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flp Inland Revenue Te Tan i Taake

Programme Business Case

Business Transformation

Delivering New Zealand's future revenue system

October 2013

COMMERCIAL IN CONFIDENCE

Programme Business Case Business Transformation

This document has been released by Inland Revenue under section 81(1B) of the Tax Administration Act 1994 (TAA). Some sections of the document have been withheld:

• as they must be kept secret in accordance with section 81 of the TAA;

• as the programme business case contains advice still being considered by Ministers;

• as some information was received subject to an obligation of confidence;

• to protect the privacy of certain individuals; or

• to enable commercial activities or negotiations to be carried out, without prejudice or disadvantage.

The release of this document also supports the purposes of the Official Information Act 1982 by increasing progressively the availability of official information to the people of New Zealand.

2 COMMERCIAL IN CONFIDENCE! 22 October 2013


Table of Contents

1 Executive Summary 4

2 Background 12

3 Introduction 13

4 Making the case for change 15

An overview of Inland Revenue 15

Organisational pressures or challenges 17

IR for the Future 23

Programme objectives 25

Required changes 25

Key outcomes 32

Key constraints and dependencies 32

Key assumptions 33

Engagement with key stakeholders 33

5 Exploring the preferred way forward 35

Overview 35

Identifying the possible strategic choices and programme options 35

Evaluation of options 41

Trade-offs between the options 42

Indicative programme costs 44

Indicative programme benefits 46

Programme risks 48

Programme roadmap and starting point 49

Stage 1: Enabling secure digital services 54

6 Other considerations 56

Financial case 56

Management case 60

Commercial case 69

7 The next steps 75

Appendix A - Overview of FIRST 80

Appendix B - IR for the Future 81

Appendix C - Investment Logic Map summary 84

Appendix D - Target Operating Model 85

Appendix E - Long-List Options Assessment 88

Appendix F - Programme costs: approach and key assumptions 89

Appendix G - Programme Benefit Assumptions 92

Appendix H - Commissioner's Statement 96

Appendix I - Roadmap principles 97



1 Executive Summary

Purpose of this business case

1. The purpose of this programme business case is to support Cabinet's consideration of Inland Revenue's proposed Business Transformation programme. It is designed to enable Cabinet to: • Confirm the case for change and the need for investment;

• Agree the investment objectives;

• Assess the strategic choices presented to deliver the change;

• Agree, in principle, a preferred way forward;

• Understand the risk of investment and potential mitigations and controls; and

• Agree the next steps to be taken, and any required funding.

2. This programme business case is not designed to: • Provide detailed descriptions of all the capabilities and changes required to

deliver business transformation as these will be fully defined in later business cases;

• Propose Inland Revenue's strategic direction; and

• Request funding for the specific programme phases.

Background

3. A good revenue and social policy system is about having good policy and good administration. Overall, we see that system as working well. The system has a broad base with low rates and is mainly seen as fair. Both compliance costs and estimates of the hidden economy are low by international standards. Social policy administration is seen as largely meeting the needs of every day New Zealanders. The majority of tax and social policy customers feel that they receive satisfactory service.

4. The capacity and capability to effectively support this system was made possible by an extensive business transformation in the 1980s and 1990s. The most significant change was a 'tax engine', the FIRST technology platform, which enabled government to initially deliver tax changes at relatively low cost. In more recent years, a number of income-related social policies have been added to this platform. The technology platform has become a key infrastructure asset for New Zealand government.

5. Inland Revenue has built a strong reputation for successfully delivering government's policy priorities. A core component of Inland Revenue's success in delivering major initiatives during the past decade has been our ability to find ways to deliver 'just enough, just in time' through modified business processes and manual interventions, particularly when implementing social policies within a platform that was initially designed for tax administration. In doing so, layers of complexity and risk have been added to Inland Revenue's business processes and technology infrastructure.



6. After more than 20 years the revenue system now needs substantial re- investment because the current platform' and processes pose five significant challenges to New Zealanders: • There is a risk of an operational failure that could severely impact

government's ability to collect and distribute money

• Inland Revenue cannot rapidly and economically implement policy changes or other priorities for government

• We are unable to make it easier and less costly for customers to receive entitlements and meet obligations

• Government is not able to fully leverage the information and expertise we have across the wider state sector

• The integrity of the revenue system will be placed at risk if we cannot maintain or improve our organisational performance

7. Any decision to change Inland Revenue's platform and processes should not be taken lightly. Implementing a new platform and processes will be lengthy and complex. Our estimates indicate that an orderly and considered transition will take approximately ten years and cost between $1,000 million and $1,900 million depending on the preferred way forward. The longer a decision to invest is delayed, the greater the likelihood that a substantial change effort will be required while managing large operational difficulties at the same time. Furthermore, government's ability to implement income related policy change will become further constrained.

The changes required

8. Our organisational strategy, IR for the Future, describes the vision of being an organisation recognised for service and excellence. Such an organisation would be agile, effective and efficient, enable customers to self-manage with speed and certainty, enable government to make timely policy changes and work with other agencies to optimise interaction across government. To fully achieve this vision, Inland Revenue will need to transform the way it does business, and provide a stable technology platform to support this transformation.

9. Business Transformation is a business-led, technology-enabled change programme to implement the infrastructure and capability that will enable Inland Revenue to deliver a modern revenue system, as represented by IR for the Future.

10. Six significant changes are needed: • Radically improve the implementation of policy changes.

• Provide smarter and more efficient customer-oriented processes including a shift from paper-based to digital.

• Further pool information and intelligence to help improve the efficiency and effectiveness of the public sector.

• Provide simple, clear and integrated delivery of services to customers.

1 FIRST plus its associated satellite applications.


Strategic Choice 1: Strategic Choice 2: Accept the Risk Mitigate System

Risk

Strategic Choice 3: Change the Revenue System Through

Business Process and Technology Change

Option 3C Government for the

Future

Option 3A Option 38 Foundational IR for the IR for the Future

Future

Option 2 Provide Platform

Stability

Option 1: Sustain Current State

Option 3-Do minimum

Limited Process Change

Limited Process Change • ' • I II I • I

• I I • • !A • II

Use Existing Technology Platform

Replace Existing Technology Platform

Ad-hoc information sharing


Limited ability to utilise third parties

Limited ability to utilise third parties Increasing usage of 3 parties and other intermediaries to deliver services >

Policy agility constrained by

systems and processes


processes


• Advance our intelligence and risk assessment capability to better target non-compliant behaviour.

• Deploy a modern technology platform that is flexible, scalable and reliable.

The decisions to be made

11. There are three possible strategic choices for government: • Strategic Choice 1: Sustain current state - accept the current level of Inland

Revenue's operational performance and risk, and sustain the current state;

• Strategic Choice 2: Replace technology platform only to mitigate Inland Revenue's existing system and performance risk; or

• Strategic Choice 3: Change the revenue system, as described by IR for the Future, through business process re-engineering supported by new technology platform.

12. These strategic choices outline the possible future states of the organisation. Note that not all of these strategic choices enable delivery of the future state organisation outlined in IR for the Future; Strategic Choice 1 represents a business-as-usual approach to delivery of Inland Revenue's services and products in the short-term, and Strategic Choice 2 delivers a modern replacement of the FIRST technology platform. Neither of these two strategic choices delivers the step-change in capability and business processes that Strategic Choice 3 would deliver.

13. From these core strategic choices there are programme options that have been identified to deliver some or all of the changes required. Their focus and link to the changes required and the strategic choices are summarised in Table 1 below.

Table 1 - Programme options by strategic choice

• I • II .1 I:. •

Increasing inky aellitv

14. The capabilites delivered by Strategic Choice 3 are required in order to successfully deliver IR for the Future. Within this choice, Options 3- and 3A-3C deliver increasing levels of capability. Strategic Choices 1 and 2 are discrete choices. Strategic Choice 2 cannot be easily or cost-effectively scaled to deliver the capabilities outlined in Strategic Choice 3 because the technology platform

6 COMMERCIAL IN CONFIDENCE / 22 October 2013


developed as part of Strategic Choice 2 would not use a set of standardised business process and services.

15. Option 3- was developed on direction from Ministers following the submission of the previous version of the programme business case in March 2013. It is a 'do minimum' option mainly focusing on reducing technology risk and improving agility.

16. The development and implementation of standardised business processes and services primarily drives the increase in cost between Strategic Choice 2 and 3. This also delivers the majority of the policy agility and changes in capability required to deliver IR for the Future.

17. There are three primary trade-offs to be balanced when considering the programme choices and options and what they will deliver, relative to their cost: • Inland Revenue's confidence in delivering the programme choice and option; • the risk to the revenue system if a change is not made; and • the benefits that the choice/option will deliver.

Costs and benefits of the options

18. A summary of the costs and benefits of the options is included in Table 2 below.

Table 2 - Evaluation of programme options

Evaluation Criteria

Strategic Choice 1

Strategic Choice 2

Strategic Choice 3

Option 1 Sustain Current State

Option 2 Provide Platform Stability

Option 3- Do

minimum

Option 3A Partial IR for the Future

Option 38 IR for the Future2

Option 3C Government

for the Future

Programme costs (over ten years)3

$100m - $130m

$200m - $700m

$800m - $1,200m

$1,000m - $1,400m

$1,300m - $1,900m

>$1,900m

Financial Benefits (over ten years) n/a Limited $100m -

$200m $1,000m - $1,500m

$1,400m - $2,700m

>$3,300m

Total economic benefits (over ten years) n/a Limited $200m -

$400m $500m - $1,100m

$1,200m - $2,500m

>$3,000m

IR's confidence of delivery n/a High Medium Medium Medium Low

Mitigates operational risk No Yes Yes Partial Yes Partial

Delivers the programme investment objectives4 No Very

Limited Partial Partial Yes Partial

Enables IR to fully contribute to government priorities and cross overnment ca abilities

No Very Limited

Minimal Partial

Possible

Partial Yes

Recommendation

19. The large ranges in both costs and benefits reflect the significant degree of uncertainty that exists this early in the programme, as well as the potential

2 The indicative benefit ranges for Option 3B have been revised since March 2013 as a result of changes to sequencing reflecting a more measured, de-risked delivery. Following validation from Inland Revenue's research team a smaller population was used which impacted the upper range.

3 These ten-year costs are expressed in real terms, and exclude costs for capital charge and depreciation. Nominal costs for the programme would be slightly higher.

Please refer to paragraph 69 for the programme investment objectives.



choices and off-ramps. The level of certainty will increase as design is progressed and Ministers make further choices. The benefit ranges for Option 3B have changed since March 2013. This is a consequence of de-risking delivery. In the March 2013 roadmap the required capabilities were delivered earlier within the 10 year life of the programme. Taking into account Ministers' feedback about delivery risk, the programme roadmap has been re-sequenced to deliver the programme in smaller steps. As a consequence, benefits are achieved later in the programme and some are now realised beyond the 10 year life of the programme. Benefits that are realised beyond the 10 year period are not counted as part of this programme business case. However, they will be counted as part of later business case(s) that span beyond the current 10 year period.

20. Strategic Choice 1 is not desirable because it does not mitigate the longer-term risks to the revenue system. Strategic Choice 2 achieves a technology change only with no re-engineering of business processes. While this choice mitigates revenue system risks, it provides little opportunity to change the way in which individuals and businesses interact with the revenue system. This choice is not flexible or scalable to support business process changes. In addition, the useful life of the new technology may be limited if an eventual decision is made to invest in a change programme to re-engineer business processes.

21. Strategic Choice 3 is, therefore, the preferred way forward with Option 3B as Inland Revenue's preferred ending point. While this option carries a higher total cost than Option 3A, it delivers an organisation that is agile, effective and efficient, enables customers to self-manage with speed and certainty, enables government to make timely policy changes and works with other agencies to optimise interaction across government. It also mitigates the operational risk that Inland Revenue is exposed to.

22. Option 3- (do minimum) has been discounted as, while operational risk is mitigated, it only partially delivers the six changes needed and makes a minimal contribution to cross-government capabilities.

23. It is important to note, however, that the end point of the preferred choice is not prescriptive. Ministers will have the ability to modify the preferred endpoint throughout the life of the programme. We will resubmit the programme business case on a regular basis, providing the opportunity to discuss and revise the programme's outcomes and its scope.

The Programme roadmap

24. A programme roadmap has been developed to support Option 3B as the preferred way forward. The high-level roadmap, shown in diagram 1 overleaf, sets out the starting point for the business transformation programme and the overall phasing of the programme. We propose to deliver the programme in four customer-focused stages over a period of approximately 10 years:

• Stage 1: Enabling secure digital services to allow the majority of customers to self-manage and reduce businesses' compliance burden in fulfilling their PAYE obligations;


Indicative timeline Y1 Y2 53 54 Y$ Yfi 57 Ytt V9 310

1. Enabling secure digital service,

2. Streamline Income and business tax processes

3. Streamline social policy del iwty

4. Complete the delivery of the future Revenue System

New Zealand's future revenue system is to be delivered in four stages

1. Enabling secure digital services

2. Streamline income & business tax processes

3. Streamline social policy delis•ery

4. Complete delivery of the future Revenue System


• Stage 2: Streamline income and business tax processes will leverage the foundations delivered in the previous stage and further reduce businesses' compliance burden to fulfil their tax obligations;

• Stage 3: Streamline social policy delivery will improve the delivery of the social policies that we administer; and

• Stage 4: Complete delivery of the future revenue system will include transitioning any remaining taxes and social policies to a new platform and de-commissioning technical platforms that are no longer required.

Diagram 1 - Business transformation programme roadmap

25. The roadmap provides flexibility by enabling decisions to re-sequence the delivery of certain changes to the revenue system if necessary, and provides appropriate decision points.

How the Programme will be managed

26. Inland Revenue recognises that the business transformation programme is a large and complex endeavour. As well as implementing the programme we will need to: • deliver our existing commitments within a constrained fiscal environment;

• contribute to Government's Better Public Services Programme; and

• deliver government's tax and social policy work programme during the implementation.

27. We have established new organisational leadership, management and governance arrangements to create a dedicated focus on organisational change. We have also put in place independent assurance arrangements to provide confidence that the programme is being successfully delivered.

28. In order to be successful we will have: • opportunities for government to monitor programme progress and regularly

review investment decisions;



• broad engagement with customers, other agencies and 3rd parties to ensure that the changes we propose meet their needs, are fit-for-purpose and provide opportunities for greater private-sector involvement;

• developed internal capability to manage large change programmes and the procurement of service and product suppliers; and

• a design and implementation partner(s) who have proven experience in transformation programmes of this scale and complexity.

Withheld under section 81 of the Tax Administration Act 1994

Next steps

31. The next steps to implement the preferred Strategic Choice 3 are: • Complete development of key indicators and measures for each investment

objective6;

• Develop a placeholder funding bid in Budget 2014;

• Complete detailed planning of the first stage of the roadmap, Enabling secure digital services;

• Prepare an integrated, multi-year portfolio plan that brings together all Inland Revenue change initiatives to facilitate decision making and inform likely funding requirements;

• Work with Treasury to determine a medium-term funding strategy for the programme;

• Shortlist potential transformation service provider(s); and

Withheld under section 81 of the Tax Administration Act 1994 Please refer to paragraph 69 for the programme investment objectives.



• Advance engagement with New Zealanders and New Zealand businesses to ensure that their needs are fully acknowledged and understood.

32. A letter from the Commissioner of Inland Revenue confirming support for this business case can be read in appendix H.



2 Background

33. In April 2013, Cabinet agreed (SEC Min (13) 4/4 and CAB Min (13) 10/4 refer) the case for change for the business transformation programme. Furthermore, Cabinet approved in principle the overall investment objectives and agreed that modernising the revenue system through business process re-engineering, supported by new technology (Strategic Choice 3) is the preferred way forward. Ministers also discussed and discounted Option 3C, an all-of-government transformation.

34. Cabinet directed Inland Revenue to work with the Government ICT Ministerial Group to refine the options for change that best meet Ministers' priorities, and to determine the preferred option and starting point.

35. The additional work discussed with ICT Ministers includes: • refinement of possible options within Strategic Choice 3, including the addition

of a 'do minimum' option and choices around which phase(s) to begin with;

• consequential engagement with stakeholders, particularly with businesses and third parties, to ensure their needs are understood and met in identifying opportunities for modernising the revenue system;

• consequential preparation for market engagement by communicating the potential opportunities and challenges of a business transformation programme, enabling the market to prepare for any future procurement process;

• engagement of external expertise to support the proposed next steps of the business transformation programme and provide independent assurance;

• a communication plan covering any public announcement of the general direction of the programme; and

• an assessment of the lessons for business transformation from the recent Novopay challenges as the independent reports became available.

36. This document is an update of the Business Transformation Programme Business Case submitted to Cabinet in March 2013. The additional information included is: • A do minimum option within Strategic Choice 3 (Option 3-);

• The programme roadmap for the preferred option (Option 3B);

• A description of the progress made in engaging with stakeholders and in implementing the management and governance arrangements; and

• The next steps.

37. As the case for change was previously agreed as part of Cabinet's decision in April, it has not been updated as the underlying rationale remains sound.

38. Central Agencies and the Department of Internal Affairs (DIA) - Government Chief Information Officer (GCIO) have been consulted during the preparation of this document.



3 Introduction

The purpose of this programme business case

39. The purpose of this programme business case is to support Cabinet's consideration of Inland Revenue's proposed Business Transformation programme. It is designed to enable Cabinet to: • Confirm the case for change and the need for investment;

• Agree the investment objectives;

• Assess the strategic choices presented to deliver the change;

• Agree, in principle, a preferred way forward;

• Understand the risk of investment and potential mitigations and controls; and

• Agree the next steps to be taken, and any required funding.

40. This programme business case is not designed to: • Provide detailed descriptions of all the capabilities and changes required to

deliver business transformation as these will be fully defined in later business cases;

• Propose Inland Revenue's strategic direction; and

• Request funding for the specific programme phases or projects.

The approach used to develop this business case

41. To assist us to prepare this business case, we engaged Capgemini, an international business consulting firm, to help us complete an in-depth analysis of our business and develop an approach that will deliver our strategic vision, IR for the Future.

42. A feature of our approach to developing this business case has been the extensive consultation that has occurred, including 350 workshops with senior executives and staff from across Inland Revenue. The key steps taken were: • Analysis of our current state;

• Analysis of the opportunities to drive effectiveness, efficiency, and economy improvements;

• Review of existing customer research and insight, and knowledge of our customers' pressure points and challenges in transacting electronically with us;

• Development of a Target Operating Model (TOM) and a blueprint which outlines the processes and capabilities that we will require in the future;

• Identification and evaluation of implementation options;

• Development of a high level implementation plan to deliver the recommended option, and;

• Sought expert advice on issues related to sourcing, probity, and finalised a senior management and governance review.



43. Consultation has also occurred with relevant government agencies and is on-going.

44. The scope and depth of analysis of this business case has been agreed with central agencies and documented in a scoping document.

45. The document has been reviewed by central agencies, the DIA (GCIO) and our IQA partner (KPMG). The March 2013 programme business case was also reviewed by the Gateway Review Team.

46. In August 2012 a Strategic Assessment for the programme was completed and submitted to the Minister of Revenue. A presentation was made to the Cabinet Strategy Committee in November 2012.

47. The Minister of Revenue and officials from Inland Revenue met with the Government ICT Ministerial Group on three occasions between May and August 2013 to further refine the programme options, and to test the programme roadmap and starting point. Central Agencies and the DIA (GCIO) were consulted during the development of the options and roadmap.

Structure of this document

48. This document conforms to the Treasury guidelines for Better Business Case programme business case development published in August 2012. It has been developed following the Five Cases model and comprises seven chapters:

a) Chapter 1: Executive Summary

b) Chapter 2: Background

c) Chapter 3: Introduction

d) Chapter 4: Making the case for change - the strategic case

This chapter confirms the strategic context for the programme and makes a compelling case for change.

e) Chapter 5: Exploring the preferred way forward - the economic case

This chapter identifies and assess the main options to meet the investment objectives of the programme.

f) Chapter 6: Other considerations

This chapter identifies a preferred way forward and outlines the:

• affordability of the preferred way forward and proposes a strategy to fund the investment - the financial case;

• arrangements to ensure that the programme will be successfully delivered - the management case; and

• commercial viability of the proposal including the likely products and services to be procured - the commercial case.

g) Chapter 7: The next steps

This section outlines the immediate next steps and the associated decision points for the programme.



4 Making the case for change

An overview of Inland Revenue

49. A well-functioning revenue system supports a more competitive and productive economy and achieves Government's fiscal, economic and social objectives. Inland Revenue is New Zealand's principal revenue agency and collects about 80% of core Crown revenue. Our core accountabilities are to: • collect taxation revenue and social policy obligations and disburse social policy

entitlements; and

• provide policy advice to government.

50. Overall, we see the revenue system as working well. It features a broad tax base with low rates and is mainly seen as fair. Both compliance costs and estimates of the hidden economy are low by international standards. The majority of customers feel that they receive satisfactory service.

51. As at 30 June 2012, we employed 5,301 staff (full-time equivalents) based in 17 cities and towns across New Zealand. Our operating budget for the financial year ended 30 June 2012 (2011-12) was $672.1 million.

52. In the 2011-12 financial year we had 7.3 million registered taxpayers and social policy customers (individuals, businesses, partnerships, trusts and other entities). Of those, 62.2% are classified as active customers.' We collect revenue mainly from income tax and GST, but we also collect several special purpose duties and levies. In 2011/12 we processed 11.9 million tax returns and schedules. Table 1 below shows revenue for the last three years.

Table 1 - Revenue collected by Inland Revenue

Revenue Type 2009-10 $ million

2010-11 $ million

2011-12 $ million

Direct taxation

Individuals $24,138 $23,136 $23,917

Corporate $7,512 $8,195 $9,121

Other $2,549 $2,582 $2,644

Sub-total direct $34,199 $33,913 $35,682

Indirect taxes

GST $11,478 $12,575 $13,119

Other indirect taxes $357 $357 $365

Sub-total indirect $11,835 $12,932 $13,484

Total IR taxation revenue $46,035 $46,845 $49,166 Source: Inland Revenue Annual Reports 2010 and 2012

53. Over the last twenty years successive governments have leveraged Inland Revenue's core competency of collecting and distributing money from just being a collector of taxes to a department that plays an important role in administering a number of income related social policy programmes including:

7 'Active customers' refers to customers that have had contact with Inland Revenue in the previous tax year.



• Working for Families Tax Credits - in 2011-12 we distributed $2.7 billion in entitlements to support 194,000 working families. The programme is administered with the Ministry of Social Development.

• Child Support - in 2011-12 we collected $426 million from 180,000 paying parents and distributed $216 million to 182,000 custodial parents.

• KiwiSaver - we administer the scheme by collecting contributions from wage and salary earners and transfer them to scheme providers for investment. In 2011-12, we transferred $2.2 billion in contributions from 1.97 million KiwiSaver members, as well as managing government contributions of $1.0 billion.

• Student Loan Scheme - we jointly administer this programme with the Ministries of Education and Social Development (StudyLink). In 2010-11, we collected $768 million in repayments from 701,000 borrowers.

• Paid Parental Leave - we make payments for the Ministry of Business, Innovation and Employment to parents who take leave from their job or business to care for a baby. In 2011-12, we paid $157 million to 25,000 applicants.

54. The capacity and capability to effectively support the revenue system was made possible by an extensive business transformation in the 1980s and 1990s. The most significant change was an "engine", the FIRST technology platform, that enabled government to deliver some income related social policy initiatives at relatively low cost. This platform has also allowed Inland Revenue to manage increasing volumes of work whilst delivering productivity gains.

55. Inland Revenue has built a strong reputation for successfully delivering government's policy priorities. However, a core component of Inland Revenue's success in delivering major initiatives during the past decade has been our ability to find ways to deliver 'just enough, just in time' through modified systems and manual interventions and workarounds for those elements that cannot be automated in the time available. In doing so, layers of complexity and risk have been added to Inland Revenue's business processes and core technology infrastructure.

56. As Diagram 1 overleaf demonstrates, we work closely with a range of stakeholders in the delivery of our accountabilities including other government agencies, tax agents and other intermediaries and the providers of other 3rd party products and services that our customers' use such as accounting and payroll software developers.


Intermediaries

• May use 3rd party products e.g. accounting software

Inland Revenue

Key:--> Information/filing Payments/funds Advice

In conjunction with: • MSD (Working for

families tax credits) Includes: • Studylink (Student • Employers (PAYE) loans) • Tax Agents • MBIE (Paid parental • Banks leave)

Includes: • Lawyers • Accountants • Other Tax

Agents • Community

Advisory Groups

Advisors

Customers

Includes: • Income Tax • GST • Other Taxes • Working for

families tax credits • Child Support • KiwiSaver • Student loans

Other Government .0jencies

Includes: • KiwiSaver scheme

providers • ACC (levies)



Diagram 1- Overview of the New Zealand revenue system

57. In particular, intermediaries play a pivotal role in assisting us to fulfil our accountabilities. For example: • approximately 5,200 registered tax agents handle the affairs of nearly 2

million customers, filing 83% of all income tax returns; and

• approximately 180,000 employers pay PAYE on behalf of about 3 million individual taxpayers, representing around 40% of total revenue collected.

Organisational pressures or challenges

58. By most efficiency measures Inland Revenue can be considered to be high performing. However, after more than twenty years since Inland Revenue's last significant business transformation, it is becoming increasingly difficult for Inland Revenue to run a business with an aging technology platform and complex processes; consequently our organisational performance is under pressure:

a) Inland Revenue is increasingly unable to rapidly and economically implement policy changes and other government priorities, such as the timely implementation of the child support scheme changes.

b) Customer compliance levels are relatively high but they have been static or under pressure and the targets set for 2015 will be difficult to meet.

c) Taxation and social policy debt levels have been increasing, placing the integrity of the revenue system at risk.

d) There is a risk of an operational failure that could severely impact government's ability to collect and distribute money.

e) We are unable to satisfy the changing expectations of our customers so that it is easier and less costly for them to receive entitlements and meet obligations.



Each area of concern is discussed below:

a) Inland Revenue cannot rapidly and economically implement policy changes or other priorities for government

Inland Revenue has a successful track record in making changes and implementing new initiatives to support Government policy changes. However, as further administrative responsibilities and customer channels have been added our environment has become more complicated,. As a result, today we struggle to deliver policy changes and other government priorities in a timely and cost effective manner. For example: • the implementation of legislative changes to the Child Support scheme is

taking longer than it took to originally implement the scheme in FIRST in 1991;

Case Study - Child Support Reform

In August 2011 Cabinet agreed to introduce a bill into Parliament proposing a major reform to the Child Support scheme.

Inland Revenue's analysis of the process and system changes that are required to support the reforms indicate that it will take over three years to fully implement the changes and will require:

• Approximately 10,500 days of systems development including 3,800 days of user acceptance testing because of the extent of the changes and the integrated design of the FIRST system.

• Substantial effort designing new business processes, training staff, and preparing customers for change.

• planning for the annual events season, the annual income tax cycle for individuals and businesses, must commence eighteen months in advance to allow time for the necessary changes to systems to be made. The annual cost for these changes is typically around $2 million; and

• testing time has increased from about 15% of a project's cost up to about 40%.

Additionally, delivering Inland Revenue's contribution to Better Public Services results 9 (one stop online shop for all government advice and support to businesses), 10 (New Zealanders can complete their transactions with government easily in a digital environment), and 7 (to reduce the rates of total crime, violent crime and youth crime), in a timely fashion is particularly challenging given the complexity of our environment.

The longer the decision to invest is delayed, the further constrained government's options to implement income-related policy will become.

b) Customer compliance

Tax revenue is typically sensitive to fairly small changes in levels of customer compliance. For example, a 1.0% increase in customer compliance represents a potential $500 million in additional tax revenue.



Customer compliance is difficult to measure because of the existence of the hidden economy. However, there are a number of leading indicators which act as proxies and can measure whether our services and interventions are having the desired results: • Customers self-manage - despite initiatives to improve customer service

delivery this indicator has remained relatively static. The indicator comprises two key measures:

o the percentage of customers who are aware of their obligations and entitlements is trending slowly downwards, as shown in Graph 1 below; and

o the percentage of customers who find it easy to comply is also relatively static, as shown in Graph 1 below.

Graph 1 - Customer self-management indicators

900% Customers are able to self manage

85 0%

80 0% — '4.1:—.....::.:

75 0%

70.0%

65.0%

60 0%

660% Sep-09 Dec-09 Mar-10 Jun-10 Sep-10 Dec-10 Mar-11 Jun-11 Sep-11 Dec-11 Mar-12 Jun-12

Cuetomers moors of obligations and entnements — — — Trend .Customers anise of obligation C end Trend end — 'Werner, 4 easy b corinf y — — — -Customers it easy to comply

Source: Inland Revenue

• Customers file and pay on-time - this indicator has been steadily falling for several years, as shown in Graph 2 overleaf. Inland Revenue has put in place a range of interventions, including some platform changes to improve compliance. At best, these have reduced the rate of decline. A continuation of the trend would be worrying both from the point of view of tax compliance and from the cost pressures generated to follow up overdue payments and returns.


On-time filing and paying compliance

en' 15• ' mt§b

Tax Year

-On-time Fling --- On-time Fling Trend On-time Paying --- On-time Paying Trend

% re

turn

s fil

ed o

n tim

e

95.0%

90.0%

85,0%

80 0%

75.0%



Graph 2 - Customer file and pay on time indicators

Source: Inland Revenue

c) Debt and outstanding returns management

Debt and outstanding returns management performance is an area of concern because the failure to rectify blatant non-compliant behaviour potentially undermines the integrity of the tax system over time: • A key indicator of debt management performance is the ratio of

collectable debt to the value of the overdue debt book. Over the last two years this has declined from 67.7% in June 2010 to 64.7% in June 2012. Some of this deterioration may be attributed to the on-going aftermath of the global financial crisis, but the trend pre-dates the crisis.

• As at 30 June 2012, the number of outstanding tax returns is 1.2 million, representing a 12% increase from the previous year. The number of outstanding returns has nearly doubled since 2005/06.

• The Performance Improvement Framework (PIE) report on Inland Revenue8 noted that the management of debt and outstanding returns required development.

d) Operational risk

There is a risk of an operational failure that could severely impact government's ability to collect and distribute revenue. Inland Revenue's platform and processes have become extraordinarily complex as they have evolved over time, and implementing changes has become expensive, time-consuming and risky.

Service delivery has peaks of processing and customer contact volumes because of the complex interdependent nature of the annual income tax cycle for individuals which involves multiple products, including income tax, student loan borrowers and Working for Families' recipients. The peak season occurs between April and September each year. The increased volume of work to be processed and associated customer contacts has a direct bearing on customer

8 Performance Improvement Framework Formal Review: Inland Revenue, State Services Commission, the Treasury, and the Department of the Prime Minister and Cabinet, May 2011



service levels and staff are diverted from non-time critical tasks such as chasing debt and outstanding returns to help manage these pressures.

Peak Period Challenges

During peak season, Inland Revenue often diverts non-contact-centre staff hours to the phones in order to handle customer demand.

As the graph below shows, in 2011/12, at the height of peak season, a large proportion of non-contact centre service delivery staff hours were diverted to answer phones. This leads to a sub-optimal customer experience and diverts resource away from other critical activities.

Increase in non-contact centre staff diverted to phonep

50k

, 40k

, 30k

, 20k

, 10k ,

2011

2009-10 ave

-r"r"Kr-r-Hvr- -ierv7P—Fr-1-1

A core component of Inland Revenue's success in delivering major initiatives during the past decade has been our ability to find ways to deliver 'just enough, just in time' through modified technology and manual interventions and workarounds for those elements that cannot be automated in the time available. In doing so, layers of complexity and operational risk have been introduced into Inland Revenue's business processes and our core technology infrastructure.

Although considered largely successful, Inland Revenue's implementation of KiwiSaver is an excellent example of the types of manual interventions required with our current processes and platform. The KiwiSaver project included the development of 93 separate interfaces with FIRST, and significant manual workarounds were required because FIRST did not easily support this social policy product.

A range of satellite applications have also been implemented, including supporting the adoption of additional customer channels, such as contact centres and online services. Inland Revenue's technology platform now includes the core platform (named FIRST), along with one hundred and eighty satellite applications. FIRST is described in further detail in appendix A.

"The legacy system [FIRST] has been overstretched to respond to demands from governments to adapt it to major new products. Developments to the system for Student Loans, Working for Families and KiwiSaver, for which it was not originally designed, have made matters harder. The strain has been evident for some years, and has increased as tax volumes have grown. "

Inland Revenue Performance Improvement Framework (PIF) Report, May 2011


Unavailability of FIRST July 2010-June 2012

• _ •

CO%

ern%

3 CO.

Den.

Graph 3 - FIRST Unavailability during 2011-12 Graph 4 - Online Services unavailability during 2011- 12

Unavailability of e-Channels July 2010-June 2012

IICOB

ecora 1COB

: iii .1.11 II I mene FIRST -High Availability Benchmark

111.111_1._ _1111 ^`"^-^' Avairatrility Benchmark

Source: Inland Revenue Information, Design & Systems


All of these changes and additions have a compounding effect, and make administration of the revenue system more difficult and costly. In the worst possible case, we would have limited capability to deliver our core functions including not paying social policy entitlements or collecting revenue.

Graph 3 and 4 below demonstrate that we are already experiencing some periods of systems unavailability due to technology failures which impact service delivery to customers and staff productivity. Typical service availability for mission-critical ICT systems are summarised in Table 2 below.

Table 2 — ICT related Service Availability

Availability Classification 9 Target Unavailability _

Continuous Processing None

Fault Tolerant 0.001%

Fault Resilient 0.01%

High Availability 0.1%

Normal Commercial Availability 0.1% — 1.0%

Our unavailability already regularly falls below the levels for high availability of 0.1%. This unavailability has a real impact on our customers. For example, we know that during these periods of unavailability, customers are unable to file their tax returns with us.

Furthermore, external expert advice indicates that an orderly and considered transition to a new platform to resolve these challenges will take approximately ten years. The recent technology modernisation completed by the Australian Taxation Office (ATO) supports this advice. The ATO modernisation took approximately 8 years and cost approximately NZ$1,000 million for a smaller sub-set of products than Inland Revenue manages. The longer a decision to invest is delayed, the greater the risk that a substantial change effort will occur in tandem with managing large operational difficulties.

9 See http://www.itsmsolutions.cominewsletters/DITYvol2iss47.pdf for further information.



e) Changing customer expectations and making it easier

A high level of compliance burden has a negative influence on economic growth, and reducing the compliance burden contributes to building a more competitive and productive economy. Businesses have consistently ranked tax compliance as their highest compliance priority, and it often contributes the most to the overall compliance burden of businesses.

The New Zealand economy is characterised by a high proportion of small businesses. Ninety-seven percent of businesses have fewer than 100 employees and 94% have less than 20. Significant proportions of these customers are not well resourced to administer their tax obligations and compliance costs can be significant relative to the size of the business.10

PricewaterhouseCoopers (PwC) and the World Bank produce an annual study, Paying Taxes", which provides data on tax systems in 185 jurisdictions around the world. The study includes an estimate, calculated by PwC, of the number of hours taken per annum for a notional business (of sixty employees) of the compliance burden to prepare, file and pay their taxes.

The estimated burden for a notional business domiciled in New Zealand is approximately 152 hours which, while comparing well with other jurisdictions, is nearly 30% higher than Australia's (102 hours). This indicates that there is significant opportunity to reduce compliance costs for New Zealand businesses.

A large proportion of this compliance burden is dominated by compliance costs associated with PAYE administration. Inland Revenue research indicates that small to medium size businesses spend an average of 39 hours per year preparing and submitting PAYE schedules, which represents nearly 40% of the total annual compliance burden.

Inland Revenue uses employers as intermediaries to collect taxes on behalf of individuals, which also includes income related social policy entitlements such as KiwiSaver and Student Loans, and Working for Families' tax credits. This places a significant imposition on employers to accurately deduct tax and other payments for their employees.

IR for the Future

59. Inland Revenue recognises that unless we change the way that we do business, we will be unable to deliver what New Zealand needs.

60. As noted in the latest Statement of Intent12, the organisation's key strategic document, IR for the Future, was developed to present a view of the changes that would be required to our working practices, leadership behaviours, systems and tools to deliver our services in the future.

1° Our own research indicates that small and medium sized business spend on average 107 hours per annum to prepare, file and paya particular tax type.

PwC, World Bank and IFC Paying Taxes 2013 12 Inland Revenue Statement of Intent 2012-2015,

htto://www.ird.ciovt.nz/resources/a/8/a8976b804b5afe6abd2abd1c69874dd9/soi-2012.odf



61. A significant change in the organisation's capabilities is required in order to successfully deliver IR for the Future. A discussion at Cabinet Strategy Committee on 26 November 2012 indicated government's preference for developing these capabilities in order to deliver IR for the Future and Government's Better Public Services programme. The Committee also noted that there were choices in how best to deliver IR for the Future, which are discussed later in this business case.13

62. IR for the Future describes the organisation's vision of what we want to achieve for New Zealanders and how we will deliver on government priorities and contribute to Better Public Services. For a further description of IR for the Future please refer to appendix B.

63. Inland Revenue's vision is to be a world class revenue organisation, recognised for service and excellence. Such an organisation would:

• be agile, effective and efficient

• enable customers to self-manage with speed and certainty

• enable government to make timely policy changes, and;

• work with other agencies to optimise interaction across government.

64. To fully achieve this vision, Inland Revenue will need to transform the way it does business, supported by a stable technology platform to enable this transformation.

65. Inland Revenue also has a key role working across government to help deliver Better Public Services because it has more contact with New Zealanders than any other government agency14.

66. Since its launch, some progress has been made towards achieving the vision and capabilities articulated in IR for the Future, including:

• initial implementation of a prototype intelligence environment, Compliance Management Environment (CME), to help develop Inland Revenue into an intelligence-led organisation;

• increasing the functionality and services provided by our online channels to make it easier for customers to file their returns online;

• implementation of additional online services, including a mobile web application, to help customers manage their own affairs;

• reshaping our regional operations to help improve customer compliance through increased visibility in the community; and

• development of change leadership capabilities so that our leaders can guide our people through a period of significant change.

67. However, to be truly successful a significant investment is needed to enable a fundamental change to the way we do business by transforming Inland Revenue's operating model.

13 STR Min (12) 13/1 14 For further information on the BPS Result Areas and their targets, please see http://www.ssc.govt.nz/bps-

results-for-nzers.



Programme objectives

68. Business Transformation is a business-led, technology-enabled change programme to implement the infrastructure and capability that will enable Inland Revenue to deliver IR for the Future and the outcomes New Zealand needs.

69. The overall investment objective of the programme is to implement the capabilities required to deliver IR for the Future by:

a) Improving agility so that policy changes can made in a timely and cost effective manner.

b) Delivering more effective services to improve customer compliance and help support the outcomes of social policies.

c) Improving productivity and reducing the cost of providing our services.

d) Improving the customer experience by making it easier and simpler for our taxation and social policy customers.

e) Increasing the secure sharing of intelligence and information across government to improve delivery of services to New Zealanders and improve public sector performance.

f) Minimising the risk of protracted system outages and intermittent systems failure.

70. Key indicators and metrics are being developed against these investment objectives so that we will know when we have been successful. We currently expect that indicators and targets will be established by 20 December 2013 in conjunction with the four-year plan. The metrics will be developed in conjunction with work underway to review and improve Inland Revenue's approach to monitoring our success in delivering our multi-year change programme.

71. A desktop Investment Logic Map (ILM) was developed for the programme with key stakeholders in a workshop on 16 July 2012. It has subsequently been updated and agreed with Inland Revenue's senior management team which includes the Commissioner of Inland Revenue and her direct reports. The ILM is attached at appendix C.

72. Any decision to change Inland Revenue's systems and processes should not be taken lightly. Implementing new technology and processes will be lengthy, time consuming, and complex. However, we believe action is required now in order to deliver the change New Zealand needs and to avoid making significant change in a more difficult environment.

Required changes

Overview

73. The capabilities that Inland Revenue will require in the future are described in Inland Revenue's Target Operating Model (TOM)15. The TOM is a comprehensive description of how Inland Revenue will operate in the future. It was developed on

15 The TOM was developed in consultation with the majority of Inland Revenue's Tier 1, 2, 3 and 4 managers



the basis of Inland Revenue's current accountabilities of collecting and disbursing money and providing policy advice, and formalises emerging needs to share services and information with other agencies to improve public services. The TOM is further described in appendix D.

74. The TOM includes the capabilities required to share and receive information with other agencies and to deliver our contribution to Better Public Services.

75. Inland Revenue in the future needs to be smarter, more proactive and more agile. We will focus on our core competencies and look to third parties to provide services beyond these, allowing for more sophisticated development of our capabilities. Guided by ministers, we will consider:

• outsourcing some of the transactional services, applications and infrastructure associated with support and some front office functions; and

• seeking partners where a third party is better placed to undertake that function or where the third party can provide additional capacity.

76. We need to make the following changes to build the capabilities that will enable the operating model we will require in the future:

• Provide smarter and more efficient processes including standardising processes and a shift from paper-based to digital.

• Further pool information and intelligence to help improve the efficiency and effectiveness of the public sector.

• Radically improve the implementation of policy changes.

• Advance our intelligence and risk assessment capability to better target non-compliant behaviour.

• Provide simple, clear and integrated delivery of services to customers.

• Implement a technology platform that is scalable, flexible, and reliable.

Smarter and more efficient processes including a shift from paper-based to digital

77. Inland Revenue will develop smarter, more effective and more efficient processes through standardising processes and shifting from paper to digital:

a) Shifting to standardised processes

Inland Revenue's business processes have evolved over time and are largely based on individual products (i.e. each taxation type or social policy) that have their own set of unique processes. Some, but not all, are due to legislative requirements.

For example, at present there are a range of different processes across tax and social policy products for customer registration and enrolment. In addition, social policy products that are co-administered by Inland Revenue and other agencies require customers to complete separate registration and deregistration processes.

As an illustration, Child Support customers who are claiming benefits are currently required to submit registration details to Inland Revenue that duplicate the information that they have already provided to MSD to register



for benefits. That same information is also required to register for Working for Families Tax Credits.

Not only does this duplication impose significant costs on customers and administrative cost, multiple registration processes can also result in delays in deregistration when a person's circumstances change. Any delays in this information being

Diagram 2 - Illustration of common business services

acted upon by Common Common Common Common Common Service 1 Service 2 Service 3 Service 4 Service 4 agencies can, e.g. Register e.g. Collect e.g. Assess e.g. Collect e.g. Make Customers Information obligabons obligations payments

unwittingly, result in Product A

an individual being e.g. Individual

overpaid and incurring Income tax

Product a debt that must then e.g.

be collected by the KimSaver

responsible agency. Product

e.g. Working

Product-based for familes

processes limit the Product

ability to which Inland e.g. Child Support

Revenue can quickly Product

introduce new e.g. Student

products because new Loans

business processes have to be designed and built for each product and respond to changing workloads.

In the future a set of common business services will be established that will standardise processes, where possible, across all products, as illustrated by Diagram 2 above, resulting in:

• reduced complexity of administering products;

• improved ability to quickly and cost effectively implement changes or introduce products and policies; and

• improved ability to leverage capabilities cross government to reduce the overall cost of administration. Introducing common business services will provide the potential to rationalise registration processes for customers, and will enable delivery of better customer experiences such as a single logon.

b) Shifting from being paper-based to digital

Inland Revenue's business processes are largely based on paper. Work is still largely structured in the same fashion as when FIRST was implemented over twenty years ago.

Increasingly customers are choosing to file returns and make payments electronically. For example, 71% of income tax returns are filed digitally (although this is low in comparison to some jurisdictions - the digital filing rate is 92% in Australia). Similarly, 66% of all payments are received electronically.


communicated and


However, electronic returns filing and payments are not significantly lowering our processing costs because:

• all schedules or returns are not validated before being accepted (whether filed electronically or in paper) meaning that many require correction before they can be successfully processed. For example, although Inland Revenue often receives EMS and PAYE schedules electronically, over 30% of PAYE schedules require some form of manual correction.

• an analysis of the EMS schedule indicates that on average, every employer makes at least one error per employee over the course of a year. This significantly contributes to employer's compliance burden, and also impacts Inland Revenue's operational performance.

• returns filed electronically are processed in the same way as returns received in paper and are not processed immediately and efficiently.

In the future, we will fundamentally re-design our processes by:

• Ensuring the vast majority of work entering Inland Revenue is in digital form or digitalised upon receipt. This will enable quicker processing with limited manual interventions and eliminate the costly processing of paper. Customers and intermediaries will be certain that their information has been accepted by us because it will be validated before it is accepted into our systems.

• Finding innovative ways of interacting digitally with intermediaries, such as employers, that makes it easy for them to provide the correct information through closer integration with their payroll and accounting software packages.

Further pool information and intelligence to help improve the efficiency and effectiveness of the public sector

78. The last 18 months have seen an increased emphasis on cross agency collaboration and improved public sector performance. Inland Revenue interacts with a range of other government agencies to deliver our business and to support their goals.

79. We share information and services with twenty six other agencies including the Ministry of Business, Innovation and Employment (e.g. companies IRD number registration), the Ministry of Social Development (e.g. for co-location purposes of Community Link sites) and the New Zealand Customs Service.

80. Traditionally, a conservative approach to the sharing of information has been required given the tax secrecy provisions of the Tax Administration Act. The tax secrecy provisions require Inland Revenue to protect the privacy of taxpayer information (and with it the integrity of the tax system as a whole) when considering opportunities to share information.

81. Further secure sharing of information and expertise with other agencies could help improve the delivery of public services to New Zealanders and New Zealand businesses and improve the effectiveness and efficiency of the public sector. For example:



• reducing the duplication of effort for both customers and agencies by ensuring that customers only provide a piece of information to government once,

• reducing benefit fraud by identifying customers that are receiving a benefit while in paid employment.

82. On-demand and secure information sharing will allow customers to provide information to government only once and reduce the duplication of effort for both customers and agencies in validating customer information.

83. We will also pool intelligence and share services with agencies where appropriate to do so.

Radically improve the implementation of policy changes

84. Inland Revenue develops policy using the Generic Tax Policy Process (GTPP). GTPP ensures that there is an open, interactive consultation process with other agencies and external stakeholders. This process is internationally recognised as an open and inclusive approach.

85. Although this design process works well, the current technology platform makes implementation of policy changes difficult and time-consuming. We need to take a different approach to the delivery of policy changes that will improve the time to market of changes by:

• simplifying and modernising the current technology infrastructure that supports the implementation of policy.

• using standardised services whenever possible when introducing new products or changing existing products. We will make explicit and transparent decisions where this is not the proposed approach.

• leveraging third party expertise to expedite the delivery of policy changes.

Advance our intelligence and risk assessment capability to better target non-compliant behaviour

86. Customer intelligence is the capability of gathering and analysing customer information to build a deeper understanding of their behaviours. Structured and effective approaches can then be developed to identify and manage potential compliance issues.

87. Customers display a range of behaviours. By applying a range of advanced analytical techniques, we are able to segment those who are willing and able to pay from those who might need help and from those who are not willing to comply. Different interventions can be applied to customers on the basis of the likelihood of non-compliant behaviour. This approach allows targeting of resources to areas of highest risk or return.

88. Some revenue authorities such as the United Kingdom's Her Majesty's Revenue and Customs (HMRC) are having considerable success using customer intelligence techniques.




89. Inland Revenue has begun investing in developing an intelligence and risk assessment capability, the Compliance Management Environment (CME), to improve detection of non-compliance and we are already seeing some success. The CME is used for GST return screening, where we apply risk modelling to detect risk transactions.

90. Inland Revenue needs to further develop its capability to become an intelligence-led organisation and to apply analytical thinking and behavioural analysis to most of what we do. In the future we will require:

• The right intelligence tools to enable effective detection of customer compliance behaviour insights.

• To develop our people to fully use an intelligence-based approach to design effective interventions to automatically select customers, identify the most appropriate intervention and pass the customer to the most appropriate channel. Interventions could range from a text or email communication, an outbound call or an in-depth audit by an investigator.

rCase Study - Compliance Management Environment (CME)

Late 2011, CME connected eleven companies linked by quite obscure personal and business information. More than thirty low-level GST refunds had been lodged over a period of time.

CME identified risky looking behaviours and linked the seemingly unrelated entities. Ultimately the Investigator identified a total of twenty five connected entities committing GST fraud and with the assistance of the Police evidence of widespread Personal Tax Summary (PTS) and Immigration fraud was also detected. The husband and wife behind the case used a simple business facade to obtain and fraudulently use their clients' personal details.

Within six months, $105,000 (well over 80%) of these fraudulent GST refunds was recovered and a prosecution has ensued. Immigration and identity theft charges ..___ were laid at the end of July 2012.




Simple, clear and integrated delivery of services to customers

91. Our customers perceive our current service to be complex and inconsistent. In the future, customers will find it simple and convenient to interact with us, as demonstrated in Table 3 below. Table 3 - Current and future customer experience

From To

Dealing with IR is complex and frustrating: Dealing with IR is simple and convenient: • It's time consuming to make sure that • It's quicker for me to make sure that

I'm paying or receiving the right I'm paying or receiving the right amount amount

• It can be difficult to obtain the answers — My accounting and payroll to the questions I have software package integrates

• I am unclear what is best way to with IR and saves me work contact or submit information to IR — My tax agent can do more on

• I don't have certainty when I submit my behalf information to IR that it has been • The digital services that IR provides are received or is correct interactive and provide me with the

• I have to provide the same information certainty and information I need to separate Government agencies • I can easily find the answers to most of

my questions myself online • IR is proactive e.g. I receive reminders

or alerts when I need to do something • I only have to provide information to

Government once • IR takes my circumstances and past

behaviour into account when I deal with them

92. Delivery of services to our customers will be informed by their needs and behaviour to make it easier for them to comply and for services to be integrated across government agencies.

93. Customer service delivery will be actively managed to ensure that the services we provide meet customer needs and are cost effective. The use of self-management tools so that customers can find the answer to common queries themselves and better manage their tax and social policy affairs on-line will be actively encouraged (and perhaps mandated in some instances).

94. Customers will be provided with certainty so they will know that the information they provide to access their entitlements or manage their obligations is correct and complete. Information will be asked from customers only once and they will know that we will share this information appropriately and securely with other government agencies.

95. Both Inland Revenue staff and customers will have an easily accessible, complete view of customer information.



A technology platform that is flexible, scalable and reliable

96. Inland Revenue requires a flexible, scalable and reliable technology platform. It will need to:

• support the capability changes described above;

• allow services to be flexibly deployed to other government agencies or the private sector;

• meet all relevant government ICT requirements and standards;

• be modular and based on modern toolsets, skillsets and standards;

• use commercially available applications (COTS) wherever possible; and

• support the migration from FIRST in an incremental way to reduce delivery risk.

Key outcomes

97. Inland Revenue in the future will be very different to Inland Revenue today. We will transform from an agency that is under pressure to a high performing and responsive agency that:

• is agile, effective and efficient

• enables customers to self-manage with speed and certainty

• enables government to make timely policy changes, and;

• works with other agencies to optimise interaction across government.

Key constraints and dependencies

98. Table 4 below describes the key constraints and dependencies of this proposal.

Table 4 - Programme constraints and dependencies

Constraints Dependencies

•

•

•

•

•

Government may not be easily able to implement significant policy proposals during certain periods of the programme.

Availability of resources with the right skills and expertise within Inland Revenue or New Zealand.

As we transition to a new platform, we will need to support both FIRST and a new technology environment.

A move to standard processes and services will require policy design to consider whether these standards should be used.

Sharing of information is limited by tax secrecy and privacy legislation.

•

•

•

•

•

Inland Revenue and government commitment is maintained over the life of the programme.

Inland Revenue may be dependent on other agencies that are delivering cross-government capabilities or services.

The private sector, either locally or globally, has the skills and expertise we require.

Legislation changes that may be required to support Inland Revenue's future operating model are made.

The current tax and social policy framework does not significantly change.

99. Changes to legislation may be required to support Inland Revenue's migration from its current system to a new operating model. The extent of these changes



has yet to be determined and is dependent on the preferred way forward. However, examples of the possible changes to legislation required may include:

• Standardising legislative definitions across one or more products;

• Removing the need for annual square-ups for a broad range of tax and social policy products, or;

• Modifying filing deadlines to better suit customers' needs and preferences, and to help smooth peak periods of activity.

100. Legislation changes will be managed through the tax policy work programme and reported to Cabinet for consideration in line with current practice.

Key assumptions

101. The key assumptions that have been made in the development of this business case are:

a) Inland Revenue continues to remain accountable for the same set of tax and social policy products as today and should be prepared to assume accountability for administering additional products.

b) IR for the Future is Inland Revenue's agreed organisational strategy and is accepted as the desired end-state by Ministers.

c) Business Transformation is focused on delivering a fundamentally new operating model for Inland Revenue (including technology platform), with the primary objective being to support the achievement of IR for the Future.

Engagement with key stakeholders

102. We have engaged extensively with the Ministers of Finance and Revenue. We have also engaged with the State Services Commission; the Treasury; the Ministry of Business, Innovation and Employment; the Ministry of Social Development; the Ministry of Justice; the Department of Prime Minister and Cabinet; and the Department of Internal Affairs; and will maintain on-going engagement to ensure that these agencies are involved in the shaping of options so that cross-government benefits and opportunities are identified and considered. These parties have been generally supportive of Inland Revenue's preferred way forward.

103. As discussed earlier, we engaged with a wider group of Ministers and the Prime Minister through attendance at a Cabinet Strategy Committee in November 2012. The Committee discussed the long term vision of New Zealand's revenue system and the case for change.

104. Between May and August 2013 the Minister of Revenue and officials from Inland Revenue met with the Government ICT Ministerial Group on three occasions to refine the programme options, roadmap and starting point.

105. Inland Revenue has established an External Reference Group specifically for the programme. The group comprises key business and community leaders, and they have indicated early support for the programme.



106. The Commissioner spoke to members of the New Zealand Institute of Chartered Accountants (NZICA) at their annual conference in October 2012 about modernising the way Inland Revenue delivers its services and responding to the changing needs of customers.

107. Delegates from the Public Service Association (PSA) and TaxPro Incorporated (TaxPro) have been provided with an overview of Inland Revenue's approach to transformation, including the key considerations and challenges, at meetings in June, August and December of 2012, and in June and August of 2013.

108. On 21 August 2013, in conjunction with the Minister of Revenue, we began engaging with the market with the release of market information. This is the first step in the procurement process and its purpose was to inform the market of our programme of work and the proposed procurement process. Further meetings were held during September 2013 to continue to engage with the tax and IT sectors.



5 Exploring the preferred way forward

Overview

109. This section describes the strategic choices and possible options for delivering the programme. The approach used to develop options was to:

• Identify the strategic choices available to Ministers;

• Develop a broad range of options within those strategic choices that could meet the investment objectives of the programme;

• Assess each of these options using available and known information against the investment objectives, and evaluate each of the options against cost, benefits, and delivery risk;

• Recommend a preferred strategic choice, and a preferred option within this strategic choice.

110. The preferred option provides an indicative direction on what government can expect at the conclusion of the programme. The options represented are representations of possible end points along a continuum of business changes.

Identifying the possible strategic choices and programme options

111. As noted above, the primary purpose of the programme is to support Inland Revenue in delivering the desired organisational future state identified in IR for the Future, in line with the conversation that occurred at Cabinet Strategy Committee on 26 November 2012. However, we have also developed programme options that do not fully achieve IR for the Future, but represent possible choices for Ministers to make on the direction of the programme.

112. There are three possible strategic choices for government:

• Strategic Choice 1: Sustain current state - accept the current level of Inland Revenue's operational performance and risk, and sustain the current state;

• Strategic Choice 2: Replace technology platform only to mitigate Inland Revenue's existing system and performance risk; or

• Strategic Choice 3: Change the revenue system, as described by IR for the Future, through business process re-engineering supported by new technology.

113. These strategic choices outline the possible future states of the organisation. Note that not all of these strategic choices enable delivery of the future state organisation outlined in IR for the Future; Strategic Choice 1 represents a business-as-usual approach to delivery of Inland Revenue's services and products in the short-term, and Strategic Choice 2 delivers only a modern replacement of the FIRST technology platform.

114. Neither Strategic Choice 1 nor Strategic Choice 2 delivers the step-change in capability and business processes that Strategic Choice 3 would deliver. Strategic Choice 1 and 2 are not scalable choices, in that it is difficult for these choices to



be further leveraged across the wider public sector. Strategic Choice 3 enables the delivery of the future state organisation outlined in IR for the Future, and also provides the opportunity for Inland Revenue to significantly contribute to wider government priorities.

115. Below these three core strategic choices, we have represented possible programme options that deliver some or all of the changes required. It is important to note that the options represented under Strategic Choice 3 are merely possibilities, and do not represent the only possible way to deliver business and technology changes within Inland Revenue.

116. The focus and link to the changes required and the strategic choices are summarised in Table 5 below.

Table 5 - Programme options by strategic choice

Strategic Choice 1: Strategic Choice 2: Accept the Risk Mitigate System

Risk

Strategic Choice 3: Change the Revenue System Through

Business Process and Technology Change

Option 1: Option 2 Sustain Current State Provide Platform

Stability

Option 3- Option 3A Option 38 Option 3C Do minimum Foundational IR for the IR for the Future Government for the

Future FuhiI

Limited Process Change

Limited Process Change • I • 1 '

Use Existing Technology Platform

Replace Existing Technology Platform a " • i • • • • • IP II


Ad-hoc information sharing • I I* II , • I I •

Limited ability to utilise third parties

Limited ability to utilise third parties I Increasing usage of Vd oarties and other intermedlariesto deliver services >


systems and processes


processes increasing policy agility

117. The capabilities delivered by Options 3-, 3A, 3B, and 3C are required in order to successfully deliver IR for the Future. Options 3-, 3A, 3B, and 3C are scalar options, delivering increasing levels of capability while Options 1 and 2 are discrete choices. Option 2 cannot be easily or cost-effectively scaled to deliver the capabilities outlined in Options 3-, 3A, 3B or 3C because the technology platform developed as part of Option 2 would not use a set of standardised processes.

118. The development of standard business processes primarily drives the increase in cost between Option 2 and the options within Strategic Choice 3, but this is also what delivers the bulk of the policy agility and changes in capability required to deliver IR for the Future. When progressing from Option 3- to 3C, the implementation risk and cost of the potential programme increases significantly.

119. Option 3- was developed on direction from Ministers to provide further choice within Strategic Choice 3, following the submission of the previous version of the programme business case in March 2013. This option mainly focuses on reducing technology risk and improving agility. Over the life of the programme Ministers will be provided with choices about the level of capability they wish to invest in through a series of business cases (each of which will include a do minimum option).



120. There are a number of possible options for delivering Strategic Choice 3, as illustrated by diagram 3 overleaf. The key difference between options is the extent of business process re-engineering, the improvement of services provided to customers and the extent of leverage across government.

121. A more detailed description of the potential programme options follows in the pages overleaf.


- Increasing levels of business process re-engineering and leverage across the wider public sector

• New digital services for customers • Better integration with taxpayer

business processes • Improved management and sharing

of information • Improved use of information to

drive more effective public services

New modular technology and replace some business processes

Adds value —

Must do —


Diagram 3 - Continuum of options

Continuum of options exist

.,00k Do minimum Preferred

Option Option

Do minimum option (3-)

Benefits to New Zealanders: ✓ Improved self-management through an

improved digital experience • Some reduction in compliance costs

Benefits to government: ✓ Modern, modular technology platform ✓ Information still collected mainly through

forms and schedules ✓ Current approach to data management of

'accept now; check later' remains, iv limited certainty

✓ One size fits all interventions remain, ie no targeting

What is not delivered: • Complexity for customers not reduced • Limited contribution to cross-government

capabilities O Sophisticated analytics that help inform

customer insight

Delivery of investment objectives: some

Financial benefits: $100m - $200m including increase in Crown revenue

Economic benefits: $200m -$400m including reduction in compliance costs

Estimated cost range: $800m - $1,200m

.••• • Preferred option (3B)

Benefits to New Zealanders: ✓ Information collected at source and

integrated with government and business processes

✓ Significant reduction in compliance costs ✓ Able to manage tax and social policy affairs

with appropriate prompting and minimal intervention

Benefits to New Zealanders and government: ,v Automatic adjustment of obligations and

entitlements when circumstances change ✓ Data validated up-front and checked for

reasonableness, providing certainty ✓ Real-time interventions based on a

customer's compliance history

Benefits to government: ✓ Modern, modular technology platform ✓ A basis for leveraging cross-govemment

capabilities ✓ Improved decision making informed by

deeper insights into customer behaviour

Improves customer experience Delivers more effective services Improves sharing of information & intelligence across government

Reduces system risk Improves policy agility Improves productivity

Delivery of investment objectives: Yes

Financial benefits: $1,400m - $2,7COrn including increase in Crown revenue

Economic benefits: $1,200m - $2,500m including reduction in compliance costs

Estimated cost range: $1,300m - $1,900m

••••


Strategic Choice

Advantages

Disadvantages

Estimated Programme Costs over ten years'


Strategic Choice 1

Sustain Current State

Strategic Choice 2

Mitigate System Risk Only

Strategic Choice 3

Change the Revenue System Through Business Process and Technology Change

Option 1


Option 2

Provide Technology Stability

Option 3- =Option

Do minimum

3A *lotion

Foundational IR for the Future

38 1111110ption

IR for the Future

3C

Government for the Future

• does not require a significant amount of organisational change

• requires the least capital investment of all the available options

• mitigates the risk of a systems failure beyond the medium term

• is simpler because it focuses primarily on a technology migration, as opposed to business process changes

• requires less capital investment

• could be implemented more quickly than Options 3A, 3B or 3C if required

• provides some policy agility for all of IR's products and services

• is a do minimum option that can be further leveraged across government and provides a pathway to Option 3A or 38 if so desired

• requires less capital investment than Option 3A and 313

• provides a flexible, scalable and modern technology solution that can be further leveraged across government

• re-engineers internal business processes

• fully mitigates operational risk

• fully decommissions FIRST at the conclusion of the change programme

• provides some policy agility, although only for those specific products and services migrated to the new operating model

• begins to deliver the desired end state of the organisation outlined in IR for the Future

• is a foundational option that can be further leveraged across government and provides a pathway to Option 3Bor 3C if so desired

• requires less capital investment than Option 3B and 3C

• could be implemented more quickly than Options 3B and 3C if required

• provides significant policy agility for all of IR's products and services

• fully delivers on the desired end state of the organisation outlined in IR for the Future

• provides a flexible, scalable and modern technology solution that can be futher leveraged across government

• migrates all services and products to the new operating model

• enables the delivery of broader government objectives, such as result areas 7,9 and 10

• fully decommissions FIRST at the conclusion of the change programme

• likely provides the greatest benefits for customers of government, by providing a common service delivery technology platform

• delivers a fully scalable technology solution that is used by a large number of government agencies

• delivers significant infrastructure savings and economies of scale

• delivers the greatest progress against Result Areas 7, 9 and 10

• does not deliver any of the investment objectives of the programme

• does not limit the risk of an operational failure beyond the medium term

• does not enable Inland Revenue to significantly improve its processes and services

• does not improve policy agility

• does not deliver the desired end state in IR for the Future

• is not a scalable solution that can be further leveraged by government

• delivers limited improvements to policy agility, and doesn't allow for easy service provision by 3"1 parties

• does not enable Inland Revenue to significantly improve its processes and services, and does not fully mitigate operational risk

• does not deliver the desired end state in IR for the Future

• does not deliver significant Improvements to customer service delivery

• does not enable the delivery of broader government objectives, such as Result Areas 7, 9 and 10

• does not migrate all products and services to the new operating model, meaning that policy agility is limited only to those products and services that are migrated to the new operating model

• will require policy and legislative changes in order to be successful

• still requires significant investment from the Crown

• initially selecting this option and then deciding to further scale it will likely cost more than the estimated costs of Option 3B

• does not fully mitigate operational risks

• is relatively complex to Implement when compared to technology change alone.

• would require some changes to processes and systems in other agencies.

•only

• requires significant capital investment over a sustained period of time

• will require policy and legislative changes in order to be successful

• requires a significant amount of organisational change and focus in order to be successful

• is complex to implement

• would require changes to processes and systems in other agencies.

• is considered too risky to successfully implement, and extraordinarily complex

• would require significant and wide-ranging policy and legislative change

• would be highly dependent on decisions made by the Better Public Services programme

• would require significant changes to multiple agencies' technology environments at the same time

• would not primarily focus on mitigating Inland Revenue's systems risk and policy agility challenges

Between $100 million and $130 million over ten years.

Between $200m and $700m over ten years, depending whether a new system using bespoke development or a new system using a commercial-off-the-shelf (COTS) solutions is implemented.

Between $800m and $1,200m over ten years

Between $1,000m and $1,400m over ten years.

Between $1,300m and $1,900m over ten years.

Greater than $1,900m over ten years.

PROGRESSED FOR FURTHER ANALYSIS

DISCOUNTED, BUT INCLUDED IN EVALUATION

PROGRESSED FOR FURTHER ANALYSIS PROGRESSED FOR FURTHER ANALYSIS

PROGRESSED FOR FURTHER ANALYSIS

DISCOUNTED AND NOT INCLUDED IN EVALUATION

" These ten-year costs are expressed in real terms, and exclude costs for capital charge and depreciation. Nominal costs for the programme would be slightly higher.



Strategic Choice Strategic Choice 1


Strategic Choke 2

Mitkiala System Risk Only

Strategk Choice 3

Change the Revenue System Through Business Process and Technology Change

Option 1


Option 2

Provkle Technology SizrolittY

Option 3- 1.411,:lon

Do minimum

3A

undational IR for the Future

Option 38

It for the Future MilErnment

n 3C

for the Future

Description This option could largely be defined as 'business as armor within Inland Revenue.

It would include only limited technology change to stabilise the existing operating model.

This option involv. a reptr cement of the current technology platform supporting Inland Revenue's services and products.

I does not involve extensive changes to Inland Revenue's business processes or operating model, and dons nbo fundamentally transform the organisation. This option only reduces systems and performance risk,

It Is, in essence, building a modem equivalent of the FIRST system.

This option focuses on development and implementation of simple, standardised processes and a modem, modular technokrgy platform.

This option focuses on development and Similar In Option 3A, this option would focus on the implementation of a new operating model and technology solution based on a common business services platform.

Unlike Option 3A, all capabilities would be migrated from the outset to the new operating model and technology platform, and FIRST would be fully decommissioned at the conclusion of the change programme.

Option 3C would focus on delivery of customer-centric services and re-using infrastructure acrom government, and the development of a standard set of business services across a range of government agencies. This would Involve signilfcant and wide-ranging changes lea numtor of ngencies' technology infrastructures, and the focus on specifically minimising IRS current systems risks and policy agility challenges would be secondary.

implementation of a new operating model for Inland Revenue, underpinned by changes in business processes, people capability, and business-as-usual functions.

This option would ako deliver a refreshed technology Platform that is scalable, flexible, and underpinned by common businem services. However, only certain capabilities would be migrated to this new operating model and platform.

Outcomes for Programme Options

Smarter, more effective and more efficient processes

Existing processes will be retained. They will be improved incrementally.

Some business processes would be updated, but not signflicantly changed or improved. They will be Improved incrementally.

It will be more difficult with this option for 3° parties to provide servic., because the system will not include common business servIces to support easy Integration between IR and other 3. portion,

Common business mrvices apixoach will be adopthd for post Inland Pevenue Products

Bono services may be provkled by 3. parties.

I'l.t Inland Rewires work wit be either received Ins Mattel format or translated from paper to digital. validated Won neSalPt and processed straight through (zero touch processing).

Common business mrvices approach will be adopted for BOMe Inland Revenue products,

Common business services approach will be adopted for most Inland Pevetho products.

Common business services approach will be adopted for A hat5ket of Government servilo

Some services may he provided by 3. parties.

Some Inland Reveres work will be In a digital

Some serykes may be provided by 3rd parties.

Most Inland Revenue work will be In a digital

Some services may be provided by 3rd parties.

Work for the Abskiat of serekm will be in a digital format, format, validated upon receipt and processed straight through (zero-touch processing).

format, validated upon receipt and processed straight through.

validated upon receipt awl processed straight through.

On demand secure sharing of information and intelligence

Information and intelligence will be shared with other agencies, but on an ad hoc basis.

es Option 1, with .rne limited improvemenbs to access and transfer of data,

/is an example, data may be securely shared through a batch nightly transfer as opposed to current manual processes, such as data-stick or tape-backup transfer.

Information will be shared with agencies and 3" parties sea secure, co-damned bask. *1st of common business services vat enable Iota provkle a single source of truth For most infomotion held at IR.

1.6 products and .rvicoo are migrated to the new operating model, other agencies and 3° parties will have improved access to data and information for certain products. Developing a single source of the truth for Information will still be difficult without all products on the new operating model and platform.

Information and intelligence will be shared with agencies and 30 parties on a secure, on-demand basis. A set of common business services will enable IR to provkie a single-source of truth for mmt Information held at IR.

Information and intelligence will be Jointly pooled with a group of agencies and 30 parties. This pooled Information and intelligence would function as a single murce of truth for most data held on indivkluals and busineases acmes the public sector.

Greater ability to d.ign and InMernent policy change

Policy design and implementation processes will not be substantially improved.

Some limited improvements as a result of implementing a new platform, but this is constrained by limited businem process change.

The ability to design and implement policy changes lord of tits products and services will be improved, as a remit of adoption of a

busimas common set of services across at of

Ability to design and implement changes will be Atirtjaill improved, although only for policy changes that are related specifically In products and services that have been migrated to the new operating model.

The ability to design and implement policy changes focal of IR's products and .rvicoo will be Improved, as a result of adoption of a common set of business .rvIces across all of IR's products and servic..

The ability to implement policy changes fore range of government .rvices may be improved substantially, but the coordination costs a.iciated with managing policy changes across mulUple systems may limit the ability to make significant policy changes inn shorter period of time. Wes products and services,

Further development of our Intelligence and risk asse.ment capability

No further development of intelligence and risk assessment capability, beyond those already planned in IR's current business.

As a result of implementing a new technology platform, there may be .me limited opportunities Sr Improve risk assessment, but this will be ronstrained by limited changes to IR's business processes, which rely h.vIly on manual interventkin.

Development of our intelligence and risk assessment capability troutr be limited.

Our Intelligence and risk assessment capability oil be further improved for those products and services migrated to the new operating model,

Pe an example, a full migration of 1ST to the new operating model may mean that Inland Revenue is able to Immediately assess GST returns for incidences of fraud, as opposed to relying on more manual interventions.

Our Intelligence and risk assessment capabilities will be significantly improved across all of fits products.

An example of the end state could Include dynamic data matching between tax types, and allow for screening of all customer returns and interactkans for potential fraudulent actlyky.

Intelligence and rink assessment capabilities will be pooled across a number of govemment agendas, and shared for a broad range of products.

For example, all 1455 disbursements may be checked and validated against IR income data immediately to ensure that beroficiarles are not receiving inoome from other 9.1014.

Simple, clear and integrated delivery of services to customers

Existing service delivery will be retained and incrementally improved.

A new technology platform may allow for some easier implementation of digital channels and service offerings, but the efficiency of these processes will be oonstrained by limited change to business processes.

Ps an example, while customers may be able to file and update tax and nodal potty information online, this may still need to be manually processed as a result of existing business processes.

The programme oil not focus on simple, clear and integrated delivery of services to customers.

Ps products and mrvIces are migrated to the new platform, service delivery will be significantly transformed and simplified. Customer Interactions will be better able to be tracked across all channels.

Without all new products on thin operating model, it still will be difficult for IR to track all customer interactions across all products.

Service delivery wit be significantly transformed, and IR will have a central source of information on customer interactions, reagrdless of the channels or products used. This sill allow for much more seamless interaction between customers and IR.

Service delivery will be radically transformed, and it is likely that a new entity would be responsible for service delivery across a range of govemment agencies.

There would be centralised customer information on interactions across a range of government services, channels, and activities.

Our technology platform needs In be flexible, scalable and reliable

Existing technology will stabilised for next 5-10 years.

The technology platform will be updated, but butt In such a way that it functions as a rnodern equivalent of FIRST. The use of common business services, and an ability to easily share and extend the platform In other &gentles and third parties would be limited.

A modem, modular technobgy platform will be implemented and this will operate alongskie the existing platform (FMST).

A modem, modular technology platform will be implemented and this will operate abngside the existing platform (FIRST).

A modern, modular technology platform will be implemented and fully used. FIRST will be decommissioned.

A modern, modular technology platform will he updated and leveraged across agency clusters. Several agecnIes' legacy technology environments may be decommissioned.



Evaluation of options

122. All of the above programme options represent possible end-points, but these end points are not prescriptive. Government can choose to modify the end-point of an option during the life of the programme.

123. An options evaluation framework was developed to evaluate all of the short-listed options. This is summarised in Table 6 below. A more detailed long-list options assessment is included as appendix E.

Table 6 - Programme options evaluation summary

Evaluation Criteria

Strategic Choice 1

Strategic Choice 2

Strategic Choice 3



Option 3- Do

minimum


Option 3B IR for the Future17


for the Future

Programme costs (over ten years)18

$100m - $130m

$200m - $700m

$800m - $1,200m

$1,000m - $1,400m

$1,300m - $1,900m

>$1,900m

Financial Benefits (over ten years) n/a Limited $100m -

$200m $1,000m - $1,500m

$1,400m - $2,700m

>$3,300m

Total economic benefits (over ten years) n/a Limited $200m -

$400m $500m - $1,100m

$1,200m - $2,500m

>$3,000m

IR's confidence of delivery n/a High Medium Medium Medium Low

Mitigates operational risk No Yes Yes Partial Yes Partial

Delivers the investment objectives for the programme19

No Very Limited Partial Partial Yes Partial

Enables IR to fully contribute to government priorities and cross overnment ca abilities

No Very Limited Minimal Partial

Possible

Partial Yes

Recommendation

124. The large ranges in both costs and benefits reflect the significant degree of uncertainty this early in the programme, as well as the potential choices and off-ramps. This level of uncertainty will decrease over the life of the programme. The benefit ranges for Option 3B have changed since March 2013. This is a consequence of de-risking delivery. In the March 2013 roadmap the required capabilities were delivered earlier within the 10 year life of the programme. Taking into account Ministers' feedback about delivery risk, the programme roadmap has been re-sequenced to deliver the programme in smaller steps. As a consequence, benefits are achieved later in the programme and some are now realised beyond the 10 year life of the programme. Benefits that are realised beyond the 10 year period are not counted as part of this programme business case. However, they will be counted as part of later business case(s) that span beyond the current 10 year period.


"These ten-year costs are expressed in real terms, and exclude costs for capital charge and depreciation. Nominal costs for the programme would be slightly higher.

19 Please refer to paragraph 69 for the programme investment objectives.



125. Strategic Choice 1 is not desirable because it does not mitigate the longer-term risks to the revenue system. Strategic Choice 2 achieves a technology change only with no re-engineering of business processes. While this choice mitigates revenue system risks, it provides little opportunity to change the way in which individuals and businesses interact with the revenue system. This choice is not flexible or scalable to support business process changes. In addition, the useful life of the new technology may be limited if an eventual decision is made to invest in a change programme to re-engineer business processes.

126. Strategic Choice 3 is the preferred way forward with Option 3B as Inland Revenue's preferred ending point. While this option carries a higher total cost than Option 3A, it delivers an organisation that is agile, effective and efficient, enables customers to self-manage with speed and certainty, enables government to make timely policy changes and works with other agencies to optimise interaction across government. It also mitigates the operational risk that Inland Revenue is exposed to.

127. Provided that Ministers agree that Strategic Choice 3 is the preferred way forward, whether Option 3A or Option 3B is selected, the initial investment and work is not fundamentally different. This is because the bulk of early work is focussed on foundational changes to the organisation's business processes and technology infrastructure.

128. Option 3C is viewed as extraordinarily complex to implement. This is because such an implementation would require coordination across multiple agencies, and would require large changes to multiple agencies' technology infrastructure and businesses processes at the same time. Significant legislative and policy changes would be likely, and a large structural realignment of the administering agencies would be required. Given the significant size of Inland Revenue's proposed transformation alone, we do not believe that a large expansion of scope beyond Option 3B is feasible. In April 2013 Ministers discussed and discounted Option 3C.

129. While operational risk is mitigated under Option 3-, it only partially delivers the six changes needed. This option contributes little in the way of delivering more effective services to improve customer compliance, improved customer experiences or cross-government capabilities. As a result, this option has been discounted.

Trade-offs between the options

130. At a broad level, there are four primary trade-offs when considering the possible strategic choices and programme options. These are:

. the perceived affordability of the strategic choice and programme options;

• Inland Revenue's confidence in delivering the strategic choice and programme options;

. the risk to the revenue system if a change is not made, and;

• the benefits that strategic choice and programme options will deliver.



131. Option 1 represents the lowest cost option, but it does not represent the lowest risk option, nor does it deliver any of the capabilities required to deliver IR for the Future.

132. Option 2 represents a substantial investment, and would achieve only one of the investment objectives namely minimising the risk of systems failure. No other investment objectives would be met, and the desired organisational future state outlined in IR for the Future would not be met.

133. As previously mentioned, there are a number of potential off-ramps and development options between Options 3-, 3A, 3B, and (to a certain extent) 3C.

134. Each option also achieves a different mix of the programme's investment objectives. A summary of how each option delivers against the programme's investment objectives is included in Table 7 below.

Table 7 - Programme options contribution to investment objectives

Investment Objectives

Strategic Choice I

Strategic Choice 2

Strategic Choice 3



Option 3- Do

minimum


Option 3B IR for the Future


for the Future

Improving agility so that policy changes can made in a timely and cost effective manner

NO NO YES SOME YES YES+

Delivering more effective services to improve customer compliance and help support the outcomes of social policies

NO NO LITTLE SOME YES YES+

Improving productivity and reducing the cost of providing our services

NO LITTLE SOME SOME YES YES

Improving the customer experience by making it easier and simpler for our taxation and social policy customers

NO LITTLE LITTLE SOME YES YES

Increasing the secure sharing of intelligence and information across government to improve delivery of services to New Zealanders and improve public sector performance

NO NO LITTLE SOME YES YES

Minimising the risk of protracted system outages and intermittent systems failure

NO YES YES SOME

Possible

YES YES

Recommendation

135. Depending on decisions made in later phases of the programme, government may choose various off-ramps that both minimise risk and deliver the greatest range of qualitative and quantitative benefits.

136. We will provide the opportunity, through regular revision of the programme business case and specific deliverables, to allow Ministers make stop/start decisions on the programme.



Indicative programme costs

137. A summary of the costs and benefits for the short-listed options are included above in the evaluation table. All costs and benefits are represented in real 2013 dollar terms. No allowance has been made for growth in customer volumes. These costs are indicative, and have been informed by external subject matter experts.

138. The indicative costs have been informed by estimations from external subject matter experts, who have used their international expertise and experience to develop cost assumptions. Inland Revenue provided the necessary insight and expertise to develop the cost estimate for the base case option, Option 1.

139. Inland Revenue has ensured that these estimates are compliant with NZ Treasury and BBC requireme 1-c incluriinn Pcti rnAtec fnr rienreriAtirn and capital charges.

Withheld under section 81 of the Tax Administration

140. We also engaged Act 1994 to assist us conduct a sensitivity analysis of the cost. The 10 year range and associated costs have been informed by this analysis. The overall cost range is highly sensitive to assumptions surrounding the IT effort and the source of IT resources (through their associated pay rates). The range is also affected by uncertainty of currency movements.

141. These large ranges of costs and benefits will decrease over time as further analysis is conducted and further decisions are made. There is no specific allowance for contingency.

142. It is our expectation that these cost estimates will also be tested with the marketplace as part of a competitive procurement process in the next phase for the programme.


144. Each of these cost categories is explained below:

• Implementation Services: This includes all of the external services that will be required to design, build and implement the new systems and processes



required to deliver the programme. This includes additional specialist skills, such as procurement, vendor management, and programme management.

• Hardware: This includes the entire physical technology infrastructure to implement new systems and processes. This also includes any on-going costs associated with maintaining this hardware within the ten year evaluation period.

• Software: This includes all of the application software and associated license fees to run new systems and processes. This also includes any on-going license and maintenance costs within the ten year evaluation period.

• People (Inland Revenue): This includes all of the internal resources that will be required to design, build and implement the new systems and processes required to deliver the programme. This also includes the non-IT people and resources to deliver the programme (eg, Project Management, Training, Change Management). These estimates also include a provision for restructuring costs.

• Other: This includes legal services, travel costs, IQA and other assurance costs.

145. The bulk of the costs for both options are in implementation services, which reflects the need for expertise that Inland Revenue does not have in-house. The approach for securing these services is discussed in the Commercial Case.

146. The key assumptions that have been made when estimating these costs are:

• External partner(s) will be performing the majority of design, build and implementation of the new systems and processes in partnership with Inland Revenue.

• The partner(s) will initially assist with the detailed design of Stage 1 and high-level validation of the design of stages 2 to 4.

• Estimates for the length of time of the programme have been based on similar revenue authorities and government transformations.

• The programme will be delivered through a number of phases, across a ten-year horizon. Updated costs and benefit analysis will be presented during the life of the programme.

We have developed costs based on a notional set of activities and deliverables for each programme option. Should these activities change substantially, it is possible the total cost estimate for the programme will need to be re-visited.

• No costs external to Inland Revenue have been included. For example, customer readiness costs or costs to other government agencies have not been included.

• Assumes that all services/infrastructure are built and maintained by Inland Revenue, not provided as an on-demand service.

• Cost estimates do not make allowance for significant future policy changes.



147. A detailed description of the approach and the assumptions used to develop these cost estimates is attached as appendix F.

148. The programme cost estimates are highly sensitive to changes in required implementation services, and drive approximately 70% of the total costs. These costs were ranged as part of the sensitivity analysis that was conducted, but should the scope of work alter substantially, it is also possible that costs will need to be updated accordingly.

Indicative programme benefits

149. Three main areas will drive the tangible benefits for the programme. Broadly speaking, these benefit areas are increasing net Crown revenue, reducing departmental costs, and improving customer experience and customer compliance costs.

150. A more detailed analysis of the intangible and tangible benefits for the programme options are included in Table 9 below.

Table 9 - Analysis of benefits

Benefit type

Strategic Choice 2 Strategic Choice 3

Option 2 Option 3- Option 3A Option 3E12°

Intangible (relative ranking)

Reduced time to implement new policy initiatives (I) (I) ID CI Reduced risk of operational failure 0 0 a • Easier for customers ICD C) CO 4110

Improving revenue system integrity (1) (1) o a Tangible ($'m)

Financial benefits to the Crown Limited $100m - $200m

$1,000m- $1,500m

$1,400m- $2,700m

Economic benefits to New Zealand Limited $200m - $400m

$500m- $1,100m

$1,200m- $2,500m

151. Each benefit area is described below:

• Reduced time to implement policy initiatives is the reduction in development and implementation effort associated with implementing policy changes within Inland Revenue.

• Reduced risk of operational failure is the reduction or removal of the risk that a technology or process failure will occur, limiting the ability of Inland Revenue to collect obligations or disburse entitlements.




• Easier for customers refers to providing certainty to customers, significantly simplifying customer requirements to meet their obligations, and improving customers' experience with Inland Revenue and government.

• Improving revenue system integrity refers to reducing fraud, associated with filing incorrect tax information, not filing required obligations, or obtaining social entitlements fraudulently.

• Financial benefits to the Crown include increasing Crown revenue through improving the accuracy of customer tax assessments and reducing the number of customers in debt, and productivity savings for Inland Revenue.

• Economic benefits to New Zealand are the reduction in customer compliance costs associated with meeting tax and social policy obligations. This is estimated by reducing the annual time that businesses spend on tax compliance. These cost savings are only estimated for small and medium- sized businesses21. Note that this benefit assumption includes a 1:1 substitution, meaning that all money saved is reinvested in the economy. It also includes the productivity savings for Inland Revenue.

152. The primary differences driving the changes between the quantifiable benefits in Option 3A and Option 3B are compliance cost benefits (wider economic benefits), and net Crown benefits. These are being driven by two primary assumptions:

• Option 3A assumes that compliance cost reductions are attained only for activities associated with PAYE compliance.

• More gains are available from Option 3B because all tax and social policy products are transferred to the new platform, enabling gains to be realised more widely across Inland Revenue.

153. For net Crown benefits, Option 3A captures only revenue benefits associated with reducing debt and increasing revenue capture for the PAYE system. Option 3B captures benefits for reducing debt and increasing revenue capture for additional products and services, such as Student Loans, GST, and other products and services.

154. Departmental efficiency benefits arise from reduced re-work and productivity savings, and consolidation and streamlining of our IT systems, data storage, and architecture.


21 Businesses with 50 or less employees, and/or a turnover of less than $12.5m per annum.





157. The potential monetary benefits for each measure have been estimated by Inland Revenue subject matter experts and compared to similar programmes of work in other jurisdictions. Inland Revenue subject matter experts have also been used where appropriate, to assist in validating and ranging these measures and benefits.

158. Guidance from the Treasury's Cost Benefits Analysis Primer has also been used where appropriate, although it is important to note that as this is a Programme Business Case, only a high-level cost benefit analysis has been conducted.

Programme risks

159. The key strategic risks that the programme is exposed to are:

a) Are we doing the right things?

Risks Mitigations

• Transformational planning is not fully mature so the preferred way forward may not deliver the benefits anticipated or may cost more.

• The proposed next steps of the programme will refine our transformation plans (please refer to Chapter 7 — The Next Steps).

• Strong programme governance and • The external environment, including

government and customer requirements/expectations and technology developments, may change over the life of

management that is representative of internal and external stakeholders and responsive to their needs.

the programme. • Provide clear accountabilities and owners

for risks and benefits that the programme will deliver.

• Programme plans designed around giving Inland Revenue and government flexibility to respond to changes and provide regular decision points.




b) Can we deliver the programme?

Risks Mitigations

• We cannot manage the programme and continue to deliver on government priorities and business as usual,

• Strong organisational and programme governance and management to ensure that organisational priorities are clear and any trade-offs are discussed and agreed with government.

• We cannot source and manage the services and expertise that we require to deliver the programme.

•

•

A transparent procurement strategy is developed to test and engage with the market.

Resources with proven experience in procuring and managing large scale vendor contracts will be acquired.

•

•

High dependence on third parties, including other government agencies and intermediaries, to support with the changes proposed.

The programme becomes disconnected from Inland Revenue service delivery functions and revenue system participants and the transition to the new operating model is slow and complex.

• Extensive engagement with other government agencies, revenue system participants and within Inland Revenue to ensure design is fit for purpose and they are prepared for change.

c) Are there other implications for government?

Risks Mitigations

• The potential impact of Inland Revenue's transformation on other agencies has not been assessed.

• We will work closely with other agencies to identify where changes may be required, and these impacts will be included in future business cases.

• There may be intervals in which government's ability to make significant policy changes is constrained.

• We will work closely with Ministers to ensure that any potential constraints or trade-offs are identified and discussed early.

Programme roadmap and starting point

160. A programme roadmap has been developed to support Option 3B as the preferred way forward. The roadmap, shown in diagram 4 overleaf, sets out the starting point for the business transformation programme and the overall phasing of the programme.

161. The roadmap was developed and tested in phases within Inland Revenue and with central agencies. The first step was to agree of a set of principles to help guide the development of the roadmap (these can be found in appendix I). A logic map was created (please refer to Appendix C), based on the Target Operating Model (please refer to appendix D), which provided the basis for developing possible roadmap approaches and options. At each stage, underlying assumptions, thinking and outputs were socialised and refined with a small, internal reference group and with central agencies.



162. Key considerations in developing the programme roadmap were to:

• Deliver visible benefit to New Zealanders and New Zealand businesses as soon as possible;

• Contribute to Government priorities, including Better Public Services and the Government's ICT strategy;

• Mitigate implementation and delivery risk as far as possible by taking smaller steps; and

• Provide Ministers with frequent opportunities to monitor progress and determine the desired level of investment in New Zealand's future revenue system.



Diagram 4 - Programme roadmap

1. EnablinnjcuidipjtaIjjyjces

• Advance channel strategy work including redesigning website and continuing development of customer tools with customers

• Encourage customers to self manage and use digital channels • Improve the collection of GST and PAYE Information from business • Deploy services required to streamline PAYE, e.g. validation checks • Develop integrated intelligence and interventions for PAYE

_Key Outcomes: • The majority of customers self-manage and use digital services • Digital border established • Businesses compliance burden to fulfil PAYE [and GST] obligations

is reduced • Improved data accuracy and certainty of Income tax deductions and

social policy entitlements and obligations for individuals • Fewer processing and customer contacts • Customers have confidence that their personal information is secure

Key Outcomes: • Compliance burden to fulfill income and business taxes

obligations is further reduced • Fewer processing and customer contacts surrounding

income and business taxes • Compliance assurance activities are intelligence -led • Increased reliability and flexibility (incl. policy agility) for

Income and business taxes

Imigtreamline income & business tax processes •411111

• Design of streamlined income and business tax processes with stakeholders

• Proof of concepts and/or pilots to test key design concepts • Acquire/build additional services required to support income and

business taxes • Transition income and business taxes to the future state

3. Streamline social policy delivery

Design of streamlined social policy delivery with stakeholders Proof of concepts and/or pilots to test key design concepts Acquire/build additional services required to support social policy delivery Transition social policies to the future state

Key Outcomes: • Social policy processes are digital and streamlined • Fewer processing and customer contacts surrounding

social policy • Enforcement activities are more focused and require fewer

resources • Increased reliability and flexibility (incl. policy agility) for

social policy products

Key Outcomes: 4. Co Pete deli of uture evenu stem • Revenue system is flexible & government has policy agility

• Infrastructure supporting the revenue system is robust i • Design, with stakeholders, of remaining services to be transitioned • Revenue system compliance is higher

• Proof of concepts and pilotto test key design concepts • Inland Revenue is intelligence-led, leaner & more i • Acquire/build additional services productive i • Transition to the future state • Increased interoperability with other agencies/ 3 parties

An Ilhotratlw TInwilna Vi Y2 53 54 55 Yi 57 YS VI 510


2. Streamline Income and business tax procasses

3. Streamline social policy delivery

3. Complete the delivery of the future Revenu e System —411

51.

COMMERCIAL IN CONFIDENCE! 22 October 2013


163. The programme will be delivered in four customer-focused stages over a period of approximately 10 years:

. Stage 1: Enabling secure digital services to allow the majority of customers to self-manage and reduce businesses' compliance burden in fulfilling their PAYE obligations;

• Stage 2: Streamline income and business tax processes will leverage the foundations delivered in the previous stage and further reduce businesses' compliance burden to fulfil their tax obligations;

• Stage 3: Streamline social policy delivery will improve the delivery of the social policies that Inland Revenue administers; and

• Stage 4: Complete delivery of the future revenue system will include transitioning any remaining taxes and social policies to a new platform and de-commissioning technical platforms that are no longer required.


26 The indicative benefit ranges for the preferred option (Option 3B) have been revised since March 2013 as a result of changes to sequencing reflecting a more measured, de-risked delivery and to assumptions for customer compliance savings following validation from Inland Revenue's research team.



165. As part of the detailed design of Stage 1 we will work with our transformation services provider(s) to ensure that we do not over invest in the capabilities required to deliver this stage. Investments will be made on an as required basis and will be sequenced as evenly as possible, unless the best option is to invest up-front. However, the cost estimates above are conservative and assume that the bulk of software and hardware required - Withheld under section 81 of the Tax Administration Act 1994

- will be purchased in the first stage. Overall business process and technical design/implementation effort is about the same for Stages 1-3.

166. Stages 2 and 3 could be swapped if so desired. This order has been proposed because it aligns with the priority of building a more competitive and productive economy; and recent investments in Student Loans and Child Support will require bedding in before further changes are made. Additionally, streamlining PAYE as part of Stage 1 will improve the timeliness and accuracy of employment information which contributes to the targeting and accuracy of welfare entitlements.

167. Common, all-of-government ICT capabilities will be adopted where they exist. Where they do not, consideration will be given to whether the investment being made in the revenue system can be leveraged across government. We will continue to work with the DIA (GCIO) to understand how best to involve them in the design process to achieve these outcomes.

168. We are progressing a number of initiatives that contribute to Better Public Services Result 9 and Result 10. For example, we are working with the Ministry of Business, Innovation and Employment to explore the feasibility of implementing a single business number for tax administration purposes. We are also working with the Department of Internal Affairs to explore possibilities for RealMe as part of the business transformation programme.

Stage 1: Enabling secure digital services

169. This stage will lay the foundations for future stages. It will directly contribute to both Better Public Services Result 9 and Result 10, and is strongly in line with the themes of the all-of-Government ICT Strategy: in particular "Services are digital by default" and supporting cross-agency collaboration and a more joined up government. For example, this stage could include the use of all-of-government services such as common web platform services to underpin the re-development of the Inland Revenue website.

170. Stage 1, shown in diagram 6 overleaf, will be delivered in manageable steps. To provide added assurance, proof of concepts and/or pilots will be used to test key design and technical components. A key underlying principle is that all customers will have confidence that their personal information is secure.


A. Optimise channels

• Advance channel strategy work including redesigning webslte and continuing development of customer tools with customers

• Remove duplication and retire legacy channels • Encourage customers to self manage and use digital channels

B. Improve information collection from business

• Improve collection of GST and PAYE information from business • Integrate with customers business processes and software • Use proof of concepts and pilots

C. Streamlined processes tor PACE

• Deploy the processes & services required to support PAYE • Use proof of concepts and pilots • Build and Implement in a number of small stages

D. Improve intelligence and interventionsim.

• Develop integrated intelligence and Interventions for PAYE



Diagram 6 — Stage 1: Enabling secure digital services

171. The desired outcomes of this stage are that our digital services will allow the majority of customers to self-manage and reduce businesses' compliance burden in fulfilling their PAYE obligations. This stage will also lay the technical foundations for the programme.

172. The key outcomes, activities and risk mitigations associated with Stage 1 are shown below.

Stage 1. Enabling secure digital services

Key outcomes Key activities Key risk mitigations

•

•

•

•

•

•

The majority of customers self- manage and use digital services.

Businesses' compliance burden to fulfil PAYE obligations is reduced — for example employee details sent directly from payroll system; the EMS will not exist.

Improved accuracy and certainty of income tax deductions and social policy obligations for individuals.

Reduced processing effort and customer contacts for government.

Customers have confidence that their personal information is secure.

Information will be validated upfront and data will be checked at the point of entry for reasonableness and run through risk analytics, contributing to reducing errors and subsequent re-work.

•

•

•

•

•

•

•

Engagement with New Zealanders and New Zealand businesses to ensure that their needs are fully acknowledged and understood.

Selection of a transformation partner(s).

Development and implementation of digital services.

Detailed design of Streamline PAYE processes.

High level design of other stages.

Build and implementation of initial technical foundations and Streamline PAYE processes.

Engagement with businesses, their advisors, payroll providers and software providers to develop processes.

•

•

•

••

Take methodical, small steps in implementing the programme through a series of projects that will contribute to the overall outcomes.

Undertake broad and continuing stakeholder engagement with New Zealanders to ensure that their needs are understood and met.

Use specialist resources (including independent assurance and advice) with proven experience in similar, large-scale organisational change programmes.

Learn from the experience of others including jurisdictions such as the Australian Tax Office.



6 Other considerations

173. This section outlines the:

• Financial case - the financial case discusses the affordability of the preferred way forward and proposes a strategy to fund the investment;

• Management case - the management case addresses the achievability of the proposal and outlines the arrangements required to ensure successful delivery of the preferred programme; and

• Commercial case - the commercial case discusses the commercial viability of the proposal including the likely products and services to be procured.




Management case

187. Inland Revenue recognises that the business transformation programme is a large and complex endeavour. As well as implementing the programme we will need to:

• deliver our on-going services within a constrained fiscal environment;

• contribute to Government's Better Public Services Programme; and

• deliver government's tax and social policy work programme during the implementation.

188. We have established new organisational leadership, management and governance arrangements that support clear accountability and create a dedicated focus on organisational change. We have also put in place independent assurance arrangements, to provide confidence that Inland Revenue is successfully delivering the programme.

189. In order to be successful we will have:

• opportunities for government to monitor programme progress and regularly review investment decisions;

• broad engagement with customers, other agencies and 3rd parties to ensure that the changes we propose meet their needs, are fit-for-purpose and provide opportunities for greater private-sector involvement;

• developed internal capability to manage large change programmes and the procurement of service and product suppliers; and

• a design and implementation partner/s who have proven experience in transformation programmes of this scale and complexity.

Overall governance and management of change

190. A review of our senior management and organisational-level governance arrangements has been completed in order to ensure that Business Transformation will be successfully managed. Additionally, the Commissioner's job expectations include successfully delivering business transformation as a key responsibility.

191. A new organisational governance structure has been adopted from 1 July 2013. An experienced business and ICT transformation executive has been appointed to the role of Deputy Commissioner, Change, with responsibility for leading and co-ordinating all change activities, including Business Transformation, across Inland Revenue. The Deputy Commissioner, Change is the Senior Responsible Owner (SRO) for the programme. In addition, a Deputy Commissioner, Information, Intelligence and Communications with extensive experience in customer engagement and analysis has been appointed to provide core capability to support transformation.

192. The Change group will:

• include strengthened permanent portfolio planning, integration and sourcing capabilities;



• provide an integrated view of portfolio resource demand;

• inform, shape and provide assurance on the enterprise design, architecture and portfolio delivery; and

• provide support, integrated information and advice to governance boards and sponsors on risks, opportunities and benefits to enable prioritisation and decision making.

193. Bringing all of Inland Revenue's change initiatives into one portfolio will provide a transparent and integrated approach to managing change initiatives. Current and future change initiatives, recognising the likely increased demand from transformation, will be brought together into an integrated, multi-year portfolio plan that facilitates investment decision making and informs likely funding requirements. This plan will enable Inland Revenue to participate effectively in budget and government processes and provide a transparent and comprehensive view of how change investments will be delivered and benefits realised.

194. The Change group is responsible for delivering an integrated, multi-year portfolio which is achievable and which takes account of all the change activities across the organisation. The Change group will ensure that it has the capabilities, resources and tools to effectively deliver on portfolio outcomes and benefits. In particular this means a greater emphasis on planning, prioritisation and decision making.

195. Three new governance forums have been established to focus on Business Performance, Investment, and Strategy. All of the Executive Leadership Team are members of these new governance forums. The organisation's governance arrangements have been significantly simplified, and they create central accountability for all organisational change as illustrated in Diagram 7 below.

Diagram 7- Inland Revenue key governance forums

1 1

I

Investment Board

Business Performance Board

1

Strategy Board

4 I

196. The Investment Board has a complete view of change across the organisation, inclusive of Business Transformation, and is chaired by the Commissioner.

Programme governance and management

197. The governance and management arrangements for Business Transformation have been reviewed following the establishment of the Investment Board. A Transformation Programme Steering Committee (TPSC) has been established and meets at least fortnightly, comprising tier 2 and tier 3 managers from within Inland Revenue. The TPSC provides assurance to the Investment Board that the transformation plan is being delivered in a timely and appropriate manner.

198. Inland Revenue will continue to ensure that programme governance is clear and includes representation from appropriate internal and external stakeholders, including other government agencies.


Investment Board

Includes External Advisors

Work streams Work streams

Implementation partner(s)

Inland Revenue management and

functions

Governance bodies

External advice & assurance


199. In addition, we will ensure that management of the programme will have clearly defined roles and responsibilities. The generic programme governance and management structure that will be applied is illustrated in Diagram 8 below32. The number of work streams, exact mix of capabilities and total number of resources that will be required will vary over the life of the programme33.

Diagram 8 - Generic programme management structure

Commissioner for Inland Revenue

External Reference

Group

Account Director (Prime Vendor)

Deputy Commissioner Change (SRO)

Transformation Programme

Steering Committee

Gateway

Independent Quality

Assurance

Programme Design Authority

Programme Director

(Implementation Partner)

Programme Director (Inland

Revenue)

• Programme Management

External Programme

Advisors

(Includes sub-contractors)

200. A dedicated Programme Director will lead the Business Transformation programme. The role of the Programme Director will be to oversee the successful delivery of the programme. The Programme Director will have previous experience in leading or delivering a successful large-scale change programme.

201. The Programme Director will be supported by a programme management function. It is anticipated that this will include capability across a number of areas:

Planning and reporting - to lead and co-ordinate programme and resource plans, and to monitor and report on programme progress, risks and issues;

• Finance — to monitor programme costs and benefits and undertake financial modelling, project cost analysis and forecasting;

32 Independent Quality Assurance processes shown in diagram 8 include central agency assurance processes. 33 Please refer to paragraph 263, diagram 9 below for current programme structure arrangements.



• Procurement - to manage the various procurement activities that will be required through-out the lifecycle of the programme in accordance with government procurement policy;

• Supplier management - to manage suppliers against agreed service levels and deliverables;

• Quality Control - to ensure that recommended solutions and deliverables adhere to programme and government architectural principles, and remain consistent with appropriate standards.

• Legal - to provide advice on supplier agreements and ensure compliance with relevant legislation;

• Communications - to manage communication with key stakeholders and to manage media relationships; and

• Change management - to lead the transition to Inland Revenue's operating model and manage internal and external stakeholders.

202. Any required policy changes will be managed by our Policy Advice and Strategy (PAS) group following government's Generic Tax Policy Process (GTPP). Throughout the life of the programme PAS will include potential policy changes in the tax policy work programme.

203. While Inland Revenue will seek to assign its most capable people to manage the programme, we recognise that we will also need to significantly develop our capability to successfully deliver the programme. The key areas where we will have to recruit expertise or engage suppliers to assist us are:

• procurement and vendor management - Inland Revenue's capability will be developed but consultants and/or contractors will initially be used;

probity advice and assurance - suitably qualified consultants will be used;

programme and project assurance - suitably qualified consultants will be used;

programme management - Inland Revenue's own capability will be supplemented with consultants and/or contractors with relevant experience;

change management and communications - Inland Revenue's own capability will be supplemented with contractors with relevant experience; and

• business process and system design and implementation - it is our intention to engage a design and implementation partner(s) rather than develop these capabilities internally.

204. Individual work streams will be responsible delivering the components of the programme. The configuration and number of work streams will vary depending on scope and delivery strategy. Resources with appropriate levels of programme and project management skills will be required to manage each work stream and individual projects within each work stream. Work streams will be managed and resourced by Inland Revenue or by a supplier depending on the deliverables and/or the commercial arrangements that have been put in place.



205. Given the reliance on external capability to deliver the programme, a detailed sourcing strategy will be developed. The sourcing strategy and approach is discussed within the Commercial Case.

206. It is anticipated that the programme management and governance board will continue to be supported by a number of advisors to provide external and impartial guidance. For example:

• Ernst & Young is currently providing advice on the procurement approach and strategy for the programme, including programme management support;


207. Inland Revenue has established an external reference group to provide an external and independent voice to assist us guide the programme. The Group operates as a 'sounding board' for ideas and innovation around design and delivery of better services and policy development, and provides assurance on the external implications of our work. It includes high profile representatives from business and the community. The current members of the Group are:

• Paul Dunne, Chair of the Tax Advisory Group

• Phil O'Reilly, Chief Executive of Business New Zealand

Geof Nightingale, Partner at Price Waterhouse Coopers

John Payne, Head of Tax, Corporate Taxpayers Group

Ian Perry, Director of Chelmsford Consulting, and

• Kerry Dalton, Chief Executive of Citizens Advice Bureau New Zealand.

208. In addition to Inland Revenue's governance processes, the Government ICT Ministerial Group has provided additional ministerial guidance to Inland Revenue on the programme.

Programme controls and reporting

209. The programme will be managed using a recognised programme management framework such as Managing Successful Programmes (MSP). The choice of the framework that will be used will be made in conjunction with a design and implementation partner.

210. The key programme controls will be:

a) The programme business case will be refreshed regularly to reflect any significant changes that require adjustments to the programme's overall investment objectives, recommended stages or projects.

b) Updates will be provided to Ministers at least annually, on the basis of the updated programme business case, to advise them of progress and any significant changes to the programme. Additionally, any significant variation to the programme will be advised to Cabinet when they occur.

c) Further business cases(s) will be prepared for individual projects or stages, for consideration by the programme board and Cabinet that will clearly articulate the investment objectives, expected outcomes and the recommended way forward. Each business case(s) will include a 'do minimum' option.



d) Programme assurance and monitoring - independent external programme assurance arrangements have already been put in place to provide assurance to Inland Revenue and ministers, including:

• Independent Quality Assurance (IQA) of the programme - KPMG has been engaged to review the programme's Strategic Assessment, the Programme Business Case submitted in March 2013, and the additional work undertaken to support the report back to Cabinet in August 2013. They have also provided independent audits of the quality of the programme deliverables. Future IQA reviews will be presented at the Investment Board and central agencies including the DIA (GCIO) will receive copies of all IQA reviews.

• Gateway Reviews - an initial Gateway 0 was held on the programme in May 2012, and a second Gateway 0 was conducted in the week commencing 17 December 2012. Additional Gateway 0 Reviews will be conducted on the programme and individual initiatives will have Gateway 1- 5 reviews when later business cases are developed to support decision points.

e) Monitoring of programme's progress by Central Agencies, including the DIA (GCIO).

211. Regular reporting on progress is provided as follows:

• Monthly reporting to the Investment Board and the Programme Steering Committee;

• Monthly and quarterly reports are provided to the Minister of Revenue, for referral to the Minister of Finance;

• Four-monthly reporting to Central Agencies as part of the Major Programmes Monitoring process;

• Yearly through the department's Annual Report; and

• Reports will continue to be provided to the Government ICT Ministerial Group prior to key decision points.

212. The Gateway 0 review conducted in the week commencing 17 December 2012 rated the overall status of the programme as Amber (meaning the programme/project should go forward with actions on recommendations to be carried out before the next Gateway Review of the programme). Inland Revenue has addressed all of the review's recommendations. Recommendations regarding the programme business case have been incorporated in this document.

213. Programme risks are being managed through a governance and risk assurance framework that complies with good practice and industry standards. Inland Revenue's methodology is based on a number of internationally recognised risk management standards.

214. Business transformation will be subject to the same strong financial planning and management controls as the rest of the organisation.

215. Inland Revenue's strong risk and financial management capabilities have helped contribute to quickly making difficult decisions in the past. For example, Inland Revenue recommended halting work on the original Student Loans Redesign



project when it became apparent that such an approach would be far more complex than originally anticipated. This action enabled government to avoid further investment in a solution that was not fit-for-purpose.

People impacts

216. This is a major programme of change. There will be significant organisational impacts for our people, processes, policy, and technology. Although the transformation will be enabled by significant technology change, the programme is fundamentally about changing the way that Inland Revenue works in order to deliver IR for the Future.

217. Our people will be the key to making business transformation a success. Delivering IR for the Future will require a different mix of skills to provide a modern revenue system. Our workforce of the future will:

• be cross-skilled across a greater range of products and processes to provide Inland Revenue with a workforce that can be more efficiently used;

• be adept in the implementation of change and have greater capability in programme management, vendor management, change leadership, co-design of services, stakeholder management and emerging technology product knowledge;

• have stronger analytical skills, including the ability to interpret information to drive compliance; and

• spend less time on transactional work, and more time on information and intelligence assessment.

218. Change management will be critical to the success of the programme. A change management strategy will be developed that:

• clearly outlines the rationale for the change, and what changes will occur and when they will be implemented;

• provides effective communications and consultation;

• has fair, transparent, and effective transition processes to the new operating model.

219. The change management strategy and plans will be included in future business cases to ensure the required workforce changes and behaviours are successfully managed. This will include any intellectual capital transfer to Inland Revenue from transformation service provider(s).

Stakeholder engagement

220. Input and feedback from New Zealanders will be critical to the successful modernisation of the revenue system. Customer services will be designed around the needs of New Zealanders, and new services will be fully tested with customers. We will engage with New Zealanders to seek their input to transform the way in which they interact with us, and with government in general, and to provide greater certainty.

221. A stakeholder engagement plan is being revised to reflect the updated programme business case. The plan will identify how we will engage key stakeholders



including other agencies, third party intermediaries (including the accountancy profession and the Id T industry), the tax and business community, and customers about our transformation. This plan will identify the level of engagement appropriate to each stakeholder group.

222. Engagement with a targeted set of stakeholders is underway, for example senior leaders meet regularly with the Transformation Reference Group and the Government's Small Business Development Group to test ideas and thinking.

223. As part of our programme planning we will provide opportunities for New Zealanders to be involved in and contribute to the design of the future revenue system. We already have excellent infrastructure and programmes in place to capture and derive insight from customers' behaviour and data. Building on a base of existing customer research and strong stakeholder relationships, we intend to develop a multi-dimensional approach across a wide range of customer groups. These engagement mechanisms are likely to include:

• targeted market research activities to design services around customer needs;

• leveraging existing stakeholder reference groups and panels, including the Transformation Reference Group, the New Zealand Institute of Chartered Accountants, Inland Revenue's Software Development Liaison Group and those established as part of Better Public Services; and

• formal consultation using the Government's Generic Tax Policy Process (GTPP) which could include the use of on-line forums to facilitate wider discussion.

224. In addition, we will continue to work with the Better Public Services Result Areas to ensure that the engagement and design work that is underway is leveraged.

225. In April this year, in conjunction with the Minister of Revenue, we released information showing the progress of different phases of the business transformation programme and the case for change. We plan to release further information as and when appropriate.

226. Some groups will be asked to provide direct input into the transformation programme; others will be invited to provide advice or comments; and some will simply be informed of progress.

227. Consultation on any policy changes will follow the government's Generic Tax Policy Process (GTPP) and ensure that there is an open, interactive consultation process with other agencies and external stakeholders, including the general public.

Learning from the experience of others

228. The programme will seek to learn from the experiences of other agencies and organisations who have undertaken similar change programmes. Two recent reports prepared by Inland Revenue, one reviewing the Novopay project34 and the other reviewing change programmes in other revenue authorities35, outline our

34 IRD2013-099 Lessons from Novopay 35 IRD2013-144 Delivering NZ's future revenue system — change programmes in other revenue authorities



key observations of the challenges of managing large change programmes and how we plan to incorporate these insights into our work.

229. These reports reinforced the need for strong governance and leadership, using specialist expertise where needed, and the importance of involving customers and other key stakeholders in design.

230. Engagement with other agencies and revenue authorities is on-going to ensure our understanding of their environments and challenges remains current.

231. There are some fundamental differences between Inland Revenue's business transformation programme and Novopay:

• The roadmap allows for the programme to be delivered in manageable steps, with frequent investment decisions supported by business cases allowing Government to adjust the pace and scope of the programme according to circumstances;

• New Zealanders and New Zealand businesses will be involved in and contribute to the design of the future revenue system, allowing the opportunity for customer-led process and policy changes to be developed before any technical specifications are defined;

• Inland Revenue owns FIRST, the technical platform, and is not under immediate pressure to decommission it. We have confirmed technical support for the platform and therefore have direct control over implementation dates; and

• Implementation of technical components will be carefully phased and we will ensure that we have the capability and capacity to run the old and new platforms in parallel.



Commercial case

Required services & products

232. Inland Revenue recognises that a significant amount of external expertise will be required in order to successfully deliver the programme, particularly in light of the fact that this investment is likely to represent the largest business and technology change programme the government has progressed for some time.

233. Transformations of this scale require strong governance and specialist capability, and Inland Revenue does not have all of this capability internally. These capabilities will include a range of governance, change, and specialist technical skills, most of which will need to be supplemented with appropriate resource from the marketplace.

234. Although a substantial number of skills will be sourced from the market, Inland Revenue recognises that it holds full accountability for delivery of the programme. Although Inland Revenue may supplement its own internal procurement expertise with other parties who have substantial experience in managing programmes of this scale, overall accountability for the successful delivery of the programme will remain with Inland Revenue.

235. As noted in the Management Case, IT development capabilities will be a core specialist capability Inland Revenue will need to source, as well as significant external process and change management expertise. Experience in similar scale transformations within government will be a key requirement.

236. There is a potential risk that a large, unmanaged demand on IT resources will place strain on the ability of the private sector and other government agencies to obtain sufficiently skilled IT resources for their own programmes of work. We will work with MBIE and any potential suppliers to ensure that there are clear plans and mitigations put in place to ensure an adequate supply of resources.

237. Inland Revenue has engaged a strategic sourcing partner, Ernst & Young, to develop an overall sourcing strategy for the programme. The Investment Board (previously the Transformation Programme Board) has reviewed these potential approaches, and identified a preferred sourcing approach for the programme.

Analysis of the possible commercial arrangements

238. Development of the programme's overall procurement approach commenced in December 2012. The intent of this review was to identify potential commercial and sourcing arrangements and to learn from similar transformation programmes internationally. This analysis was primarily focussed on the selection of an implementation partner(s) with a significant technology-enabled transformation track record.

239. As part of an analysis of the potential commercial structures, a range of potential contracting approaches were identified as possible options. These are summarised below.



A number of possible delivery models could be utilised by the programme in order to partner with external suppliers.

Description IR Capability Required Pros Cons Recommendation

_

I

_

IR

r

0

' Iii)

- One or two supplier(s) engaged to deliver the outcome

- May use multiple third parties to deliver - Prime holds the commercial relationship

with the sub-contractors

- Vendor management of large-scale commercial contract

- Commitment to a strategic partnership

- Single point of responsibility - Build 'best-of-breed' with each

supplier playing to their strengths - Can leverage established partnerships

both reducing cost and mobilisation time

- Broad market input

- Possible higher cost due to Prime passing through a management margin

- IR may have less control over sub- contractor selection

/Preferred

Common model used to deliver similar programmes internationally

Cons

ortiu

m

0

- Multiple parties engaged to deliver design and implementation in collaboration

- Requirement to present a consolidated management layer with collective responsibility

- Each party can have a contract with IR

- Vendor management of complex, multi-source commercial environment, multiple large-scale contracts

- Build 'best-of-breed' with each supplier playing to their strengths

- Can form quickly in the market in the right conditions

- Can give more direct control over the top-to-bottom supplier mix in the eco- system

- Difficult to manage lines of responsibility

- Can take time to form in the market if the market is not already primed

- Consortium parties can have conflicting objectives

- A bidder who would be preferred if they were independent may rule themselves out as part of an unsuccessful consortium

e Possible

Could provide the opportunity to directly engage NZ suppliers

_ O'

,,±m

¢' 5

r, te —

- Single supplier engaged to deliver design and implementation through the use of IR third parties

- Each party has a separate contract with IR

- Management of multiple contracts in a complex environment

- Arbitration in supplier disputes

- Removes IR's management responsibility

- Allows the use of suppliers network as ' an introduction to partners

- Complex management environment transferred to supplier

- Aggregator has limited power or leverage over third parties

- Difficult to attribute responsibility - Would require significant IR resources

to manage

ePossible

Would help engage the market, however this approach is often unpopular with many suppliers due to blurred lines of accountability and control

_ oi c t, '5 vi

u 7) in

le

of to

- Multiple parties engaged to deliver design and implementation

- Each party has a contract with IR

- Vendor management of multiple commercial contracts

- Overall system integration completed by Inland Revenue

- Allows direct control over all participants in the eco-system

- Multiple contracts to manage - Multiple parties to be managed and

co-ordinated towards a single outcome - Requires significant IR resources to

manage

ePossible

Vendor and system integration management is considerable, and would require a large IR management team

—

a u 't to

Jo!, IF)

_

a

s .

- One supplier is engaged to deliver design and implementation without the use of third parties

- Extensive evaluation criteria to evaluate a capable partner

- Single point of responsibility - Possible to develop a close partnership

- Limited selection of suppliers capable of supplying these services in the NZ market

*No Given the scale and scope of the programme, there is unlikely to be a vertically integrated supplier capable of delivering the programme in its entirety

_

u a 2

I.

.

_

•

- IR does the end-to-end Phase 1 activities themselves

- Design, Build, Implement, and management skills required, which would need to be resourced by IS

- Tailored solution designed by the organisation, for the organisation

- Huge resource requirement - Skills and capability gap in both

management and delivery - Insular focus, limited market/external

input

4-5)NO Resource requirement is beyond what could conceivably be built given the market and timescale constraints

V = Vendor, IR = Inland Revenue


Pros Cons Recommend Representation Potential Engagement Scope

1

2

3

ID I) 1.

2

3

4

2 RI

3

4

• Ability to select the best supplier to fit requirements of each phase

• SR has control over each phase

This procurement approach aligns best with the traditional government procurement and funding model

• Possibility of engaging with a large number of suppliers

• Ability to source the best supplier for design only

• A single supplier has oversight of the whole system and delivers a consistent design across the programme

• SR has control over the management of each phase of the programme

• Engaging a separate supplier in the build phase could result in significant rework

• Going to market at the end of each phase creates breaks in project momentum and increases the timeline

• Significant cost incurred by suppliers to participate in several procurement processes

• Engaging a separate supplier in the build phase could result in significant rework

• Project timeframes span several years with significant gaps between phases

• Due to this timeline, agreeing appropriate risks and incentives with suppliers will be difficult

Potential for duplication of effort between designer and builder

Design for Stage 1 Only

Design for Entire Programme

• Supplier knowledge is maintained throughout the first phase of the programme

• Ensures continuity between phases of the first phase of the programme

• A single supplier has accountability for design of the overall programme

• Supplier knowledge is maintained throughout the first phase of the programme

• Enables the supplier to be engaged through defined stages with an initial contract for design of a small part of the overall programme thereby reducing risk

• Retains ability to contract other service providers for discrete parts of the programme if required

• Engaging separate suppliers for design in other programme phases may cause duplication of effort

• This procurement option is not wholly aligned with the Government's traditional procurement models

• Significant reliance on a key supplier

• Potentially engaging separate suppliers for build and implement in later phases could increase programme timeframes

• Due to the large scope of the design work, agreeing appropriate risk-sharing and supplier incentives may prove difficult

• Due to staged contracting with the vendor, SR may not be able to negotiate optimal terms

Phase

Phase

Complete Stage 1 Implementation

Design of Entire Programme + Complete Stage 1

• Supplier knowledge is maintained across the entire programme

• Less specific requirements drive higher market competition

• High reliance on a single, key supplier

• The timeframes and magnitude of the programme limit the ability to contract with suppliers for the entire transformation programme

• Limited opportunities for specialist, local suppliers to participate End-to-End Transformation

Phase

2

3

4

Phase

:ILI:1461016

Phase

1

2

3

4


There are also choices about how Inland Revenue can approach the market and what services it seeks to procure from the market as part of an initial engagement

D = Design, 8 = Build, I = Implement, R = Run



The proposed commercial model

240. Inland Revenue has recommended a preferred approach for both the contracting model and initial market engagement.

241. Inland Revenue's preference is to secure a vendor with specific expertise in large-scale business technology transformations, to provide the necessary scale and to provide a single point of responsibility.

242. However, Inland Revenue also recognises the desirability of providing appropriate roles for New Zealand-based suppliers. The large scale of this work means that Inland Revenue will require significant external expertise and other auxiliary services, and will work with the strategic partner to identify and source appropriately skilled New Zealand-based suppliers where possible. It should be noted that this approach does not exclude the use of other vendors where that meets Inland Revenue's requirements, and that Inland Revenue's portfolio of change is expected to provide a range of opportunities for New Zealand-based suppliers.

243. Other contracting models were considered but not preferred because more complex supplier models would require significant internal procurement expertise and resourcing, and Inland Revenue does not currently possess these skills. As a result, it was viewed that a distributed sourcing model where more responsibility is placed on Inland Revenue would expose the programme to an undue level of risk.

Initial market engagement

244. The preferred scope of sourcing is to secure a design partner to undertake the detailed design for stage 1 and high-level validation of the design for stages 2 to 4. This partner may also be used to later build and implement components of the programme.

245. The engagement and negotiation timeline for this approach is likely to be lengthy. Similar transformations have commonly taken up to two years to finalise supplier agreements and contracts.

246. As the programme will be a long-term, multi stage process there will be opportunities for different service providers with the right skills and experience to assist Inland Revenue in design, build and implementation.

Proposed procurement process

247. Inland Revenue has issued a Transformation Market Brief that sets out the vision, case for change, goals, desired outcomes and benefits of our transformation, our current business model and high-level view of our technology environment and the proposed four-stage procurement process. An Expression of Interest (EOI) will follow this initial market briefing stage in October 2013.

248. The EOI stage aims to verify whether potential service providers(s) have the capability and capacity required to meet Inland Revenue's needs. An expected outcome of the EOI stage is a shortlist of service providers to be invited to participate in the Competitive Dialogue stage.

249. This EOI process would be followed by Competitive Dialogue (CD), which would provide the opportunity for potential service provider(s) to query the outcomes 72 COMMERCIAL IN CONFIDENCE / 22 October 2013


and requirements in the EOI in greater detail, and also allow Inland Revenue to further refine its outcomes and requirements in preparation for issuance of a formal Request for Proposal (RFP). A further down-select of potential vendors may occur at this stage as well.

250. The RFP would be significantly shorter than other large-scale RFPs, primarily because vendors would have already been significantly engaged through the EOI and CD processes, and it is expected that an RFP evaluation could be significantly shorter.

251. Following conclusion of the RFP evaluation, we would then look to enter negotiations with a preferred supplier, and finalise contractual arrangements to bring on board a transformation service provider(s).

Depth of the market

252. A more detailed market analysis has been conducted as part of the sourcing strategy and market engagement processes. This market analysis has informed the broader procurement process and indicates that there are likely to be five to ten organisations with the experience and capacity to meet Inland Revenue's requirements for a transformation service provider(s).

253. Other market analyses, conducted by the likes of Forrester and Gartner, note that the international marketplace has only a limited number of suppliers able to provide the level of capability and expertise that Inland Revenue will require.

Probity

254. Due to the size of the expected market engagement, the expected close relationship between the transformation service provider(s) and Inland Revenue, as well as the public scrutiny of the programme, Inland Revenue recognises that clear and transparent procurement processes are paramount to maintain the integrity of the programme.

255. A probity framework was developed in December 2012 and presented to the Investment Board. It has subsequently been implemented.

256. Inland Revenue will regularly conduct probity audits to ensure that the programme's procurement approach is sound, transparent, and fair to all suppliers involved.

257. As part of the programme management arrangements, Inland Revenue will have two specialist probity roles within the programme. These are:

• Probity Advisor, which will provide advice and guidance to the programme office on matters of probity;

• Probity Auditor, which will review and ensure that procurement processes and market engagement is occurring in line with agreed procurement standards and principles.

Adherence to government procurement principles & guidelines

258. Inland Revenue will adhere to relevant government procurement principles and guidelines, and will regularly engage with MBIE, The Treasury, and the Government ICT Supply and Management Office (GISMO) in regards to contractual arrangements. 73 COMMERCIAL IN CONFIDENCE! 22 October 2013


259. Because of the large scale and potentially unique nature of this engagement, it is recognised that regular reviews and decisions related to the procurement process will need to be made. Inland Revenue will endeavour to work with all relevant parties to ensure that agreements are reached prior to engagement with the market.

260. The Commissioner of Inland Revenue has already held several meets regularly in regards to the potential procurement process with the relevant Chief Executives and Deputy Commissioners from The Treasury, MBIE, and the Service & Systems Transformation unit of the Department of Internal Affairs.



7 The next steps

261. This section describes the immediate next steps of the programme. The key areas of focus for the transformation programme over the next 12 - 18 months will be to:

• Complete development of key indicators and measures for the investment objectives including the setting of appropriate targets by 20 December 2013;

• Develop a placeholder funding bid in Budget 2014 as part of the four-year plan process, as investment decision points are unlikely to align with Budget processes;

• Complete detailed planning of the first stage of the roadmap, Enabling secure digital services, including confirmation of key decision points and the timeline for supporting business case(s) by 20 December 2013;

• Preparation of an integrated, multi-year portfolio plan that brings together all Inland Revenue change initiatives, including the business transformation programme roadmap and our IT strategy, for inclusion within the four year plan;

• Work with Treasury to determine a medium-term funding strategy for the programme, including self-funding options, once the detailed planning of the first stage of the roadmap is complete;

• Shortlist potential transformation service provider(s) following an evalution of EOI responces by 20 December 2013;

• Advance engagement with New Zealanders and New Zealand businesses to ensure that their needs are fully acknowledged and understood. There are two planned policy work streams on the tax policy work programme directly relevant to transformation. These are:

o Consultation on the first stage of the roadmap: Enabling secure digital services to ensure the policy and legislative framework enables the implementation of secure digital services and the streamlining of PAYE and GST information; and

o Tax administration fit for the 215t century to ensure the policy and legislative framework supports the delivery of Stage 2: Streamline income and business tax processes and Stage 3: Streamline social policy delivery of the roadmap.

• Future Statements of Intent will include direct references to the programme, including its objectives, targets and progress.



262. Table 14 below shows the milestones and decision points associated with the next steps. Table 14 - Milestones and decision points

Milestone Date Continue the establishment of new programme management and governance arrangements

Completed - 1 July 2013

Review lessons from Novopay Completed - 1 July 2013 Refine programme options within Strategic Choice 3, including a 'do minimum' option

Completed - 5 August 2013

Engage with stakeholders Commenced - 21 August 2013 Engage external expertise, including independent assurance

Completed

- Assurance management plan approved 25 September 2013

- Independent assurance provider to be confirmed October 2013

Prepare for market engagement Completed - 30 September 2013

Issue Expression of Interest (EOI) Completed - 3 October 2013 Confirm Programme Business Case 22 October 2013 Confirm metrics for investment objectives By 20 December 2013 Complete EOI shortlist By 20 December 2013 Confirm roadmap, including definition and sequencing of the initiatives in the programme

By 20 December 2013

Engage with ICT Ministers on detailed roadmap

To be confirmed

Commence Competitive Dialogue with short-listed vendors

By 3 February 2014

Issue Request for Proposal (RFP) By 28 April 2014 Update roadmap based on feedback gained during Competitive Dialogue By 30 April 2014 Engage with ICT Ministers on updated roadmap and planned consultation

To be confirmed

Begin consultation on Enabling secure digital services

By early 2014

Submit business case(s) to undertake detailed design of stage 1 and high-level validation of stages 2-4

By 30 June 2014

Begin consultation on Tax administration in the 21st century

To be confirmed

263. The Programme Business Case will be updated once the business case(s) for Stage 1 Enabling secure digital services have been developed. However if there are substantial changes to the business transformation programme before then, we will review whether an earlier update to the Programme Business Case is required.

264. A programme governance and management structure for the current phase of work has been established that is consistent with the arrangements described 76 COMMERCIAL IN CONFIDENCE / 22 October 2013

Naomi Ferguson Arlene White Giles Southwell Greg James Jeanie True!! Mary Craig

Myles Ward Struan Little

Commissioner (Chair) Deputy Commissioner, Service Delivery Chief Financial Officer Deputy Commissioner, Change Chief People Officer Deputy Commissioner, Corporate Integrity & Assurance Chief Technology Officer Deputy Commissioner, Policy & Strategy

Withheld under section 81 of the Tax Ad ministration Act 1994

Deputy Commissioner Change (SRO)

Transformation Programme

Steering Committee

Programme Director (Inland

Revenue)

Greg James

Alan Pinder

Arlene White Giles Southwell Greg James Myles Ward Ron Grindle

Les Greeff

Investment Board

Chief Advisor to Deputy Commissioner Corporate Integrity & Assurance Deputy Commissioner, Service Delivery Chief Financial Officer Deputy Commissioner, Change (Chair) Chief Technology Officer Principal Transformation Director

Implementation partner(s)

Inland Revenue management and

functions

Governance bodies


earlier. Diagram 9 below depicts the current programme structure and includes key people and roles.

Diagram 9 - Current programme structure



Preparing for market engagement and procurement

265. As discussed in the Commercial Case, the procurement process will involve a number of steps. An extensive process has been planned to enable the selection of a transformation partner(s), as illustrated in the diagram below. As the programme will be a long-term, multi-stage process there will be opportunities for different service providers with the right skills and experience to assist Inland Revenue in the design, build and implementation of the business transformation programme. It is expected that there will be both domestic and international participation in this process. The partner(s) will initially assist with the detailed design of Stage 1 and high-level validation of the design of Stages 2 to 4.

Diagram 10 - Procurement process

Market Information

inform the market of iFt's Transformation Programme and proposed procurement process.

Expression of Interest Competitive Dialogue Request for Proposal Negotiation

Select a short-list of service provider(s).

Work with short-list on high-level design; undertake due diligence; formulate contract documents.

Select a preferred service provider(s).

Negotiate terms and conditions; execute contract.

266. Market briefings began on 21 August 2013 to identify potential suppliers. This is to ensure that key stakeholders, media and taxpayers understand the need for, 77 COMMERCIAL IN CONFIDENCE / 22 October 2013


scale, complexity and benefits of the major changes proposed to Inland Revenue's systems and processes, and that they support them.

Engagement with stakeholders

267. Inland Revenue proposes to commence engagement with customer groups including employers, payroll software developers and other intermediaries to identify opportunities for simplifying the revenue system and reducing compliance costs.

268. Inland Revenue will use the outcome of engagement to both inform and validate future business and technology requirements that will be communicated to the market as part of the process of sourcing a design and implementation partner.

Preparing for technology transformation

269. Inland Revenue will also develop a proposed FIRST migration approach. The migration will be a very complex undertaking and there may be a number of alternative approaches, which will be validated with an implementation partner.

Future decisions

270. It is our intention to continue to seek the guidance of the Government ICT Ministerial Group prior to critical decision points. For example, during the development of key business cases.

271. Cabinet's approval would be sought at the following critical decision points:

• prior to completing and executing a commercial contract with the preferred partner, and

• at major milestones, such as the commencement of design and build of various products and services.





274. We will provide Ministers with investment choices throughout the life of the programme informed by a series of business cases, each of which will include a 'do minimum' option, to allow the pace and scope of the programme to be adjusted according to circumstances. We recognise the need to ensure value for money from any investment in the future revenue system and not over-invest in the capabilities required to deliver this change.

275. The information required to support these decision points will be agreed in advance with Ministers and central agencies.

276. The transformation programme will be implemented over a ten year period, and delivered in a series of stages. These decisions will be presented to Ministers through a series of business cases where direction and funding are required.



Appendix A - Overview of FIRST

This appendix provides an overview of FIRST and its satellite systems.

Originally the term FIRST described the Unisys mainframe components but now is often used to collectively describe both the core Unisys mainframe applications, the integration layer (EAI) and the associated satellite systems and environments. These satellite systems retrieve information via an Enterprise Application Integration (EAI) software layer. The following diagram shows the Inland Revenue systems map with the core FIRST mainframe-based system at the centre.

Current Application Map (simplified) and FIRST definitions

Online Services Voice Services Corporate Services Definitions

'FIRST Core': Core eFae trFere %mess Client SPI(AIR HMS

FallIt$1•5 Workspace

Forme Returns & CaN Recording Virtual Hold Calculators SIR'

Mainframe System

'FIRST Satellite': Look al Account Informal..

Genesys Voce &APP. ATE. Vows Byomelr

INanagamonl Paid Parental Leave

Satellite (non-Mainframe) System

'FIRST Input Services Enterprise kttegr*tIcn Output Services

FIRST - Revenue & Social Policy Applications

Chant Rectstration Correspondence Returns Generatmn

Returns Imagng Letters Onkne Integration': EAI (and any other) Integration Layer between FIRST Core and FIRST Satellite

Autograph Payments Imaging

Returns & Payment Cunt & Revenue Dehl & Returns Praeserng Accountrng Management

Hates 'Prosy.

Tax Agent Management MNuma Crown Revenue

EDSR

Security Services

°LACS KivriSaver Services

Knowledge Management Services

Business Rules Services

Case Management

Manley Access Management (IAMS)

Ceneal Admenstratmn System (CAS)

E Metonse Data Warehouse

Otacle Poky Automation (CPA)

*Casa tAudM

Revenue ForecasIng

The diagrams and description of FIRST structure presented in this paper are a simplification of the structure of FIRST designed to provide an overview of the groups of tasks performed by FIRST and a starting point for discussion. An unintended consequence of these diagrams is to the create the impression that FIRST applications are arranged in modular "boxes" with well-defined boundaries, clear handover points between applications and "neat signposts" in the programmes describing where you are and what lies ahead. Unfortunately this does not describe the reality of the FIRST programme code. In fact the applications are layered and interwoven with multiple programmes swapping data at multiple points within the programme.



Appendix B - IR for the Future

This appendix contains images from Inland Revenue's IR for the Future brochure which all staff received.

IR for the future 81 COMMERCIAL IN CONFIDENCE / 22 October 2013

We need to:

• Reduce our cost of administration

O Maintain government revenue in , challenging economic environment

O Work more across government to improve services

O Respond to the challenges of an

increasingly digital world

O Improve the quality of information we use to make business decisions

O Improve the responsiveness and agility of systems that hold and process business information

What we are here for

We contribute to the economic and social wellbeing of New Zealand by collecting and distributing money

Our success is reflected in two outcomes:

> Revenue is available to fund government programmes through people meeting payment obligations of their own accord.

People receive payments they are entitled to, enabling them to participate in society.

What we want to be

A world-class revenue organisation recognised for service and excellence

We work with customers and other organisations to make compliance easy and to give New Zealanders confidence that everyone pays and receives the right amount.

lobe recognised for service and excellence we aim to achieve the performance goals that define a world-class revenue organisation. These are

• Speed

> Certainty

> Compliance

> Value

What's important to us in how we work

.iluing people flovating to make cA dine' enL,

These values support a culture based on good relationships, continuous improvement and collaboration, so that we can achieve our performance goals.

Our transformation goals

The key features of our business in the future will be:

O Efficient self-management options for customers that provide speed and certainty

O A broader approach to compliance based or smarter use of information and a wider range interventions

O A range of different working relationships with other organisations, including strategic partnerships to deliver some services

O less transactional work and less direct contact with customers

Excellence in complex technkal work

0 More automation and streamlined information flows

o Greater use of commercial IT products in our systems and services

o A healthy culture which our people value and thrive in

Our challenges


Our story


things that are important to us, in how we work together are real from day to day - making Inland Revenue a great place to work The following statements reflect the thoughts and ideas of our people and describe the attributes and behaviours we value most. The challenge for every one of us is to make them real - demonstrating our values internally by how we work with each other, and externally with our customers and other organisations.

II us( and ct tegrt y

We act with integrity, honesty and professionalism. This ensures that we continue to be one of New Zealand, most trusted organisatrons.

• We follow through and take responsgeloy for our own actions • We handle menthe and confidential Wormation appropriately

• We pie people the nejlt informamon and advice du hist time • We Interpret and apply the kroaornmenely

Valuing people

We trnt each other and our customers with respect.

• We value each other's contributions and aver mother poems oh/ iew.

• We wainue and value the Memory of ow people • We encourage merpane to learn and grow. • Weare tenement an the was we deal wen pewee • We naked Any for people to get it sight

Innovating to make a difference

We keep finding new ways to lift our performance and make compliance easier.

• we comma time and enely ore innaanon

• We understand that mull Improvements waked delete... • We town to no. cintornenana hod 50i1100111 to their needs • We learn from our experiences and the expenenws of Others • We know when to take mks and when not to.

Working togethei

We work together and with other organisations to deliver better services and value.

• We work cooperatively across dilleent areas to achieve common goals.

• Wei haw confidence in each other's wark and decision,.

• We work wetland through °Ow, organtsaboni to improve services • We aaweig share knowiedge and information toga bane Imola • We ...five people in detniorn that Alva them

How I contribute... We all contribute directly to "IR for the future through our datto.day nark. This diagram provides a simple may between cur indwidual contributions and the big picture

e"..715FPFPF

Strategic plan Personal objectives

and job

Business plans expectations

IR for the future Our challenges

Our transformational goals Our priorities Our Culture

Our foundations What we are here for What we want to be What's important roes in how we work


Our priorities

ft We retain, develop and attract high-calibre people with the skills required in the future - enabling a culture of service and excellence

TO DELIVER THESE We need to continue to build our information and intelligence capability. improve our systems, align our resources and invest in the future skills required to enable a culture of service and excellence.

Our culture is moulded by our beliefs, values and behaviours. It helps us achieve our vision and is the foundation for everything we do - from our relationships, to the decisions we make and the actions we take. We all contribute to achieving our future. We ensure the

WHAT ELSE GUIDES • Our Legislate. • Our Code of Conduct • Our Charter • Our Treaty of Waitangi

responsibilities

Our cut

• icàdrii ii. lie long direction arid Mani eiltadenhip

• We are open to new ways of worlong and nesibent to ooaping change.

• Mom.. inn Mks tannin mom efficiently and ellatively and improves productively.

• Applymg greater lodgement we tailor out approach to the treatment of risk.

Conaboratkin is important as we operate lean environment weth less emphaus on dual control.

AA We proactively influerice voluntary compliance and address the cause. of compliance risk and threats through a I 111W 1:1 interventions

• We identifi Aid renew ho nen sui

• Intellegma, research and evaluation IfliPITI011t

fleaworts

• Ow interventions vary - from poky design to our atidte aaMtles - and ant bawd co wstonser behaseour.

• We lows more on influnwrit own.

• Compliance poonoestrive our enource allocations.

• lahmal excellence Melds trust and conlidelsee

We move customers to cost • ettec Cosi channels while creating an environment to make it easy for customers to sell-manage

• we pomace tiw in of cost-erhcove automated channels.

• We progresswely nidoce the paper (Kennet

• Channel &up enables easy self. service and gives greeter wrinnty for °Monsen

• We reduce the need for customers to contact us

•• 'A'e improve the efficiency and fr „tfectivenesf of government through

working with other agencies and private providers

We are leaden or coNalsoratwe service delivery across government We seek opportunities co work woh external parties - we understand Melt business and work wth them to provide mutual benefits.

• We so &sir serwes wrth others

• We manage ow relananhIps based on the needs of Me situation (one Si,. doer not Stall

We use our information to make timely decisions and build an intelligence-led organisation

• Om ouiugeose inki. e n-worporate awe

• We colhst a wider range of information from room sources.

• We improve data quality, integruy and timelines.

• We carefully manage how we share information to woman/mow cnikdonce and adwrsn mnswgency gook

Our systems ,' . and future necil

• AY renew our busmen appleations and technology platforms in an aril...cud way

• We dneeop processes to ensure we achieve value-for-money and realise the benehts from the changes we make.

• We ahgn our ureters. planning and decision , making processes.



Appendix C — Investment Logic Map summary

This appendix contains a summary of the desktop Investment Logic Map summary for Business Transformation.

Inland Revenue for the Future

Withheld under section 81 of the Tax Administration Act

1994

PROBLEM

BENEFIT 4

STRATEGIC INTERVENTIONS

Improved stability of collection &

disbursement functions

40%

e -N We face a risk of a systems failure

that would severely impact

our ability to collect and

distribute money 20%

Minimise the risk of protracted systems

outages and intermittent systems failure

25%

Implement policy changes quicker and easier

25%

Improved ability to implement changes

to policy 30%

We are struggling to maintain our organisational

performance and respond to government

needs 40%

Cost of interaction is reduced

10%

Increase sharing of intelligence and

information across government

10%

(

We are no longer aligned with the

changing expectations and dynamics of our

customers

Improve compliance and enable Inland Revenue to

collect a larger percentage of the

collectable tax base 20%

Improved customer experience

20%

40%

Support Better Public Services to deliver

customer-centric services 20%

Template Version: 4.0

Template version: 4.0


Collect Obligations

Disburse Entitlements

Advise on Pelicy

Shar•Auttoritativ• Data MEM% fowl %mks%

We contribute to tPc. economic and social wellbeing of New Zealand by collecting and dctbutng n,,

/Outcome & Accountabilities


Appendix D — Target Operating Model

This appendix contains a high level overview of Inland Revenue's Target Operating Model (the TOM). The TOM comprises of five layers, as illustrated in the diagram below and overleaf.

The Layers of the TOM

The Outcome and Accountabilities Layer: What IR will deliver to NZ Government, citizens, businesses and agencies

The Direct & Design Layer: Represents a transformational change for IR: significant shifts in capability required. Provides air traffic control for Inland Revenue and transforms the Policy to Operations value chain removing one driver of complexity in IR.

The Manage Delivery Layer: Represents a transformational change for IR: significant shifts in capability required. Will act as the Production Control Centre for IR, forecasting demand, determining optimal delivery mechanisms and managing workloads and workforce

The Deliver System Layer: Provides a future delivery engine-room where IR will deliver in more agile, distributed (other agencies, private sector), measured, effective and efficient ways AND know what is happening in real time

The Support Layer Depicts the capabilities that are critical for IR to deliver to its customers...and deliver well Enables IR to determine the best of way of delivering these services


rxr.s&linrr& Stamm Portorounce Mime and Dose Sys aunts Direct &

Aeon Clownwent m Pates

Dollen 'Sworn' intemott WPM.. UM.. Ans Mamie Trulorts

ceenitn a Services enatoeCisissomen An.... Seats'

PEREMAM OMMIS,

Mom EOM MeV MUM Truman

Mom* Rm.,. md Wombed

Alamo Rumor md toestluotott

hiMbet 11/10.1.1•041 & ...Mete

moue* Cuna Omelet & Wool.

fledpients

um./ ,re tett lAdInKI Own! Crovecnintint IR facilitates the exchange of Govu A.-unt

5.'4'. Onto MOM,/ end Information Wort Roseau

Deem md,.....I Indeoeual 'Systerif

COLLECT ASSISSOMMIMISIE EARMIOUNTS MIMS(

ASSURE COOMMICE

KOSTER • MICR CUSTOMERS INFORM CUSTOMERS ASMTCUMMAERS PROME I ACCOUNT FOR

CUSTOMERS

SuppOrt Pm** Wows* he.. And Malmo Moridal on/ Wrap Precuremont Mame and PRAM IC7

•Sintetn' Physical Mum.. Mom.

This layer represents the key capabilities IR requires to effectively design and direct changes across the wider 'System' (defined as all entities and individuals affecting or effected by the

collection of obligations and/or disbursement of entitlements.)

Direct & Design 'System'

Manage Delivery This layer represents the capabilities required to plan, manage and deliver IR's services.

Deliver This layer represents the key capabilities required by all parties in the 'System' to effectively and

'System' efficiently deliver on IR's accountabilities.

Support

This layer represents the key capabilities IR requires to support the delivery of the wider 'System'


The diagram below provides a description of each layer of the TOM.

/A

Outcomes& ccountabilities

This layer represents the outcomes IR contributes to and the (5) key accountabilities IR has to the NZ government.


ColloW Obliget non Mamma entitlements advise en Poky

owe molonontet en* Yee. sonny.

• Collection and disbursement functions able to be used across government • Formalisation of emerging accountabilities and building capability to

deliver these: i. provide expert services ii. share authoritative data

*nevelt ebl ink I /Outcome &

We atotneote to the ec000ntle end foci* wellbeeig of New &Amyl by collecting And distnlytiong money

Business Transformation Programme Business Case

The diagram below describes the changes that Business Transformation will make by TOM layer

What will be transformed?

Do. & NOP 'System. ....I leips,ats.

Mamie thrliwry

M..* gm.* and ( nano..

Innoldent/ Recipients "wen

mama now,,,t ono, Exchange Mowry and

Dino Ilifterenetkne 00111

0.kliVer .Synem.

_ ..;

.111111101&0110L' :1imiwafx., .:FII,FIUMACCOUNIf.011: •J..-- .!:,a11101111111 A , ,ri

%PPD. 01111111110/16011.111.0.6 11.4..'::.... . .

• A radically different approach to the design and management of change that reduces time to market for policy and: i. leverages third party capabilities ii. optimises service design acrossthe 'System' iii. focuses on end-to-end product performance iv. leverages customer and risk insights to optimise service design for

compliance v. reuses common services when introducing new products/product

changes

NN\-• New ways of working through: i. greater use of third party capabilities ii. a 'digital border' that ensures high accuracy of data and the

elimination of paper iii. improved use of existing and emerging e-channels iv. sharing data across agencies to support core functionswith IR

providing authoritative source of income related data. v. delivery of services outside the traditional organisational boundaries

(e.g. through ServiceLink) vi. provision of 'expert services' to support cross government fraud and

risk analysis

• Support for the provision of cross-government support services

• Who can deliver these services most effectively and for best value for money




Appendix E - Long-List Options Assessment

This provides the long-list options framework that was used to define the potential programme options.

Scoping Options Service De ivery Options Service Solution Options SC01 SCO2 SCO3 SCO4 5C05 SD1 SD2 SD3 SD4 SD5 SD6 SOL1 SOL2 SOL3 SOL4

Assessment

"Do Nothing"

Focus on Systems & Risk

Mitigation

Focus on Revenue

Maximisation

Focus on Systems

and Process Agility

Focus on Cross- Agency

Capability In-house IR only

In- house IR & third

parties

In-house IR + third parties + tactical cross-

agency/ PPPs

Cross- Sector

AOG /Service-

Link" Complete

PPP Sustain FIRST

Sustain FIRST +

Remed- iate &

Migrate

Replace FIRST; COTS+

Investment Objectives Minimise the risk of protracted systems outages and intermittent systems failure

Yes Yes Yes Yes Yes Yes Yes Yes Yes Yes Yes Yes

Partial Partial Partial Yes Implement policy changes quicker and easier No ,. Partial Yes Yes Yes Partial Partial Yes Yes Yes Yes

Leverage our infrastructure to support wider government

t—llo : • Partial Yes Yes Yes Yes Yes Yes Yes Yes Partial

Yes

Yes

Yes

Yes

Yes

Improve compliance and

enaectble Inland

larger Revenue

the totax coll a 0/0 of base

_ Partial Yes Yes Partial Partial Yes Yes Yes Yes

Support Better Public Services to deliver customer-centric services

Partial Yes Yes Partial Partial Yes Yes Yes Yes

Evaluation Criteria Ensure continuity of the primary revenue collection facility of IR

Yes Yes Yes Partial Yes Yes Yes Yes Yes Yes Partial Yes Yes Yes

Ensure policy responsiveness Partial Yes Yes Partial Yes Yes Yes Partial Partial Yes Yes Yes Improve service delivery Partial Yes Yes Yes Partial Yes Yes Yes Yes Yes Yes Yes Yes Yes Leverage cross-agency capability Partial Partial Partial Yes Yes Yes Yes Yes Partial Yes Yes Yes

Delivery Risk/Achievability Yes Partial Partial Partial Yes Yes Partial Partial Yes Yes Yes Yes Yes Yes Yes Partial Partial Yes Yes Yes Yes Affordability/VFM

Market Depth & Capacity Progress for VFM

Yes

Possible

Yes

Possible

Yes

Preferred

Yes

Possible

Yes Yes Yes

Preferred

Yes

Possible

Yes

Possible

Partial Partial Yes Yes Pforogress r VFN Possible Preferred Summary

Options Progrecsed to Short-List Any options that do not meet any of the evaluation criteria are not progressed --.....-

-

--....-

— -

--......-

-

...

—

--,../

—

0 0 tion Title Option 1 - Maintain Current State SD3 - IR + third .arties + tactical cross a.enc

SD3 - IR + third parties + tactical cross agency SOL3 - Remediate & Migrate SCO 2 - Focus on Systems & Risk Mitigation Option 2 - Provide Platform Stability Option 3A - Partial IR for the Future SCO 3- Focus on Revenue Maximisation SD3 - IR + third parties + tactical cross agency

SOL4 - COTS Application & Implementation Partner

Option 3B - IR for the Future SCO4 - Focus on Systems and Process Agility SD3 - IR + third parties + tactical cross agency SOL4 - COTS Application & Implementation

Partner Option 3C - Government for the Future SCO 5- Focus on Cross-Agency Capability SD4 - Cross-Sector

SOL4 - COTS Application & Implementation Partner



Appendix F — Programme costs: approach and key assumptions

This appendix describes the approach and key assumptions used to estimate costs for the programme options.

Key Assumptions and Summary

1. An external partner will be performing the majority of design, build and implementation of the new systems and processes. 2. Estimates for the length of time of the programme have been based on similar tax and government transformations. 3. The programme will be delivered through a number of phases, across a ten-year horizon. Updated analysis on costs and

benefits will be presented at the beginning of each programme phase. 4. We have developed costs based on a notional set of activities and deliverables for each programme option. Should these

notional activities change substantially, it is possible the total cost estimate for the programme will need to be re-visited. 5. No costs external to Inland Revenue have been included. For example, customer readiness costs or costs to other government

agencies have not been included. 6. Assumes that all services/infrastructure are built and maintained by Inland Revenue, not provided as an on-demand service. 7. Cost estimates do not make allowance for significant future policy changes.

Costing Approach Undertaken

1. As part of the current programme phase, Inland Revenue initiated a number of activities to understand and validate the costing assumptions and the estimation process. These included:

a. Cost estimates for the overall programme, based on a notional set of initiatives and activities over a ten-year period were developed by an external advisor.

b. We undertook a high-level assessment of the reasonableness of this cost estimate, as well as an integrity check of the cost model developed by the external advisor. This involved a number of engagements with internal and external subject matter experts.

c. We then undertook a sensitivity analysis of the assumptions that supported the cost estimate, through various engagements with internal and external subject matter experts, culminating at an all-day workshop held on 28 November 2012. The workshop was facilitated by Withheld under section 81 of the Tax Administration Act 1994

d. At the all-day workshop we also conducted an assessment of the uncertainty inherent in the costing estimates. This was limited to the large technology initiatives that drive the bulk of the costs. Apart from the uncertainty in earlier cost



estimates, the workshop considered material developments that had occurred since the initial generation of the programme's cost estimates.

2. Activities undertaken above informed the development of the cost estimate ranges for Options 3A and 3B. The estimated range is broadly based on the P15 - P8536 results of the Monte Carlo simulations carried-out using inputs from an all-day workshop.

3. The reasonableness of the estimated range was tested with senior Inland Revenue technology leaders.

A list of additional assumptions follows.

36 P85 represents the probability that the programme costs have an 8 5 °/o chance of being equal to or lower than this estimate. A P15 estimate represents the probability that the programme costs have a 15% chance of being equal to or lower than this estimate.



Appendix G - Programme Benefit Assumptions

This appendix describes the approach and key assumptions used to estimate benefits for the programme options.

Background:

• Benefits were initially articulated as part of early programme development.

• Consultation on the creation of the benefits model included a series of workshops with Inland Revenue subject matter experts and follow-up sessions facilitated by Inland Revenue's third party vendor. There were also initial workshops with Inland Revenue's senior management team to review these early proposals.

Approach:

• Step one: Validation of the programme's benefits was undertaken, from both a bottom-up and top-bottom approach: o A group of subject matter experts, provided informed knowledge of the initiative intent (at a granular level) and were

asked for their high-level assessment of the benefits, o At a high-level, a reasonableness test was conducted to determine whether the quantum appeared realistic given the

underlying assumptions, o The originally developed benefits model was tested for its reach and applicability, o To assist in sanity checking, where applicable, the use of previous research was utilised to get a sense of the order of

magnitude, and o The results of this process were summarised in a CFO presentation to Inland Revenue's senior management team, o The summary of this feedback indicated that the organisation was broadly comfortable with the level of benefits outlined in

the early benefits model, although further calibration of this model was required.

• Step two: A revised model was developed. This model reflected feedback from subject matter experts and the senior management team, and this resulted in an estimated range of benefits for various programme options.

o Re-validation was undertaken through meetings and email conversations, o To begin the process of capturing wider economic benefits, an internal workshop estimating the expected impacts on

compliance cost reductions was also conducted.



Appendix H — Commissioner's Statement

Cp Inland Revenue Te Tan Taake

Office of the Commissioner 55 Featherston Street PO Box 2198 Wellington 6140 New Zealand

Telephone: 04 890-1500 Facsimile: 04 890-4567

15 October 2013

Commissioner's Statement: Programme Business Case — Business Transformation

The purpose of this business case is to enable the Minister of Finance and the Minister of Revenue to confirm the overall direction of the business transformation programme and the programme's starting point.

The business transformation programme will deliver a modern revenue system for New Zealand. Inland Revenue in the future will:

• Deliver government policy changes with more agility; Enable our customers to self-manage with speed and certainty; Be agile, effective and efficient; and Work closely with other agencies to deliver Better Public Services.

The business transformation programme will deliver visible benefits to New Zealanders and New Zealand businesses and contribute to Government priorities including Better Public Services and the ICT Strategy. Inland Revenue will mitigate delivery and implementation risk as far as possible by taking smaller steps. Ministers will be provided with frequent opportunities to monitor progress and determine the desired level of investment in New Zealand's future revenue system.

I am fully committed to successfully delivering the programme. I confirm that the analysis supporting this business case is sound and the recommended way forward is achievable.

Mary Craig Acting Commissioner of Inland Revenue

www.ird.govt.nz



Appendix I - Roadmap principles

This appendix describes the principles established to help guide the development of the road map.

1. The programme will be constructed and delivered in small steps to manage delivery and operational risk, enable organisational learning and demonstrate tangible progress that builds confidence in Inland Revenue.

2. Stages will comprise one or more projects that may be managed independently but which will, in their entirety, map to agreed outcomes in support of the Business Transformation Programme Business Case and Inland Revenue's desired future state.

3. Stages will be designed to ensure value for money for the Government as the investor and demonstrable benefit to customers/taxpayers.

4. Each stage will be discrete/self-contained to ensure that both Inland Revenue and Ministers have off ramps at the conclusion of a stage.

5. Throughout the life of the programme, Inland Revenue will re-evaluate stages in light of emerging opportunities, challenges and priorities.

6. In balancing trade-offs between outcome realisation, cost, benefit realisation and risk management, minimising delivery and operational risk will be accorded a greater weighting.

7. As part of a risk minimisation approach, the delivery of stages will not be contingent on:

Fixed legislative dates — rather, legislation will be an enabler not a driver of timeframes for delivery.

• Delivery of capabilities by parties over which Inland Revenue has no control.


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