten and tested, putting work behind schedule, Cofoni says. IRS employees didn't jump out of their seats to help.

And that, says one 17-year IRS computer programmer, drove managers crazy. "We have total power over the machines. . . . Managers have none," says the programmer, who is fluent in the archaic ALC language in which the all-important master file is written. "It breaks their minds . . . because ALC is the most powerful language on Earth," says the programmer, who asked to remain anonymous. She describes her colleagues as "special people," "creative" and "nonconformist."

The programmer points out that the tax system has never crashed and credits its dying computer language, which, she says, is technically superior to modern languages. Few people in the United States can write ALC, and most programmers no longer learn it. The IRS programmer is contemptuous of managers, suspicious of their rumored desires to outsource people like her. Why would she help the managers write systems and programs that could put her out of a job? "I'm not going to sit down and help them do it," she says laughing.

Doria, the Booz Allen consultant, says modernization problems stem from lack of governance, a failure to decide who's in charge. Technology experts think in terms of things to build, she says. They're not versed in "change management," the art of guiding an organization in the throes of revolution. The IRS needed consultants like her to steer the ship, she says, while technologists like CSC could rebuild it. But pressed to give an example of when change managers have had better luck than technologists in overhauling a large organization, Doria struggles for an answer. There are pockets of success in many organizations, in and outside government, she says. But "I don't think there's anything of the dimension that we had at the IRS," she admits.

Which begs the question: If there has never been a project like transforming the IRS, then how can anyone judge it to be a failure?

Judging a Giant

Is it really fair, or even instructive, to hold IRS modernization to the standard of other business transformation projects, even large ones? In 2003, the IRS processed $1.9 trillion in taxes from more than 222 million returns. It has a nationwide network of offices, service centers and enforcement divisions. And it has to adapt to frequent changes in the tax code promulgated by Congress. Thus, the IRS is a giant bureaucracy beholden to the political winds.

Cofoni, the CSC federal boss, says the IRS project ranks "in the extreme upper end" of all such projects. Laphen, the company president, calls the project "the hardest one we've ever done. No question." This from a company that has modernized or worked for more than 150 of the world's largest banks, and has annual revenues of $14 billion. But nothing in CSC's experience prepared the firm for the IRS, Laphen and Cofoni say. Everything CSC knew-or thought it knew-about turning around huge organizations was chucked out the window.

No one involved in the sad saga of the IRS comes off clean, not even the oversight board. "Everyone is to blame," Levitan says. "CSC was starting work [in some cases] without contracts. That's ridiculous." Of Rossotti's grand blueprint, Levitan says, "The plan was pretty damn good, and it's still pretty damn good. [But] it's all about execution. Could anybody have done more? Yeah," he says, including the board. "We should have yelled earlier and louder."

Lately, yelling can be heard from other quarters. The FBI's modernization project to replace antiquated computers and install information-sharing technology also is faltering.

CSC was a lead contractor on a critical part of the Trilogy project to provide new FBI technology infrastructure, and was under pressure to meet an April 30 deadline. Laphen met with FBI Director Robert Mueller and gave him his personal assurance CSC would deliver-which it did, two days early. But other key elements of FBI technology modernization, including a new case management system, the province of another contractor, are running late.

Trilogy was salvaged when Mueller got involved personally and demanded quick action, Laphen says. It was the ultimate "senior-level buy-in" that management gurus insist is key in any modernization. But Mueller brought his influence to bear only after media accounts and congressional hearings laid bare the FBI's deficiencies. Following Sept. 11, the need to retrofit the bureau's technology became urgent.

In cases of huge mission pressures such as the FBI's or those of other large-scale modernizations such as the Navy Marine Corps Intranet, it's hard to imagine how a project can be saved simply because the person in charge demands it. NMCI, a plan to move Navy and Marine Corps computer systems onto a common network, now is so beleaguered that it threatens the existence of its contractor, Electronic Data Systems Corp.

Nevertheless, CSC, IRS and oversight board officials agree that senior-level involvement is helping at the IRS. Laphen and Cofoni meet regularly with Everson, whom Levitan calls "a bright guy." Everson and Grams have sent a clear message: Failure is not an option. "There is no question about it," Levitan says. But now comes the hard part. That message "[has] got to be driven down into the organization," Levitan says. And if that means down employees' throats, so be it. Recalcitrant business managers must understand that there are deadlines, and that they'll be held accountable for failure, Levitan says.

CSC has gotten the message. "We have to re-establish our credibility," Laphen says. "We just have to deliver." In a light moment following an interview, Laphen suggests, "So, the headline is: CSC makes good on its commitment!" It doesn't really have a choice. Provisions in the contract allow for one of CSC's subcontractors to take the reins if the lead contractor is unable to fulfill its duties.

But no contract can make the entire IRS respond. Grams says leaders of IRS business units have been assigned to each modernization project. Reporting to them is another layer of managers whose full-time job is to keeping the mammoth project on track. And Grams is watching them. "Those that are performing well and living up to my expectations will be rewarded," he says. "Those who don't will be counseled." And dealt with, he adds. "If we've got a round peg in a square hole," Grams says of anyone who doesn't sense the urgency, "we're going to help them move on."