The Internal Revenue Service (IRS) is currently in the early phases of its effort to modernize its outdated, paper-intensive tax processing systems. This multi-billion dollar effort, known as Business Systems Modernization, is projected to last up to 15 years. The IRS created the Business Systems Modernization Office (BSMO) to oversee the modernization effort and hired a contractor, Computer Sciences Corporation (CSC), to help design and integrate the projects. One of the initial modernization projects is the Customer Relationship Management Examination (CRM Exam) project.

The CRM Exam project was initiated to correct long-standing weaknesses in the IRS’ ability to efficiently and accurately compute complex corporate taxes. The CRM Exam project is not a complex system development project; however, the experience gained from planning, developing, and releasing low-risk projects can help the BSMO and the CSC improve as future, more complex projects are initiated.

The objective of our audit was to determine whether the CRM Exam project team had implemented processes to deliver intended taxpayer benefits in a reasonable time and at a reasonable cost. To accomplish our objective, we reviewed the CSC’s delivery of goods and services and evaluated the project team’s compliance with critical processes established to enable project success.

The CRM Exam project is one of the first modernization projects to complete the planning phases. The project team expects to deliver the CRM Exam application to Examination personnel beginning in the latter half of Fiscal Year 2001. As part of this and the other early modernization projects, the BSMO developed and revised most of the key processes necessary for project success. As the project progressed, we noted improvements in areas such as contract management, quality review of products delivered by the contractor, and project sponsorship by IRS business executives. However, the CRM Exam project team was not able to complete the CRM Exam project planning phases in a timely and cost-effective manner. In addition, there were several key development processes that were not effectively implemented by the project team. Improvements in these key processes will be needed to successfully deliver future modernization projects.

The BSMO and the CSC overestimated their ability to deliver the CRM Exam project timely and within budget. The actual completion date and cost for the planning phases varied from original estimates provided to the Congress by 7 months (70 percent increase) and approximately $2.5 million (115 percent increase). The majority of these variances occurred early in the project and more recent cost and schedule estimates have been significantly closer to actual performance. While these delays and cost overruns were significant, the IRS took actions during our review that should help address the factors contributing to the delays and overruns.

Configuration management involves establishing proper control over approved project documentation, hardware, and software and assuring that changes are authorized, controlled, and tracked. While the BSMO and the CSC did develop policies and procedures for configuration management, the project team did not ensure the processes were properly followed. Access to official documents was not restricted and procedures for making and approving changes to the documents were not properly implemented. Without this control, it will become harder to determine which document or configuration item is the official baselined document. This could lead to project teams following the wrong set of requirements or agreements while developing the projects. During our audit, the BSMO and the CSC initiated corrective actions regarding configuration management processes.

Risk management procedures provide guidelines for identifying, tracking, and reporting risks. However, the CRM Exam Risk Management Plan did not include key indicators that could be used to identify and track the status of risks. Additionally, risk reduction plans and issue statements were not always clear and specific. Inadequate identification and monitoring of potential risks can lead to schedule delays and additional costs. The BSMO and the CSC have begun initiating corrective actions regarding risk management processes.

During the last phase of planning, the requirements for security and the integration with other projects were not stable. The BSMO did not include requirements to develop critical security documents in the initial contract for the final planning phase. Also, the IRS made a decision early in the final planning phase to implement the project without integration with other IRS systems. However, discussions about whether to integrate continued throughout the final planning phase because the "no integration" decision was not properly communicated to all stakeholders, including the IRS Commissioner. While the instability of the requirements did not significantly affect the CRM Exam project, unclear requirements could lead to project delays and additional costs to complete future modernization projects.

The BSMO has recently been focusing on issuing contracts where payments are based on contractor performance rather than simply on the hours expended by the contractor. The BSMO has also improved its ability to ensure specific contract requirements are agreed to prior to tasking the contractor to begin work. However, the most recent contract with the CSC that we reviewed did not apply performance-based contracting methods and did not properly define the requirements of the next phase of the project’s development. As a result, the contractor was being paid based on hours expended, instead of results achieved, and the IRS and the CSC had not agreed to responsibilities for the next project phase.

The BSMO and the CSC use earned value measurement, a best practice method of periodically comparing actual cost and schedule results to budgeted results. While the BSMO is improving its ability to monitor the performance of the CSC, further steps can be taken to improve earned value measurement. We determined that earned value data did not include all costs and had not been validated. When all project costs are not included and validated, actual return on investment and earned value cannot be calculated accurately.

The Project Manager was using a schedule to manage the project team’s tasks. The schedule listed the tasks that needed to be completed by the project team. Each task was identified with a specific identification number, and had an assigned start date, finish date, and estimated duration. However, near-term tasks were not assigned to individual team members, and the schedule did not factor in or allow for adequate reserve or recovery time. Without implementing more effective techniques in allowing reserve time and allocating task assignments to individual team members, the BSMO and the CSC could continue to overestimate their ability to deliver projects on time and within budget.

This audit was performed in conjunction with several other modernization project audits. The conditions described above were also identified in the other audits. Because these conditions were identified in multiple projects, we believe that corrective actions should be taken by the BSMO at the program level rather than by the individual project teams. Consequently, we are not making any recommendations in this audit report. We plan to issue a separate report later this year with recommendations for corrective actions that the BSMO can take at the program level to address the conditions we identified.

Management’s response was due on August 13, 2001. As of August 22, 2001, management had not responded to the draft report.