Inland Revenue report: Update on Inland Revenue's plans for transformation

Date: 9 September 2011 Priority: Low

Security level: In Confidence Report number: IRD 2011/127

Action sought

Action sought

Deadline

Minister of Revenue Note the contents of this report for discussion at meeting of Joint Ministers scheduled for Tuesday, 13 September.

Read before meeting on 13 September.

Minister of Finance Note the contents of this report for discussion at meeting of Joint Ministers scheduled for Tuesday, 13 September.

Read before meeting on 13 September.

Contact for telephone discussion (if required)

Name

Position Telephone

Peter Mersi Deputy Commissioner, Business Transformation

Withheld under section 9(2)(a) of the Official Information Act 1982

Tim Occleshaw Deputy Commissioner, Information Design and Systems

55 Featherston Street PO Box 2198 Wellington 6140 New Zealand (t Inland Revenue

Te Tan i Taake Telephone: 04 890 1500 Facsimile: 04 890 4567

9 September 2011

Minister of Revenue Minister of Finance

Inland Revenue report: Update on Inland Revenue's plans for transformation

EXECUTIVE SUMMARY

Inland Revenue's business transformation programme is focused on responding to the Government's expectations of a public sector that delivers smarter, modern services for less.

Business-led, technology-enabled transformation

Over recent months, Inland Revenue has reconsidered its plan for the transformation of its business processes. Previously, the plan was to leverage change through specific tax and social policy initiatives, such as student loans, to build the technology capabilities needed to deliver more automated services and self-management options for customers. However, difficulties in implementing the changes arose because Inland Revenue's existing business processes and technology systems and processes proved to be too tightly intertwined to accommodate the changes as planned.

Subsequently, a revised approach to transforming Inland Revenue's business is being taken. New technology systems alone will not drive the modernisation of business processes and services. Instead, the approach will be more business-led but technology-enabled. This approach has been endorsed as best practice by independent advisors (Capgemini Consulting) who have contributed to the work undertaken to date.

A set of principles have been adopted to guide transformation more broadly and ensure a prudent approach to technology renewal. These principles are:

• Integrity of the tax system: Ensure revenue collection and distribution on entitlements.

• Speed to market: Improve speed and confidence in ability to enact policy change.

• Cost-effective service: Provide easy to use, reliable and cost-effective automated channels which encourage voluntary compliance.

• Quality of information: Improve the quality of information that we process and use to make business decisions.

• Design for the future: Enable public and private sector collaborative opportunities and cross-government initiatives, and directions and priorities for common ICT capability.

• Capabilities: Standardise functions across the enterprise differentiating only when there is a clear business need.

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• Architected solutions: Data and systems architecture will use a modular approach with well-defined services.

• "Sweat assets": Existing technology assets (including software) will be re-used if they are fit for purpose and it is economic to do so.

• Sustainable systems: Fit-for-purpose technology packages will be used when it is economic to do so, rather than building bespoke systems.

• Simplify the systems' estate: Continual consolidation and rationalisation will be used to reduce technology duplication and overlaps.

• Proven technologies: Technologies will be proven by comparable usage before being adopted.

• Future-proofed systems: Systems will be designed for internet and mobile channels to accommodate rapid technology change.

An in-depth analysis of Inland Revenue's business has been undertaken to inform the revised approach. Over time, a series of business changes, supported by technology changes, are proposed to incrementally release business benefits and realise the future business model. The model is open to whether Inland Revenue or other parties, or a combination, will deliver services in the future.

Several foundation initiatives have been identified as first steps towards implementing the plan for a business-led, technology-enabled transformation of Inland Revenue's business. They include, for example, changing the way business processes and data are managed. These changes are fundamental to more efficient and consistent delivery of services by increasing standardisation of processes, improving data accuracy, having fewer "exception" processes and less manual intervention. Policy changes may be needed to enable some of these changes.

A phased approach to technology renewal

The complexity and inherent limitations of Inland Revenue's FIRST technology systems constrain Inland Revenue's ability to achieve speedier implementation of policy changes, services that are more appropriate to the digital age and that support closer working relationships with other government agencies and intermediaries.

The preferred technology renewal approach is to create new technology capabilities in discrete steps or phases, where each phase replaces or increases capability in the existing system and is justified in its own right from a business benefits perspective. As decisions are made to advance each phase, and technology renewal occurs, elements of Inland Revenue's current systems will be retired.

A phased approach to technology renewal and redesign will allow Ministers to make choices along the way so that the Government is not committed irrevocably to a particular course.

When new technology is required, Inland Revenue will use the technology products that have already been purchased, only going back to the market if these prove to be unsuitable.

Many of the first steps along this path will be foundational, such as "disentangling" FIRST and data purification. While these initiatives will realise some benefits, the benefits will increase as new capability is deployed. The speed of this process will depend on cost, risk and realisable benefits for the Crown, customers and Inland Revenue.

NEXT STEPS

Subject to Ministers' feedback on Inland Revenue's revised approach to business transformation, Inland Revenue will:

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• Continue to progress work required to sustain FIRST, as described in the accompanying report. (IRD 2011/126 refers).

• Continue to progress a number of major change initiatives which contribute to the business transformation objectives (for example, reforming Inland Revenue's service delivery operations and the upgrade of desktop computer systems), along with ongoing policy implementation including student loans redesign, child support reforms, simplifying taxpayer filing requirements for individuals and Budget 2011 changes.

• Re-focus other change projects to ensure they align with a more business-led approach and look for earlier benefits.

• Engage an internationally-experienced third party to support Inland Revenue to develop a detailed, multi-year implementation programme. The procurement process to source this expertise is currently underway.

• Report back to Ministers by the end of January 2012 to advise of any additional funding implications for Budget 2012 or Budget 2013.

• Report back to Ministers by June 2012 (the exact timing is dependent on the outcome of the procurement process) with a multi-year implementation programme that integrates and sequences business-led, technology-enabled transformation initiatives. If necessary, this work programme will form the basis of a Stage 1 business case.

RECOMMENDATIONS

It is recommended that Ministers:

a. Note that a revised approach to transformation has been adopted that is in line with international best practice and is principle-based;

Noted Noted

b. Note that a phased approach to technology renewal and redesign is proposed to allow a series of discrete decisions that do not commit the Government irrevocably to further investment; and

Noted Noted

c. Note that officials propose to report back to Ministers by January 2012 to confirm any additional funding implications for Budget 2012 or Budget 2013.

Noted Noted

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d. Direct officials to report back to Ministers by June 2012 (this timing is subject to securing internationally experienced expertise) with a detailed, multi-year implementation programme that integrates and sequences a business-led, technology-enabled transformation.

Noted Noted

Tim Occleshaw Peter Mersi Deputy Commissioner Deputy Commissioner Information Design and Systems Business Transformation

Hon Peter Dunne Hon Bill English Minister of Revenue Minister of Finance

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PURPOSE

1 This report updates Ministers on Inland Revenue's business transformation work programme. It focuses, in particular, on addressing Ministers' questions in relation to Inland Revenue's approach to transformation and future technology renewal. The discussion of technology renewal phases builds on the accompanying report (IRD 2011/126 refers) that addresses the sustainability of Inland Revenue's FIRST technology systems.

BACKGROUND

2 The Inland Revenue report, Simplifying Customer Interactions detailed (stage 2) business case (IRD 2011/022), which was referred to the Cabinet Business Committee on 23 March 2011, asked the Committee to note that Inland Revenue would report to the Cabinet Expenditure Control Committee in May 2011 with an update on its approach to technology renewal. (CBC Min (11) 5/12 refers) Subsequently, the report-back was deferred and replaced with a commitment to report back to ICT Ministers by late September 2011 with a reassessment of Inland Revenue's business transformation programme, including the approach to technology renewal.

REASSESSMENT OF INLAND REVENUE'S APPROACH TO TRANSFORMATION

3 Earlier this year, Inland Revenue recognised the need to revisit its approach toward the transformation of its business to ensure a stronger business-led focus. Previously, the approach sought to leverage change through specific tax and social policy initiatives, such as student loans, to build the technology capabilities needed to deliver more automated services and self-management options for customers. Inland Revenue's revised approach focuses on delivering enterprise-wide capabilities (such as end-to-end processes, service delivery and engagement models and workforce management) that will support all of the tax and social policy products that the Department administers.

4 While technology renewal and redesign is critical to transforming the way Inland Revenue delivers services, it will not, by itself, drive business change. Sustainable changes can only be realised if a more holistic approach (involving people, processes, policy and technology) is adopted, based on a sound understanding of the current state of the business. Independent advice, provided by Capgemini Consulting, has endorsed the revised approach to business transformation as representative of international best practice.

5 Inland Revenue has adopted a set of principles to guide transformation that includes ensuring a prudent approach is taken to technology renewal. The principles are:

• Integrity of the tax system: Ensure revenue collection and distribution on entitlements.

• Speed to market: Improve speed and confidence in ability to enact policy change.

• Cost-effective service: Provide easy to use, reliable and cost-effective automated channels which encourage voluntary compliance.

• Quality of information: Improve the quality of information that we process and use to make business decisions.

• Design for the future: Enable public and private sector collaborative opportunities and cross-government initiatives, and directions and priorities for common ICT capability.

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• Capabilities: Standardise functions across the enterprise differentiating only when there is a clear business need.

• Architected solutions: Data and systems architecture will use a modular approach with well-defined services.

• "Sweat assets": Existing technology assets (including software) will be re-used if they are fit for purpose and it is economic to do so.

• Sustainable systems: Fit-for-purpose technology packages will be used when it is economic to do so, rather than building bespoke systems.

• Simplify the systems' estate: Continual consolidation and rationalisation will be used to reduce technology duplication and overlaps.

• Proven technologies: Technologies will be proven by comparable usage before being adopted.

• Future-proofed systems: Systems will be designed for Internet and mobile channels to accommodate rapid technology change.

DEVELOPING A FUTURE BUSINESS MODEL

6 Working with these principles, Inland Revenue has undertaken an in-depth analysis of its business, identifying problem points for customers and staff, and opportunities for improvement. From this current-state analysis, a business model has been developed that will support the realisation of the transformation, improved delivery and better alignment with the Government's expectations and customers' needs.

7 Further work must be done to confirm the implementation path needed to realise the future business model, aligned with technology renewal. Some of the foundation initiatives identified to date would, for example, change the way in which Inland Revenue manages its processes and data as these are key to increased standardisation, by improving accuracy and operational efficiencies, with fewer errors, exception processes and manual interventions. Policy change may be needed to enable aspects of transformation.

8 The business model leaves open any future decisions on whether Inland Revenue or other parties would deliver these services. While Inland Revenue is committed to expanding the relationships that it has with other parties, including strategic partnerships to deliver some services, there are a number of pre-requisites that need to be addressed before Inland Revenue is in a position to take full advantage of the opportunities (for example, data purification).

ENABLING THE FUTURE BUSINESS MODEL THROUGH TECHNOLOGY RENEWAL

9 Technology renewal and redesign alone will not transform the way in which Inland Revenue delivers services. It is, however, a very important enabler for the changes needed to support a future business model and modernise the services currently delivered. Currently, the complexity and inherent limitations of FIRST's technology systems constrain Inland Revenue's ability to transform the way in which it operates, delivers services and its ability to engage in "whole of government" initiatives.

10 Inland Revenue's proposed approach to technology renewal focuses on building enterprise-wide capabilities that will support more efficient, consistent and standardised processes across all tax and social policy products. Processes have been modified over the years as new programmes such as KiwiSaver and Working for Families have been added to Inland Revenue's responsibilities. This has contributed to inefficiencies as a result of "exception" processing and manual interventions being required.

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A PHASED APPROACH TO TECHNOLOGY RENEWAL

11 A phased approach to technology renewal and redesign is proposed that is in line with the principles described above and, more broadly, with a prudent approach. Where new technology is required, Inland Revenue's assumption is that it will use the technology products that have already been purchased, only going back to the market if these prove to be unsuitable.

12 The advantage of a phased approach is that it will allow decisions to be made on whether to undertake a given level of renewal (which reflects a particular set of costs, risks and benefits). It does not commit the Government irrevocably to further investment or change. Rather, the proposed phases represent discrete steps that will realise benefits, with choices about what further level of investment and degree of service enhancements Ministers are prepared to support over time.

13 This approach also recognises that renewal of Inland Revenue's technology systems will need to be gradually implemented over a number of years, along with changes to business processes. This sequencing of technology renewal is essential to enable new technologies to be implemented while existing systems are gradually retired or refurbished. Changes will need to be implemented alongside delivery of the Government's policy work programme and ongoing service provision to customers and intermediaries. Significant preparation work will need to be undertaken and investment required in a number of fundamentals/foundations before real gains can be achieved. For example, determining how best to "disentangle" the highly intertwined nature of existing systems and processes, and identifying the best approach for data-cleansing and migration are all complex issues that must be addressed.

IMPLEMENTATION PHASES AND INLAND REVENUE'S PREFERRED POSITION

14 Each phase described in the table below represents a further step along the technology renewal path in terms of:

• the scale of technology renewal; • the extent of enterprise capabilities realised; • the likely cost (estimated costs are not yet sufficiently robust to be included in

this report); and • the timefranne for implementation.

15 Phase 1 describes the activities needed to ensure ongoing vendor support for FIRST's integration layer and strengthen the systems that support online filing services to ensure they can handle the expected levels of demand from tax intermediaries and other customers. These activities are the "must do" investment that is described in the accompanying report (IRD 2011/126 refers). Phases 4 and 5 show different ways of achieving complete renewal of all of the Department's existing technology systems.

16 Inland Revenue's preferred technology renewal position is Phase 3: Targeted Transformation. This point on the technology renewal path delivers sufficient technology renewal to support the future business model and enable significant improvements in services and the realisation of business benefits. Achieving full technology renewal in Phase 4: Total Transformation Hybrid is an ultimate, desirable end point but this scale of change would only be pursued if the benefits of full renewal fully outweighed the costs.

17 Phase 5: Total Transformation via Packages is included for completeness only and represents an extreme position. Inland Revenue does not recommend Phase 5 as it would require business processes (and possibly legislation) to be modified to fit with the abilities of available software packages.

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Table: A phased approach to technology renewal

Phases

Description

The base case comprises a set of activities required to maintain current state systems and support the anticipated growth in transactions and known legislative change.

Together with the general ongoing maintenance required to support the current systems, the two key activities within this phase include: • replacement of the FIRST's integration layer as vendor

support for current software ceases in January 2014; and • enhancements to improve Inland Revenue's online filing

software so that employers, tax agents and intermediaries receive a more reliable online filing service.

Completion of this phase will extend the life of FIRST systems and minimise the known risks within current state systems. It will not remove functionality constraints or enable future changes to the business through transformation.

This builds on the Phase 1: Base case above, plus a further set of activities that contribute to transformation. Completion of this phase achieves marginal improvements, reduces further risk and starts to reduce reliance on FIRST.

Activities include: • separating business rules processing from FIRST to

enable the rules to be more easily used across all Inland Revenue's systems. This will contribute to faster implementation of business and policy change;

• breaking down or disentangling the tight integration within the processes of FIRST so that, in future, components of FIRST can be more easily split off for replacement; and

• further improvements to online services to improve the customer experience.

This phase builds on Phase 2: Transformation foundations above.

Completion of this phase will improve speed to market, enables greater connectivity with third parties and will realise business benefits.

1. Base case "must do"

2. Transformation foundations

3. Targeted transformation

Activities within this phase would include: • implementation of a new enterprise workflow/workload

system to improve the way Inland Revenue services its customers;

• improvements to the way Inland Revenue collects and processes information into its systems to improve data quality. This will benefit Inland Revenue's compliance and risk management and provide customers with greater certainty on their tax and social policy positions; and enhancement of many of the technologies to address

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customers' "points of annoyance" such as limitations in existing systems to allow self-service.

4. Total This phase builds on Phase 3: Targeted transformation, transformation - transforming all of Inland Revenue's technologies with hybrid systems that best fit future business and technology

requirements.

This may include software package deployment, refurbishment of some existing systems, integration of externally-sourced services and/or in-house development.

Phase 4 would result in the implementation of more modern technologies and services that have greater flexibility to support business and policy changes.

5. Total This phase represents full replacement of all of Inland transformation Revenue's technologies with commercial off the shelf (COTS) via packages. software packages.

The key difference between this and Phase 4: Total transformation - Hybrid is that transformation using COTS packages would need business and policy rules to be adapted to align with the abilities of the software packages. This would imply a large impact on legislation, stakeholders and Inland Revenue. For this reason, Inland Revenue does not recommend this extreme position.

IMPLICATIONS FOR INLAND REVENUE'S ABILITY TO IMPLEMENT POLICY CHANGE

18 Inland Revenue notes that current systems limit its ability to implement major policy changes in a timely and cost-effective manner, and to deliver major changes concurrently. The proposed approach to technology renewal should, however, begin to provide some additional flexibility for policy initiatives (in terms of reduced implementation times and costs for some types of changes) within the first few years. Specifically, the early initiative to "disentangle" the FIRST system. As this happens, and as the policy and business rules are progressively placed into a separate "rules" engine (as proposed for upcoming changes to the child support scheme), some types of policy changes will be able to be implemented more easily. Substantial improvements in terms of complexity of change, speed and cost, will take longer to be realised.

NEXT STEPS

19 Subject to Ministers' feedback on its revised approach to business-led, technology-enabled transformation, the Inland Revenue proposes to complete a more detailed assessment of optimal sequencing, timeframes, costs and benefits. Inland Revenue is in the process of issuing a Request for Proposal to secure internationally-experienced resources to assist with this work. While exact timing is subject to the outcome of this procurement process, Inland Revenue is currently working to report to Ministers by June 2012 with a detailed, multi-year implementation programme that integrates and sequences business-led, technology-enabled transformation initiatives. If necessary, this work programme will form the basis of a Stage 1 business case.

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20 The proposed timing will also enable Inland Revenue to gauge its capacity and capability to manage transformational change initiatives in addition to meeting existing commitments. Other jurisdictions' experiences in undertaking major business and technology transformation highlight the critical importance of pre-planning, foundation work and sequencing given the complexity and integrated nature of current state systems and business processes.

21 Key activities over the months ahead are:

• Continuing to progress the work required to sustain FIRST, as described in the accompanying report (IRD 2011/126 refers).

• Continuing to progress a number of major change initiatives which contribute to business transformation objectives (for example, reforming Inland Revenue's service delivery operations and upgrading desktop computer systems), along with ongoing policy implementation including student loans redesign, child support, simplifying filing requirements for individuals and Budget 2011 changes.

• Re-focusing other change projects to ensure they align with the new business-led approach and look for earlier benefit realisation.

• Engaging an experienced independent third party to help further develop the transformation approach outlined above, bringing international experience and knowledge. The procurement process to source this expertise is currently underway.

• Reporting back to Ministers by the end of January 2012 to advise any additional funding implications for Budget 2012 or Budget 2013.

• Reporting back to Ministers by June 2012 (timing subject to the procurement process) with a detailed multi-year implementation programme that integrates and sequences business-led initiatives with a phased approach to technology renewal. This work may form the basis of a Stage 1 business case.

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