Government Executive - Authors - James R. Thompson

Fixing The IRS

James R. Thompson — Sun, 01 Apr 2012 01:00:00 -0400

For decades the Internal Revenue Service tried but failed to modernize its massive data systems, but Doug Shulman finally has something to celebrate. When he became IRS commissioner in 2008, Shulman set out to rectify a key technology project, which had fallen years behind schedule and was tens of millions of dollars over budget. Now the goal that eluded the agency for more than 20 years—the conversion of taxpayer data to a modernized database—has become a reality.

On Jan. 17, the IRS flipped the switch on its new Customer Account Data Engine, known as CADE 2, moving the data of 140 million taxpayers to a 21st century computing environment. Successor to the failed CADE 1 project, the new system allows the agency to update taxpayer accounts and process returns on a daily basis rather than weekly, which was the case with the Individual Master File. As the main repository for taxpayer data for more than 50 years, the IMF relied on 1960s-era software and a flat file structure in which data was arrayed in spreadsheet rows. Accounts were stored sequentially so that information for taxpayer number 100,000,001, for example, could be accessed only by skipping through the first 100,000,000 accounts. Huge tape drives have long been the most prominent piece of hardware at the IRS’ computing centers.

CADE 2, in contrast, is a relational database in which accounts can be accessed directly. Daily updates help ensure that when a taxpayer calls, the account information available to the customer service representative is no more than 24 hours old. Refunds for those who file electronically can be issued in as few as five days, compared with 10 to 17 days previously.

Critics might point out that most private and many public organizations transitioned from flat file to relational databases 15 to 20 years ago. Considered in this light, CADE 2 seems less an achievement than an indicator of technological backwardness. Yet those who have participated in the modernization journey recognize that the size and complexity of the IRS’ databases, as well as the many constraints within which a federal agency must work, should be taken into account.

The CADE 2 milestone occurs at a time when the government’s most visible and scrutinized agency can point to other important achievements in 2011.

Slightly more than 77 percent of individual taxpayers filed their returns electronically, close to the goal of 80 percent set by Congress. The IRS seems certain to achieve that goal within the next year or two.

Seventy-three percent of individual tax filers surveyed in the American Customer Satisfaction Index expressed satisfaction with the service they received from the IRS, up from just 51 percent in 1999.

The IRS’ score in the annual “Best Places to Work in the Federal Government” survey conducted by the Partnership for Public Service, a nonprofit think tank, increased to 68 (on a scale of 100) from 56 in 2003. Although there is still room for improvement,

it is a significant achievement for a production operation such as the IRS that has to compete with more glamorous missions at places like NASA and the intelligence agencies.

Taming the Beast

These recent successes stand in sharp contrast to where the IRS stood 15 years ago. In October 1997, a Newsweek cover story titled “Behind the IRS Curtain” reported on Senate Finance Committee hearings at which taxpayers and whistle-blowers presented a picture of an agency that provided indifferent service and routinely abused the citizens it was supposed to serve. Although some of the worst accusations later turned out to be unfounded, the experience convinced Congress, as well as many in the agency, that reform was in order.

When Congress passed the Internal Revenue Service Restructuring and Reform Act in 1998, it set the stage for a transformation as thorough and as dramatic as any in recent government history. Key elements included:

n Converting the agency’s geographically based configuration to four major operating divisions, each responsible for a separate group of customers. In the old structure, authority was decentralized to the district level; in the new structure, key operational decisions are made at the division level.

n Employing a strategic approach to tax administration featuring risk management techniques and collaborative relationships with stakeholders. Under the new Compliance Assurance Program, for example, IRS auditors work with corporations to resolve tax issues before a return is filed. The program reduces uncertainty for taxpayers and allows the IRS to shorten the audit cycle and improve timeliness. The Volunteer Income Tax Assistance program promotes partnerships with community-based organizations to staff more than 12,000 sites where 3 million low-income taxpayers receive help annually in filling out their tax returns.

n Launching a new system of performance measures, in which the traditional emphasis on business metrics has been balanced with indicators of service quality and employee satisfaction. “I see in our executives, our senior managers, our front-line managers and our employees more discussion about the connection between business results, the customer experience and employee engagement,” says Beth Tucker, deputy commissioner for operations support. “I can tell you that when I came onboard 28 years ago that was not engrained as part of a normal conversation.”

n Recruiting outsiders for key leadership positions as a means of changing the agency’s insular culture. Charles O. Rossotti, who was commissioner from 1998 to 2002, paired an outsider with an insider at the top of each operating division.

‘The Eagle Has Landed’

Technology issues are at the core of the IRS’ modernization effort. The agency’s first major attempt to update its data systems began in 1988. But Congress cut off funding for the program in 1995 after concluding that much of the $3.5 billion spent had been wasted. In 1998, under heightened oversight from Congress, Rossotti launched the Business Systems Modernization program in which the IRS partnered with a consortium of firms led by Computer Sciences Corp. It was estimated that BSM, which included 11 information technology projects, would take 15 years and $7 billion to complete.

By 2004, however, modernization efforts were again off track. According to the Government Accountability Office, five of the projects were behind schedule and exceeded cost estimates by significant amounts. CADE 1, the centerpiece of the program, was projected to exceed its estimated price tag of $98 million by $37 million, and it was 30 months behind schedule. GAO found multiple management flaws, including inadequate definitions of systems requirements, increases in project scope, and deficiencies in cost and schedule projections.

Observers say the problems stemmed from the scope of both the challenge and the program. Paul Cofoni, CSC’s vice president at the time, put it in perspective at a House Ways and Means Committee hearing in 2004. “In my 30 years of working in the technology field, I have never encountered any program of the size and complexity of the Business Systems Modernization program at the IRS,” he told lawmakers. The central conclusions from an internal review were that BSM, as originally conceived, was too ambitious and the IRS had ceded too much control to the outside consortium. The program was later scaled back and the agency took on a greater management role.

By the time Shulman became commissioner, CADE 1 had missed several key milestones. The completion date had been pushed back from 2013 to sometime between 2018 and 2022. Shulman was not prepared to go to Congress and ask for hundreds of millions more dollars for a program the fruits of which wouldn’t be available for another decade. He and his team made two key decisions: focus exclusively on the CADE project to the exclusion of other downstream applications included in BSM, and bring management of the program in-house.

According to IRS Chief Technology Officer Terry Milholland, whom Shulman recruited from Visa International in 2008, the IRS had become too dependent on outside vendors. “There was no direction, no plan, no ‘how do all these pieces play together,’ ” Milholland says. “The IRS was no longer in charge of its own destiny. So, what we said was we have to know our own stuff; we have to be accountable for our own processes, our own technology.”

Under Shulman’s leadership, the project was turned around. “We broke a cycle of batch processing that had been done for 50 years the same way and that is now being done in a day,” Milholland says. “We’ve taken an amazing amount of waste out of the system.” Deputy Commissioner Tucker recalls, “The day we stood this up and we had our first successful overnight, somebody from Terry’s team made the connection with the man landing on the moon, saying, ‘The eagle has landed.’ ”

David Powner, GAO’s director of information technology issues, describes CADE 2 as “the key to modernization.” Putting taxpayer data in a more accessible format will enable the IRS to develop applications that customer service representatives, auditors and tax collectors need in their day-to-day dealings with taxpayers. In 2011, GAO listed the program as one of seven successful major IT acquisitions across government, an achievement Powner attributes to strong management and oversight, and “executive-level focus and attention.”

From Keystrokes to Kilobytes

Another technological development that has huge implications for the way the IRS conducts business has been the trend toward electronic filing of tax returns. In 1998, Congress set the bar for e-filing of individual tax returns at 80 percent by 2007. The IRS missed that goal. But in 2009, Congress gave the program a boost when it passed a law requiring tax preparers who handle 10 or more returns per year to file electronically. The percentage of e-filers jumped from 67 percent in 2009 to 78 percent in 2011.

The switch to electronic filing saves the IRS tens of millions of dollars annually. It has allowed the agency to scale back processing centers from 10 to three. The processing cost per electronic return is 17 cents, compared with $3.66 for paper returns that must be entered manually in the agency’s database. Electronic filing also boosts accuracy and reduces the time employees spend resolving transcription errors.

To encourage e-filing, the IRS has had to reassure electronic filers they are not at any greater risk of being audited than those who file by paper. The agency captures 100 percent of the data from electronic returns in its database, while it captures as little as 40 percent of the information from paper returns. To level the playing field, the IRS uses only 40 percent of the data from electronic returns for enforcement purposes. As the volume of paper returns diminishes, the agency plans to begin capturing 100 percent of tax data, whether from paper or electronic returns. This move is expected to boost efforts to reduce the tax gap—the amount of taxes owed but not paid.

Busy Signals

In 1997, the National Commission on Restructuring the Internal Revenue Service reported that only 51 percent of taxpayers calling the agency’s toll-free line with questions got through to a customer service representative during the filing season. The panel directed the agency to “review and restate its mission to place a greater emphasis on serving the public and meeting taxpayers’ needs.”

The following year, the agency consolidated 70 call centers into 26 interconnected sites, allowing callers to be transferred to customer service representatives based on availability. Training programs and automated tools were developed to help employees answer tax law questions. The IRS’ internal Customer Service Representative Level of Service rating—the

proportion of callers who get through to an assistor—improved from 51 percent to 87 percent in 2004.

But ratings dipped again in 2008—to 53 percent—when the IRS sent checks to more than 100 million households as part of President Obama’s economic stimulus program and call volume doubled. Service leveled out to 72 percent in 2011, but average wait times increased to 12 minutes, compared with five minutes in 2007. According to Steven T. Miller, deputy commissioner for services and enforcement, the decline reflects resource constraints and continued high call volume. The IRS budget dropped to $11.8 billion in fiscal 2012, a $300 million decrease from the previous year. The president’s fiscal 2013 request includes an additional $1 billion, but most of the increase would be allocated to enforcement rather than to service.

Call volume has increased exponentially with new programs that involve payments and tax credits to citizens and businesses, such as the economic stimulus and health care reform. Key stakeholders, including the IRS Oversight Board and National Taxpayer Advocate, have urged Congress to increase agency funding to help it manage expanded responsibilities. “The IRS has been tasked with a wide range of new responsibilities under the Affordable Care Act, such as the administration of new credits for individuals and businesses and additional information reporting,” the board said in its fiscal 2012 budget report to Congress. In recent report, National Taxpayer Advocate Nina Olson noted the “imbalance between workload and resources” is unmanageable and impairs the agency’s ability to serve taxpayers and collect taxes.

Shulman doesn’t buy the argument that the agency’s mission has expanded; he says all the new responsibilities are tax-related. “Every time something happens, we keep saying there are other people who can do it and people will say, ‘We actually trust the IRS to get this done.’ That’s what happens behind the scenes. So, I think this agency should be quite proud of that,” he says. “It’s just we need to make sure we get the resources to get it done.”

For the remaining year of his term, Shulman plans to focus on enforcement and workforce initiatives begun under his stewardship. In 2009, the IRS introduced continuing education requirements for the 750,000 professional tax preparers across the nation. The field has been largely unregulated; many preparers lack training and some have been exposed for unethical conduct. Shulman sees the initiative as an opportunity to leverage the IRS’ limited resources in the interest of improved compliance.

“When I came in there were just under 100,000 [IRS employees], which seems like a lot, but not when you’re squaring off against 200 million-plus filers,” he says. “If you can get that industry, which is engaged with 80-plus percent of the filings that happen, on the same page around service and compliance, that’s a huge point of leverage.” The IRS targets preparers responsible for the highest incidence of noncompliant returns for outreach and education.

Perhaps Shulman’s highest priority is the staff of professionals under his own roof. With his Workforce of Tomorrow program, Shulman aims to make his agency the best place to work in government. Currently ranked 65th out of 240 federal agencies, the IRS has a ways to go. Just by setting the goal, Shulman hopes to communicate to employees his commitment to improving their quality of work life.

“Having people who show up every day, feel engaged, feel like their bosses add value—which means they push them, they support them, they take care of poor performers—that you’re learning and developing skills, and that you’re engaged and feel respected in the workforce,” he says, “if you focus on all those things, it’s a prerequisite to an institution working well.”

James R. Thompson is an associate professor of public administration at the University of Illinois-Chicago.

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Just Rewards

James R. Thompson — Sun, 15 Jul 2007 00:00:00 -0400

Pay for performance can work if systems are properly designed and managed.

Paybanding has become a loaded term, with different meanings for different groups. To top managers, it means pay for performance and an enhanced ability to hold employees accountable. To mid-level managers, it means more control over pay, promotion and assignments. To many rank-and-file employees, it represents a threat to a cherished tradition of guaranteed pay increases.

In my recent report for the IBM Center for the Business of Government, I found that despite all the controversy, most payband systems bring only incremental change from the General Schedule. For example, most are designed to deny poor performers some or all of the annual general pay increase. The reality is that in most such systems, a small percentage receive low performance ratings. In 2002, only 0.2 percent of workers in the Navy Demonstration Project in China Lake, Calif.-the first federal payband system-were rated at the lowest two rungs of the five-level appraisal system.

A few agencies have systems that are a more radical departure from the status quo, the report shows. At the Government Accountability Office, the comptroller general controls the size of the agency's general pay increase each year. In 2006, he set the annual adjustment at 2.6 percent, compared with 3.4 percent for GS employees. The goal is to allocate a higher portion of raise funds on the basis of performance rather than longevity. And at the Internal Revenue Service, managers given the mid-range "meets expectations" rating receive only the general pay increase, when in the past they also could get a step increase. One result is that high performers can earn proportionately higher pay increases than they could under the General Schedule.

Payband systems provide important recruitment and retention advantages. Many of the organizations with such systems have high numbers of scientists and engineers, whose jobs are difficult to fill. Such is the case at nine research and development laboratories at the Defense Department and the National Institute for Standards and Technology. Paybanding allows the flexibility needed to compete with the private sector for technical talent. With paybanding, salaries can be set anywhere within the employee's relevant band.

Although many are apprehensive about paybanding, experience shows high levels of satisfaction. At China Lake, employee support grew from 29 percent when the system was first implemented in 1980 to 70 percent by 1994. There also have been high levels of satisfaction with the NIST and Commerce demonstration projects.

Some organizations have struggled to ensure that their payband systems are cost neutral. At NIST, salaries increased by 10 percent more than did salaries for a control group during the first seven years of the project, the report shows. It is ironic, therefore, that paybanding has been proposed as a solution to the high salary costs that result from GS pay policies. But GAO's payband system allows the comptroller general to make annual adjustments taking budgetary considerations into account. The payband system for IRS managers allows the commissioner also to scale pay increases to funding availability.

Although the government's experience with paybanding generally has been positive, there is cause to be wary as it is extended to larger agencies such as the Defense and Homeland Security departments. Experience is mostly in small organizations. Size presents a challenge, particularly because top managers must devote significant attention to design and implementation of these systems. That's why the Pentagon's decision to phase in the new National Security Personnel System is a good one.

Another challenge is management training. Supervisors must be prepared to tell some workers that they are contributing less than others and will receive smaller pay increases. The skills to effectively convey expectations, support employees as they strive to meet expectations and to assist those who are falling short are at a premium. The funds required to provide managers with this type of "soft skill" training is in short supply at most agencies.

Executives contemplating a plunge into paybanding should tread cautiously and heed lessons learned.

James R. Thompson is associate professor and director of graduate studies for the Graduate Program in Public Administration at the University of Illinois-Chicago.

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Reversing Reinvention

James R. Thompson — Sun, 01 Jun 2003 00:00:00 -0400

Daniel Cooper, chief of the Veterans Benefits Administration, has switched the agency's focus from employee and customer satisfaction to productivity and efficiency.

aniel Cooper, a retired Navy admiral who now heads the Veterans Benefits Administration, calls his predecessor, Joe Thompson, "a visionary." But it's not clear whether Cooper means Thompson was an impractical dreamer or a farsighted leader. During Thompson's tenure as the Veterans Affairs Department's undersecretary for benefits from 1997 to 2001, the VBA was a hotbed of management innovation: Thompson redesigned work processes, placed a priority on customer service and implemented a system of balanced measures to assess the performance of the agency's regional offices. Driven by productivity concerns, Cooper has abandoned or scaled back Thompson's innovations. With this change in direction, the agency has had to confront fundamental questions about its structure, its relationships with customers, and the relative merits of hierarchical vs. collaborative management.

Thompson, who had spent his entire career at the VBA, was out to fix what he regarded as fundamental flaws in the way the agency operated. In place of what he termed an "assembly line approach" to claims processing, Thompson sought to substitute a team-based structure that required employees to develop broader skills. He emphasized collaborative decision-making and employee empowerment. "I believed the system was flawed at its heart," Thompson says. "There was an over-focus on production, an under-focus on quality, an over-focus on seeing people as easily replaceable cogs in a machine."

Cooper, a 33-year veteran of the Navy, had no previous experience with the VBA when Veterans Affairs Secretary Anthony Principi appointed him in March 2001 to head a task force seeking to improve the disability claims adjudication process. Principi was determined to resolve a burgeoning backlog, which had risen to 285,000 claims by January 2001, when he took charge of the department. When the task force completed its work in October 2001, Principi appointed Cooper undersecretary for benefits. Cooper's primary mission has been to reduce the backlog.

The VBA administers programs to provide education, home loan guaranty, life insurance, vocational rehabilitation, disability compensation and pension benefits to qualified veterans. Sixty percent of the agency's 13,000 employees are assigned to the disability compensation and pension program, which manages benefit payments to veterans with disabilities connected to their military service. The process of adjudicating compensation claims is complex. VBA employees must determine whether a veteran is disabled, whether the disability is service-related and rate how severe the disability is. Traditionally, a series of claims examiners in the adjudication unit handled each claim. The work was specialized, involved repetitive tasks and included a large number of handoffs as claims passed from specialist to specialist.

BREAKING DOWN THE WALL

Joe Thompson was determined to eliminate the assembly line approach. He had begun his career as a claims examiner at the VBA's New York Regional Office doing work he describes as "mind-numbing." After tours of duty in Washington and Philadelphia, Thompson returned to New York as regional director in 1990. He was convinced that the traditional approach to claims processing produced neither a high quality of work life for employees nor good service for veterans. A fundamental problem, Thompson believed, was the traditional separation between the services unit, responsible for all direct contact with veterans, and the adjudication unit, where claims were processed. The benefits counselors in the services unit didn't know enough about the claims process to answer veterans' questions, while the claims examiners in the adjudication unit had no direct contact with the veterans whose claims they were judging.

Thompson and his staff at the New York Regional Office convened focus groups in which veterans complained that they couldn't find out the status of their claims or talk to the people making decisions about them. "Veterans didn't understand what was going on through this process," says Thompson. "They didn't know why we made the decision, they were not kept apprised of it through the whole process and they got angry and frustrated."

Thompson envisioned an organization in which highly skilled workers performed a broad range of tasks and interacted directly with veterans. He and his colleagues at the New York Regional Office attempted to break down the wall between the services unit and the adjudication unit, combining the responsibilities of benefits counselors and claims examiners in a new position, called veterans service representative. These representatives were to manage each claim from start to finish and serve as a single point of contact for veterans about their claims. Workers would have opportunities to gain new skills and veterans would get better service.

The changes Thompson introduced at the New York Regional Office were consistent with those Vice President Al Gore was trying to introduce across government in the early 1990s as part of President Clinton's reinventing government initiative. Thompson and his staff at VBA's New York Regional Office became the first recipients of Gore's Hammer Award for reinvention excellence. Gore subsequently was instrumental in Thompson's promotion to VA undersecretary for benefits in 1997, a post from which he sought to extend the changes developed in New York across the entire agency.

BACK TO THE FUTURE

Thompson's tenure was turbulent. He attempted to change multiple organizational systems and practices to accommodate the new claims adjudication process. Thompson instituted a case management system to keep veterans apprised of the status of their claims. The approach required new computer software and additional training for employees. Thompson expanded the amount and quality of training provided across VBA and developed a method for tracking employee development. He introduced a balanced scorecard method of measuring performance using a mixture of business, employee and customer satisfaction assessments. With only four years to reform long-standing practices, Thompson drove his change agenda aggressively.

Not all the changes were well received in VBA's regional offices. Faced with staff cuts and continuing performance pressures, many regional directors were concerned that the cascade of changes would slow claims processing. Employees who had counseled veterans on the telephone for most of their careers had to be trained to adjudicate claims, and employees whose focus had been on claims had to learn communication skills. Workers were pulled away from their regular duties to be trained in their new responsibilities.

VBA regional directors traditionally had a great deal of autonomy in running their offices, something Thompson was loath to change. So, instead of ordering regions to adopt his model, Thompson gave the regional directors substantial flexibility in adapting it to their circumstances. By 2001, as Thompson's term drew to a close, many offices still had not fully adopted the key innovations. Some had not even broken down the wall between service and adjudication. At the Chicago Regional Office for example, a separate phone team talked with veterans, rather than the team handling the claim. Thompson stepped down as undersecretary for benefits in September 2001, two months short of his four-year term. Secretary Principi asked for Thompson's resignation and that of his deputy, Patrick Nappi, subsequent to the discovery of an embezzlement scheme involving two employees at the Atlanta Regional Office. Neither Thompson nor Nappi were implicated in the scheme. Thompson served as special assistant to the secretary until January 2002, when he retired to become a management consultant.

BALLOONING BACKLOGS

One obstacle to implementing Thompson's model was continuing pressure to maintain productivity in light of an escalating backlog of disability claims. Although the backlog had been reduced to about 240,000 claims by October 2000 from a peak of more than 400,000 claims in the early 1990s, new legislation caused the backlog to spike. A 1999 decision by the Court of Veterans Appeals had lifted the requirement that VBA help with claims that were not "well grounded." But, under pressure from veterans advocacy organizations, Congress passed the 2000 Veterans Claims Assistance Act, reversing the court's decision and directing VBA to reassess 98,000 claims processed after the court's ruling. By mid-2001, the backlog was back up to more than 400,000 claims.

As head of the task force dedicated to finding ways to reduce the backlog, Cooper assigned task force members to three teams and required each team to visit one VBA regional office that was considered good, one considered poor and one in between. Early on, the task force concluded that the regional offices should revert to a more specialized approach to claims processing. "After about the first week, two people on the team came in and said, 'Look, the first thing we ought to do is have the regional offices reorganize. We've got to get into specialized teams. They are just unglued in the way they are working right now,'" Cooper says. "Everybody talked about it, pushed it back and forth. About halfway through, I said that's the only way to go." Specialization was appealing to many in the agency who felt that the range of tasks required of veterans service representatives under Thompson's approach was just too broad.

Once he took over VBA, Cooper directed regional offices to revert to a specialized approach, with six teams, each responsible for a different phase of adjudication. Though one team now handles all phone contact with veterans, Cooper's approach isn't entirely a return to past practice. New technology allows those handling phone calls also to provide updated information on claims status. Representatives rotate among the teams, allowing them to develop the full range of skills needed to process claims.

Opinion is split within the agency about whether Thompson's approach demanded too much of the representatives. Cooper acknowledges that some employees were able to master the job and that Thompson's model worked in some offices. "It wasn't necessarily the model that was bad, it was all the bells and whistles that were hung on it," Cooper says. Jack Ross, director of the Cleveland Regional Office, concurs. "We were going through something like 80 changes," he recalls. "There were so many changes that people couldn't react to them in a timely fashion."

Some who believed in what Thompson was trying to do say Cooper's return to specialization was needed to increase short-term efficiency. In addition to adopting a more specialized approach, Cooper created a Tiger Team-a specialized unit of experienced employees-to speed the processing of claims that had been pending for more than a year and those of veterans over age 70.

He also set up nine resource centers to collect and rapidly process claims that included all necessary evidence. Several regional directors say their employees were relieved to have some of the responsibility for claims development and rating lifted by the return to specialization.

"People were reaching the breaking point trying to do all facets of the job," says Ross. "It was just too complex. They were happier doing a segment of the job." Donald Stout, director of the Oakland Regional Office, says the generalist approach simply was not conducive to the efficient processing of claims.

MARCHING IN STEP

Even more important to Cooper than his new model for processing claims is bringing discipline and accountability to the organization. "If there is one word that I will hang my hat on-and we mention frequently in the [task force] report and I mention it ad nauseam in any talk I give-it's accountability," Cooper says. "I honestly felt that there was not sufficient accountability everywhere. I was convinced that when headquarters said 'everybody do this,' 57 different offices set up the polling machine and they all voted."

Veterans organizations support Cooper's push for accountability. "The regional office directors were very autonomous in the past," says John McNeil, deputy director of the National Veterans Service at the Veterans of Foreign Wars. Headquarters officials "took away that autonomy, and they have iron fist control now. When they make a decision, all the regional offices fall in line. That is really critical and that has worked." Cooper has imposed the same structure on all regional offices. He contends that consistency is the only way to ensure that veterans are treated the same no matter where they live. "When I have a veteran who goes into an East Coast regional office and gets . . . 30 percent disability, and he goes to California and he gets 100 percent, there's something wrong," says Cooper. "So the whole goal is to get them consistent across the board."

Cooper also has moved to hold regional directors accountable for the performance of their offices. "Under [Thompson] and really even before [him], there really was no ramification for poor performance," says Michael Walcoff, associate deputy undersecretary for operations. "If you were a director and you ran a poor station, for the most part nothing ever happened to you." Under Cooper, the field operations office has issued performance standards for the number of claims processed, timeliness and the accuracy of claims processing. Regional office directors who fail to meet the targets get a call, often from Cooper himself. Some directors prefer the new approach to Thompson's balanced scorecard, which was used for the same purpose but required interpretation. "Cooper has given me a clear set of goals. They don't change from month to month," says Ross of the Cleveland Regional Office. "To figure your balanced scorecard you had to do two or three computations. You couldn't just look at data and say, 'OK, this is where I am.' Cooper has given us five to six areas to look at. On a day-to-day basis, I know right where I am in terms of what goals are set for me. That to me is what accountability means, when he tells me, 'Look, you've got to hit those marks.'"

Lost in the equation, however, are measures of employee satisfaction and customer satisfaction that featured prominently in Thompson's scorecard. "I never took a satisfaction muster on my ship, so I never saw one of these before," Cooper says. Customer and employee surveys still are performed, but directors are not held accountable for the outcomes. These measures have been "de-emphasized," according to Walcoff. The current emphasis is "let's get the work out the door," says Oakland Regional Director Stout.

The almost exclusive emphasis on productivity concerns Thompson, who contends that VBA sacrificed quality and service in its past attempts to hit the numbers. Thompson says his objective was to "put a human face on the process" by providing the veteran with a single point of contact and periodic status reports.

But Robert Epley, associate deputy undersecretary for policy and program management, contends that service still is emphasized. He says the most important element of service is fast, efficient handling of claims, something that comes only with increased productivity. "Part of customer service is timely service," Epley says.

DOOMED BY BACKLOGS

Although people disagree over whether Thompson's claims processing model was flawed, the consensus is that it was doomed by circumstances. Under enormous performance pressure created by the increased backlog, the regional offices simply couldn't take the time to adequately train employees and to ensure each claim received case management treatment.

Although his model didn't survive in its original form, Thompson and his ideas still influence VBA. For example, under a program initiated by Thompson, employees must be certified as proficient in a range of tasks in order to get promoted.

Thompson's focus on data integrity also has had a significant effect. "Joe used to say, 'Give the VBA a number, and they'll hit the number,' and that was because they would find ways to cheat," Walcoff says. "Joe made it very clear when he first came on that if there was one thing he was going to accomplish here, he was going to bring some integrity to the organization. And we worked hard at it, and we brought stations in and brought directors in and we put numbers in front of them and said, 'How do you explain this?' We got to the point where I think you could at least give some credence to the data we were presenting."

Thompson says one of his most important accomplishments was boosting resources for the agency. From a low of 11,300 employees in 1999, the agency is now up to more than 13,000. Thompson contends the increase in staff, rather than Cooper's more specialized approach to claims processing, accounts for the drop in the backlog from 430,000 claims in December 2001 to 310,000 in February 2003. Some regional directors agree. "If you staff adequately and make sure that they're good quality folks [with] decent management, you're going to get a good product out of them," says Stout.

VBA now is well on its way to reducing the claims backlog to Principi's goal of 250,000 by the end of this year. Principi's second goal, reducing to 100 days the time it takes to process a claim, will be tougher to reach, though progress is being made. But once VBA is regularly meeting its production goals, will Cooper's model leave employees bored and stultified? A regional official who asked not to be named says yes. "You give somebody a routinized job, and the longer people do it, the more they're bored," the official says. "Bored people cause problems; they steal from their employer, they file grievances, they start playing other games."

Thompson worries that Cooper's model will drive top-flight employees to leave VBA for more meaningful and challenging work. "My fear is that some of the things that are being put into place will drive out the best of them," Thompson says. Nappi, Thompson's former deputy, agrees. "If you want government people to be clerks, then break up the process and make it an assembly line, and you will hire people who are just myopically concerned about their little focus," Nappi says. "If you want to attract people who are intelligent, who can use ingenuity, who can take pride in a product, then you don't want an assembly line. That was Joe's argument from the get-go." Cooper's model addresses the problem by rotating employees among the different teams, so they have a chance to learn the full range of skills. "You aren't going to be on that team in perpetuity," he says. "[Regional directors] ought to rotate the best people around and give them that broad view."

Thompson regards case management as his most important innovation. He says the close relationship between worker and veteran fostered by case management allowed workers to "see service to veterans as a noble experience, to make a difference in the lives of the people who sacrificed for this country." Even some who disagree with other parts of Thompson's program concur with him on this point. "I would hope we go back to case management. There is a certain amount of goodwill that is generated by that. It is the care and compassion element," says Ross. "We needed to put out a fire. Our backlog was so big. The timeliness was so poor. Something needed to be done immediately. Positive results are being generated. I would not want to return to the teams, but customer satisfaction and customer service, that's what we're about."

James Thompson is associate professor and director of graduate studies for the Graduate Program in Public Administration at the University of Illinois-Chicago.

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Taxing Transformation

James R. Thompson — Fri, 01 Dec 2000 00:00:00 -0500

The IRS is deep into one of the government's most massive restructuring efforts, but many wonder whether the agency can sustain its momentum.

he plot is a familiar one in Washington. An agency stumbles, is roundly denounced on Capitol Hill, and new leadership is brought in to attempt a fix. The IRS has added some new wrinkles to the old story in its efforts to modernize the tax system over the past few years. The IRS stumble was larger than most. Estimates are that the agency wasted $3.5 billion between 1990 and 1996 in an attempt to update its data processing systems, a project known as tax systems modernization. Because of the agency's size and notoriety, the systems modernization fiasco garnered an unusual degree of attention on Capitol Hill, culminating in an investigation and special reform legislation.

Most importantly, the nature and extent of the IRS fix set it apart from traditional cleanup efforts. The IRS is approximately two years into an eight- to 10-year effort to fundamentally change how it does business. Traditionally organized along geographic and functional lines, the agency is now divided into four operating divisions. Each one represents a different customer segment: individual taxpayers, small businesses, large corporations and tax-exempt organizations. As of Oct. 1, the former field structure, which featured four regional and 33 district offices, was dismantled. Employees now report up a chain of command in one or another of the new operating divisions: Wage and Investment Income, Small Business/Self-Employed, Large and Mid-Size Business and Government Entities/Tax Exempt. The agency has reduced management layers by half, from 10 to five; restructured managerial jobs; and instituted a system of organizational measures featuring balance among customer satisfaction, employee satisfaction and business results.

The IRS is moving aggressively to meet a congressional requirement that 80 percent of taxpayers file their returns electronically by 2007. The changes hold promise as one of the more significant management achievements in the annals of the executive branch. If outcomes even approximate what agency leaders have planned, the IRS will go from whipping boy to star pupil, from a symbol of bureaucratic incompetence to public service exemplar. But obstacles loom. One concern is that congressional support will wane. Also, observers are worried about whether the internal commitment will be sustained following the eventual departure of IRS commissioner and master strategist Charles Rossotti.

A Perfect Fit

Rossotti is former chairman of the board at American Management Systems, a large, Virginia-based consulting firm that specializes in "transforming large organizations into next generation enterprises." Rossotti's selection as commissioner was a departure from the long-standing tradition of appointing tax lawyers to the top post. The magnitude of the IRS' failures led former Treasury Secretary Robert Rubin to seek a management expert for the top job. Rossotti, one of those queried about prospective candidates, expressed interest in the position and was appointed commissioner in late 1997. With impressive credentials of his own, a network of business and consulting contacts on whom he could call for assistance, and firsthand knowledge of the federal environment from a stint at the Defense Department early in his career, Rossotti was a perfect fit for the job.

In 1997, when Rossotti took charge, the IRS had been traumatized by a series of attacks from Capitol Hill. As a result of the computer modernization fiasco, Congress created the National Commission on Restructuring the Internal Revenue Service. The commission's report, released in June 1997, became the basis for the 1998 IRS Restructuring and Reform Act, which was wending its way through Congress when Rossotti took office. What had been a relatively low-profile legislative item ended up on the front pages of the nation's newspapers and on the television news during Senate Finance Committee hearings in September 1997. At the hearings, a number of people alleged that IRS collection agents and investigators had mistreated them. Then-Deputy Commissioner Michael Dolan publicly apologized on behalf of the agency, pledging an immediate and comprehensive review of all allegations of impropriety. As a direct consequence of the hearings, extensive safeguards for delinquent taxpayers threatened with enforcement action were incorporated into the Restructuring and Reform Act.

After the hearings, it was clear that drastic action was needed at the IRS. Rossotti was willing to provide it. Observers say Rossotti spent six months before assuming office studying the problems at the IRS, talking with experts and writing a 50-page manifesto for change entitled "Modernizing America's Tax Agency." The five levers of change Rossotti identified in that document-creation of customer-based operating divisions, changed managerial roles, use of balanced performance measures, "revamped business practices," and new technology-serve as the basis for the transformation that's under way.

"Modernizing America's Tax Agency" sets forth the scope of the task, saying, "It will require fundamental change in almost all aspects of the IRS." It also issued an implementation challenge, declaring, "This change must take place while the IRS continues to administer a very large, complex and ever-changing tax system." A key step toward meeting that challenge, according to several close observers, was the decision to give management consulting firm Booz-Allen and Hamilton a prominent role. Initially hired to "validate" Rossotti's design concept, Booz-Allen later took on the job of structuring and driving the change process. According to IRS Chief Human Resources Officer Ronald Sanders, Booz-Allen brought "a very effective discipline for getting issues on the table, getting them decided and getting them implemented. That sort of self-discipline is tough to enforce, and that has been one of their principal contributions."

At times, Booz-Allen has assigned as many as 150 people to work with the IRS modernization office to move the project forward and to involve employees. Deputy Commissioner for Modernization John Stocker estimates that about 10,000 IRS employees have worked on one of 16 design teams, assisted with pilot projects or participated in one of the many focus groups. The key decisions are made by the Executive Steering Committee, chaired by Rossotti, which includes approximately 30 top executives and representatives from the Treasury Department and the National Treasury Employees Union, the largest organization representing IRS employees.

The steering committee has provided a forum for Rossotti to exercise what several observers describe as a hands-on leadership style. John Dalrymple, commissioner of the new Wage and Income Division, says that Rossotti "thinks strategically, but he knows you have to get down and get your fingers dirty, roll up your sleeves and know what's going on. He has an innate ability to ferret nuggets of importance out of the bureaucratic morass." Larry Langdon, commissioner of the large and mid-sized business division adds, "he's always looking at what is happening next but he also has the ability . . . to dip down to a level of detail." NTEU President Colleen Kelley, a member of the steering committee, reflects on Rossotti's degree of involvement: "I remember one of the first teams coming in and thinking they would make a presentation and they would leave," she recalls. "[They] didn't get very far [before] Charles had a question because he had read all the pre-read materials; he knew everything that was going on. He was engaged, very engaged, and it didn't matter the division or the issue."

Of even greater importance to Kelley is what she regards as Rossotti's commitment to involving rank-and-file employees in design decisions. "From Day 1 he reached out to NTEU, made it clear that he knew we could help, that he wanted employees involved and that he wanted our help to get employees involved," Kelley says. While the union has long had a partnership agreement with the IRS, Rossotti went beyond the legalities of that agreement in soliciting union participation. According to Kelley, "Normally, when the agency makes a decision, then how it gets implemented is something we partner on. But that's been different in this organization. From the very beginning, there were NTEU members on these teams designing the whole concept."

Rossotti has made a strong impression in the managerial ranks as well. One longtime manager who preferred not to be identified says, "I've never met anybody who was ever exposed to him who didn't appreciate the pure intellect. Most of us don't give off that kind of praise. We just wouldn't say anything. But, you go to a meeting with him, and he grasps it very quickly, he understands it and he's moving to the next place." Former Chief Operations Officer Jim Donelson, now retired partly as a consequence of the changes Rossotti wrought, nonetheless offered the following observation: "You won't get a better individual or manager or a more honest person than Rossotti. He is an outstanding person, he is a brilliant guy, a quick study."

The Carrot vs. the Stick

Rossotti and his lieutenants set out to change not only the structure, but also the operating philosophy of the IRS. A premise of "Modernizing America's Tax Agency" is the need for the IRS to place more emphasis on "pre-filing" activities such as taxpayer assistance and education. According to Rossotti's report, the IRS has traditionally spent about 75 percent of its budget on "post-filing" compliance activities-including the auditing of returns and the collection of delinquent taxes-and less than 10 percent on pre-filing activities.

Rossotti and other members of the leadership team argue that it makes sense to use more of the IRS' limited resources to provide taxpayer assistance early in the process to reduce errors, rather than investing time and energy in costly audit and collection actions to penalize taxpayers for errors after the fact. Dalrymple, commissioner of the Wage and Investment Income Division, explains that "by delivering better service up front, we can save valuable compliance resources for difficult situations. It was a realization that by solving smaller problems before they become big, you save the organization a lot of money and a lot of burden for taxpayers."

For many employees engaged in compliance activities, the shift in emphasis is perceived as a devaluing of that work. The underlying difference in philosophy between this group and agency leadership is over the most effective tool to promote taxpayer compliance. Should it be the carrot of improved education and assistance, or the stick of more audits? Advocates of the stick fear that more taxpayers will be tempted to cheat if word gets out about reduced compliance efforts. They further question the priority on the use of customer satisfaction as a measure of performance. A manager who asked not to be identified says, "If we do a good job of collecting taxes, people get mad at us. I don't see it as a negative. The employees know what they are doing. The people who want to change are amateurs rather than professionals and don't understand our goals here."

A contrary view is offered by Large and Mid-Size Business Division Chief Langdon, who acknowledges that, "The crooks are alive and well," but adds, "there is also a substantial number of taxpayers who want to comply with the laws." Rossotti adds, "Our goal here is to serve the honest taxpayer. It's just that there's more than one way you have to do it. One way you have to do it is by providing whatever services that people who are compliant taxpayers need, because if you don't provide it to them, you're sort of stupid. I mean they're trying to pay you money." At the same time, he notes, "You can't let everybody who doesn't feel like paying get away with it. You have to find a way to do both."

Te 10 Deadly Sins

The importance of the issue has escalated with disclosures that compliance activities dropped dramatically between 1996 and 1999. According to a May 2000 report issued by Treasury's inspector general for tax administration:

Enforcement revenue ("any tax, penalty, or interest received from a taxpayer as a result of an IRS audit or collection action") is down 13 percent.
Federal tax liens filed are down 78 percent.
Levies on delinquent taxpayers' assets such as bank accounts, wages and accounts receivable are down 84 percent.
Seizures of taxpayer property for nonpayment of taxes are down 98 percent.

A variety of explanations for the declines have been offered. Top managers emphasize a long-term loss of resources that has left the IRS with approximately 100,000 full-time equivalent positions, 15,000 fewer than in 1996. Compliance managers point out that the problem has been exacerbated by a decision to assign audit and collection employees to taxpayer service activities, such as answering phones and helping taxpayers file their returns during tax season. Rossotti says that practice will cease if Congress provides additional resources.

The most controversial explanation has to do with Section 1203 of the Restructuring and Reform Act, which identifies 10 categories of employee actions that, if proved, result in automatic termination with appeal only to the commissioner. These have come to be known as the "10 deadly sins." The most controversial of the 10 requires termination if an IRS employee is found to have harassed a taxpayer. According to managers, employees involved in collection activities are concerned that any citizen who doesn't want to pay taxes can allege harassment, thereby prompting an investigation and delaying payment. The provision has induced an attitude of extreme caution on the part of revenue agents and officers. "If you don't follow the law or manual properly, you will be subject to disciplinary action or removal. The only person who can save you from removal is the commissioner," notes Jim Donelson, former chief operations officer, now retired. "That would chill you to the bone if you spent 25 years with the service."

Section 1203 is a target of almost universal condemnation. Mike Murphy, president of the Tax Executives Institute, says, "I don't see any benefit at all but to scare the hell out of employees." Ken McDaniels of the Federal Managers Association says, "1203 shouldn't have become law. That provision has really harmed us as an agency." Rossotti says simply, "We would have preferred to have the ability to deal with that in our own way rather than have it prescribed in the law." He adds, "I think we underestimated the impact of this 1203 . . . we probably did more harm throwing gasoline on what was already a smoldering fire by basically not having a good enough explanation in our initial training of people. That just took something that was kind of a fear and made it a huge fear."

Making the whole issue even more charged for employees involved in compliance was the release of a May 1999 report by the General Accounting Office concluding the allegations of taxpayer abuse made at the Senate Finance Committee hearings in 1997 and 1998 were unfounded. The GAO report has served as justification for those within the agency who don't think a complete overhaul of the organization was warranted.

Bob Wenzel, deputy commissioner for operations, notes that the hearings stimulated almost 7,000 pieces of correspondence, most of which related problems that individual taxpayers have had in dealing with the IRS. Wenzel says that going through the correspondence item by item made clear "the seriousness of problems with our systems and processes and how critical it is that we get the right kind of support to our employees so they can do their jobs well." Many of the complaints arose from incompatible data systems and poor communication among officials in different functional units, problems the current changes are directed at correcting.

Making Managers Compete

Morale problems among middle managers extend beyond disillusionment over Section 1203 and the perception that compliance activities are being given short shrift. As part of the restructuring, executives and managers were required to compete for their jobs. As a basis for selection, approximately 1,600 senior managers and executives applying for jobs in the new structure were asked to provide evidence of their competencies in areas such as leading people, business acumen, leading change and communication. The applications went to panels convened by the new operating division heads. Each panel conducted an extensive process of rating and interviewing the applicants.

"There was a lot of opposition," says Bobbie Kelly, director of the Personnel Policy Division in the Office of Strategic Human Resources. "The attitude of many managers was, 'I'm already a career executive, I've been given tenure. I've already competed. Why do I have to write up my competencies?'" But Wenzel argues that "the jobs in the new IRS are totally different than they were in the old. This is not a rollover of a district director position or a division chief position or a branch chief position. If you look at the new positions, they're different. All the position descriptions were rewritten. To be fair about the process, we needed to open this up and re-compete all the positions."

About 10 percent of the management corps opted to take buyouts rather than compete. Donelson was a member of this group. "I didn't want to go through that process," he says. "They knew what I could do . . . . [I thought that] if I'm not appreciated for who I am and what I've done, perhaps this organization is not the right place for me anymore." Another manager who opted for a buyout says, "I don't disagree with the structure, I'm not an advocate nor opposed. I've been through one too many reorganizations. I have yet to see one that has gone full circle that has been fully stabilized. I don't see this one as any different."

Managers say the competition would have been more traumatic had it not been managed as well as it was. All managers, including those not selected for new posts, were guaranteed jobs without loss of pay and without having to move. A mid-level manager who is staying with the IRS says, "One thing Rossotti did that had a dampening impact [is that] he emphasized over and over that if you do not get picked for this job, you will not be booted out on the street, you will be put in a pool with transition workers. We will find meaningful work for you." Daniels, whose managers' organization has many IRS members, says, "The organization did an exceptional job in making it as fair and stress-free as possible. [Managers] knew they wouldn't lose grade or pay, they could stay in the same geographic location. It is only a question of where they would work."

Employees as Strategic Assets

The job competition was managed by the Office of Strategic Human Resources, a unit that in many ways symbolizes the new values that Rossotti and his team are attempting to introduce. Heading the office is Ronald Sanders, former director of civilian personnel at the Defense Department. Implicit in the creation of the human resources office is the idea that employees should be regarded as strategic assets-an idea that has gained wide currency in the private sector but that has come only lately to government. "I am to people what the [chief financial officer] is on finance and the [chief information officer] is with regard to information," says Sanders. "It is a stewardship rather than a regulatory function."

The new philosophy is perhaps most apparent with regard to training matters. The IRS has dramatically increased its training budget and has encouraged employees to seek advancement and to develop their skills, competencies and careers within the agency. Employees can apply for financial support for training that is mission-related, but not necessarily job-related, from a new $1.6 million human resources investment fund. Employees are being given broad discretion in the types of courses being funded. Almost 4,000 employees applied for assistance under the program, of which about half were funded. The IRS intends to increase the funding level to $2 million for 2001.

An element of the new human resources philosophy is that when it is deemed critical that employees gain new competencies, the agency will provide training at its own expense. For example, the IRS has created a new position, taxpayer resolution representative, which corresponds with a previous position, customer service representative. The new job has a wider scope of responsibilities and requires a higher level of skill. The agency has accordingly imposed a requirement that employees transitioning to these positions either demonstrate competency in accounting or take six hours of accounting training. The IRS has made time and funding available for that training. Sanders cites this as an example of the new strategic orientation. He says that the attitude was, "Don't worry about the precedent, here's what we need to do, let's do it."

Sanders' office is attempting to move the organization to a competency-based human resources system. Such a system provides much greater specificity about the skills required for a position and how those skills are applied. It places greater emphasis on "soft" job elements such as teamwork, cooperation and the ability to communicate.

Traditionally, "even if you had potential for advancing to another job, you didn't know what the competencies [were]," says O'Rourke. "That is the key. Employees and managers will know what the competencies are for successful work in that position. If you are in wage and investment income and decide, 'I would like a job in small business,' you can identify the competencies you will need. Within [the Office of Strategic Human Resources], we can identify a bridge position [and can say], 'you have to get to this position in wage and income before you can cross over to this other position.' "

For managers and executives, competencies now serve as a basis for appraisal and rewards as well as training. For bargaining unit members, however, competencies are being used only to identify training needs. "We have yet to be convinced of the validity of using competencies to determine performance or promotion potential," says NTEU's Kelley. "They haven't convinced us yet that it could be done in a fair and objective way for employees."

Jim White, director of tax policy and administration at GAO, identifies the new performance management system as IRS' most important human resources innovation. "That's where you create incentives that managers and employees will operate under," he says. "In the past, when revenue collection was emphasized, you had perverse results . . . . The hard part is creating a balanced set of measures to [provide incentives for] workers to provide good service and work to ensure compliance." The new system will feature balanced measures with emphasis on employee and customer satisfaction in conjunction with traditional business measures. Measurement is a particularly charged issue for the IRS. The purported abuses identified during the Senate hearings were, to a large extent, blamed on over-reliance on a measurement and reward system that pressured employees to use inappropriate collection tactics. As part of the new balanced measurement system, the agency has instituted regular surveys of both employees and customers.

The most problematic aspect of the new system is that it must simultaneously hold managers accountable for results, while ensuring closure of collection or audit cases. Customer satisfaction or employee satisfaction don't equate to specific performance rankings. Agency leaders are concerned about creating incentives for managers to cut corners in order to score highly and thereby achieve good ratings. Managers have therefore been directed to rate their subordinates on the basis of actions taken rather than results achieved. Now the question is whether managers and their supervisors will tend to revert to a reliance on numbers as a basis for making distinctions among employees and thereby promote inappropriate behaviors.

Turning the Titanic

Despite the vast changes and progress made, Rossotti and his team acknowledge that there is a long way to go. A great concern is that Congress won't sustain its support for the changeover. Compliance and service needs can be jointly addressed only if Congress is forthcoming with additional resources. In the fiscal 2001 budget process to date, however, Congress has been reluctant to provide the level of funding IRS leadership believes is necessary.

Rossotti had requested funding for an additional 2,800 positions to allow restoration of some compliance activities. The initial version of the Treasury appropriations bill included no funds for the additional positions, however, and approval of approximately 2,000 of the 2,800 positions came only after White House intervention. President Clinton vetoed the Treasury appropriations bill for reasons unrelated to the IRS, so at press time the issue was still unresolved. If approved, the 2,000 positions will alleviate short-term pressure, but the shortfall will make it more difficult to resolve the debate about the priority given service over compliance. And to the extent that the dispute signals a waning of congressional support for the transformation, the long-term prospects for obtaining needed funding dim.

IRS leaders also are concerned that Rossotti may not see IRS through the transformation. As part of the 1998 restructuring act, he was granted a five-year term, which ends in 2002. Even if he serves out his term, however, the reorganization will only be about halfway finished when he leaves. Confirmation of the new IRS Oversight Board by the Senate in September was a positive development. Rossotti anticipates that the board "will provide an element of stability and continuity that might not have been available otherwise."

While acknowledging that the IRS is off to a promising start and that leadership has been effective, the GAO's White emphasizes importance of follow-through at middle and lower levels of the organization to a successful outcome. "Does the management structure have the capacity to manage the transition, develop the details of the plans, implement the plans, and manage the new organization?" he asks. Michael Murphy of the Tax Executive's Institute similarly acknowledges the difficulties ahead. "The Titanic has turned, but the challenges remain," he says.

James R. Thompson is an assistant professor of public administration at the University of Illinois-Chicago.

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The Management Game

James R. Thompson, Katy Saldarini, and C. Wayne Peal — Thu, 01 Jul 1999 00:00:00 -0400

his month, a landmark conference in Washington will bring together the two movements that have defined efforts to improve federal management in the 1990s: Total Quality Management and reinventing government.

Government Executive is proud to present the new conference, Excellence in Government '99: Leading at all Levels, in conjunction with Vice President Al Gore's National Partnership for Reinventing Government and the Office of Personnel Management. Featured speakers at the conference will include not only Gore and Senate Governmental Affairs Committee Chairman Fred Thompson, R-Tenn., but top officials from several agencies and experts in theories of organizational improvement and change management. (For complete information about Excellence in Government '99, see www.excelgov.com.)

In keeping with the goals of the conference, this special report focuses on key elements of the TQM and reinvention movements.

First, C. Wayne Peal, a 35-year veteran of service at the Central Intelligence Agency, writes about how TQM engendered a federal effort-the President's Quality Award Program-that provides managers with a road map through the tangle of management reforms in the 1990s. In an accompanying article, we detail the accomplishments of the nine high-performing organizations honored by the PQA program this year. These organizations will be recognized at a special ceremony at the conference on July 14.

Next, James R. Thompson, a scholar of the reinvention movement at the University of Illinois-Chicago, takes on the subject of "laboratories of reinvention," a creation of the Vice President's reinvention effort. Several of the labs have made stunning improvements, he notes, but their record in engendering widespread change in agencies is mixed.

The stories in this special report share a common theme: In the end it is the change agents within government-the leaders at all levels-who will determine the future of efforts to improve the federal government and the service it provides to the taxpayers.

Strategies for Success
Follow the President's Quality Award program criteria to make your way through the tangle of 1990s management reforms.

Tops in Quality
The President's Quality Award Program honors nine high-performing organizations.

Experiments in Excellence
The ambitious Clinton administration effort to create "laboratories of reinvention" across government has met with mixed success.

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Experiments in Excellence

James R. Thompson — Thu, 01 Jul 1999 00:00:00 -0400

hey evoke a host of different metaphors: "islands of excellence," "catalysts for change," "antibodies," even "leper colonies." The person responsible for them has described them as "bonfires," saying, "If you want to create a revolution, start a hundred fires and fan the flames."

"They" are the reinvention laboratories sponsored by Vice President Al Gore's National Partnership for Reinventing Government (NPR). Bob Stone, a former top NPR official, gets credit for the idea. He was inspired by the success of the Defense Department's Model Installations program, which he helped foster when he was deputy assistant secretary for installations at the Pentagon. Under the Model Installations program, DoD base commanders were permitted to waive certain categories of rules and regulations in return for improved operational efficiency.

The same idea serves as the basis of the reinvention lab program. Offices throughout government are eligible to apply for lab status in order to test new approaches to delivering service. Sponsors of the program hoped improvements identified at the labs would be copied in other organizations, helping create a more innovative, less risk-averse culture in government.

After five years, the evidence as to whether the lab program has been a success is mixed. On one hand, more than 340 units have been designated as laboratories, including, recently, the entire Veterans Health Administration. Many individual labs have achieved substantial success, and a few have leveraged broad change. On the other hand, many labs have either been shut down or simply linger on without much activity. "The fires haven't grown and spread as much as I want," Stone acknowledges.

Part of the problem may be that the labs are an anomaly-an attempt at "bottom-up" change within a predominantly "top-down" culture-and have been treated accordingly. "When we start fires, they don't spread like they should," says Jim Schmid of the Army's Soldier and Biological Chemical Command (SBCCOM), one of the earliest and most active of the labs. "The bureaucracy has a well-financed bucket brigade."

'Beta' Reinvention

Another problem relates to how NPR itself has structured-or not structured-the lab program. According to Stone, the lab idea was conceived in 1993 as a "beta version" of reinvention, and was launched with a minimum of structure.

In a March 1993 letter to agency heads, Gore defined a reinvention lab as "a place that cuts through 'red tape,' exceeds customer expectations, and unleashes innovations for improvements from its employees." That definition was sufficiently loose to allow virtually any activity deemed suitable by a department or agency to become a lab. One consequence has been to stimulate a great deal of activity under the lab rubric. Another has been that many initiatives involving only minor changes to processes and procedures have become labs.

Some who are pursuing more radical change bemoan this development. "In the Army case, they asked who wants to become a lab, and everybody who raised their hand became a lab. There was a dilution of organizations that were devoted to change," says Schmid. He says labs striving for fundamental change are regarded as troublemakers because they press agencies to loosen the waiver process or give labs more authority.

Schmid argues that the NPR should have stuck with the approach it took early on, when, he says, would-be labs were told, "You have to demonstrate to us that you are worthy of becoming a lab by showing us the things you have tried to do and been stymied at." Instead, he says, NPR took the approach, "We don't want to control this, we don't want to limit it; we want to empower departments to do this on their own."

Jeffrey Goldstein, chief of internal review at the Defense Logistics Agency and former reinvention lab coordinator for NPR, agrees that lab candidates should have to meet a higher standard. "There was no process before I got there," Goldstein says. "Basically anyone who wanted to become a lab was encouraged."

Goldstein endorses the use of "framework documents" between NPR and individual agencies specifying a process for designating, tracking and ultimately decommissioning labs. Agencies would be required to create agreements with labs identifying goals and specifying how progress toward those goals would be measured.

Structured Experimentation

Some agencies, including the Army and the departments of Justice and Interior, have their own highly formalized processes for creating reinvention labs. In Justice, for example, each lab is guided by an executive advisory group consisting of representatives of participating agencies. Lab leaders are provided training in teamwork and problem solving, and each lab must submit a charter listing issues to be addressed, proposed changes and anticipated outcomes. Each lab also must develop a business plan, create a performance measurement framework and report quarterly on its progress.

The Secure Electronic Network for Travelers' Rapid Inspection (SENTRI) lab initiated by the Immigration and Naturalization Service has benefited from Justice's structured approach. SENTRI's objective was to expedite processing citizens who regularly cross the U.S.-Mexican border. Bob Mocny, now special assistant to the deputy commissioner of the INS, oversaw the project. One problem he faced was gaining the cooperation of people not only at INS, but also at the FBI, the Drug Enforcement Administration and other Justice agencies. The response of some of these people, Mocny says, was, "Bob Mocny, who is he? I don't have to do it. There was inaction on the part of some people; they had other priorities; this wasn't the biggest one." As a consequence of a conversation with his brother, who also works at Justice, Mocny became aware of the Justice Performance Review and the lab program. He applied to JPR and was accepted.

Justice sponsorship and approval, all the way up to the deputy attorney general, helped Mocny get the cooperation he needed. "Becoming a lab gave [the project] an air of importance," he says. "The Vice President and deputy attorney general were aware of it and wanted to see it happen."

Mocny assembled a 14-member team representing six different Justice agencies. They developed a new system, including a special entry lane at Otay Mesa, a border crossing point near San Diego for SENTRI program participants. The participants, having been carefully screened, are provided transponders for their vehicles. Upon approaching the gate, the transponder triggers a computer which brings up information for the inspector on the people authorized to enter the country in that particular vehicle. The average waiting time in the SENTRI lane is one minute, and since the lane was created the waiting time at the regular lanes at Otay Mesa has dropped from 25 minutes to less than 12 minutes. The program is now being replicated at four other sites along the southern border.

'Hill of Beans'

A key question about the lab program is whether such achievements in various reinvention labs constitute the kind of breakthrough change required to achieve long-term goals of lower costs, enhanced service and changed government culture. Even at Justice, with its highly regarded lab program, three of its six active labs (Automated Personnel Processing, Electronic Document Exchange, U.S. Marshals Service Accreditation) deal with matters that, while important, will not result in fundamental change in how agencies operate.

One problem is that the inherently top-down, centralized nature of the federal government often precludes giving individual units the degree of autonomy that radical change requires. The reinvention lab at the Army Research Laboratory (ARL) provides an example.

The NPR's Stone and others cite the ARL as one of the most successful labs. ARL teams have won four Hammer Awards and have been nominated for a fifth. But Ed Brown, head of the Special Projects Office at the ARL, says being a lab "hasn't meant a hill of beans to us." Brown contends that although lab status has helped in obtaining waivers from regulations, most have pertained to relatively peripheral matters. Brown says that ARL has been unable to get waivers in the two areas that impose the most critical constraints: personnel and budget.

Ironically, two of the rules that ARL would like to waive are a direct consequence of the NPR itself. ARL has asked for relief from the Defense Department's Priority Placement Program, which was designed to help employees who have lost their jobs during reductions in force brought on by the Clinton administration's downsizing effort. Under the program, "if someone has been RIF'd, you have to take that person," Brown says. "The problem is PPP gave us people who were not minimally qualified. We said we have stringent requirements. They decided, 'You don't need the expertise you say you do.' It has done an enormous amount of damage."

The other rule Brown would like waived relates to the proportion of high-level positions at ARL. As a consequence of the NPR's drive to reduce the governmentwide ratio of supervisors to employees from 1-to-7 to 1-to-15, ARL has a cap on the number of GS-14 and GS-15 positions it is allowed. The problem, says Brown, is that in a research laboratory, "you get a GS-14 or GS-15 not because you are a supervisor, but because you publish a lot." Also, he says, with more of the lab's work being done under partnership arrangements with private firms, there is a need for more people in higher grades to manage such agreements.

In fact, Brown says, partnership arrangements are "the most fundamental reinvention" the ARL has undertaken. But "NPR had nothing to do with that," he says. "We thought of it ourselves; ran it through the system; worked the politics of it."

Institutionalizing Innovation

Brown argues that reinvention generally and the lab program specifically should be targeted at an organization's core business. "Reinvention is a good thing in concept," he says. But, he adds, "When I ask people, 'Why do you want to be a reinvention lab?' they mumble something; they haven't figured it out. You have to look at your fundamental business. Do you need to make that business better? What crisis are you coming up against? Not, 'I want to be a lab and I'll figure out what to do later.' "

One lab that did look at its fundamental business is the New York Regional Office of the Veterans Benefits Administration. The lab and the former director of the office, Joe Thompson, have gained notoriety for the extent and thoroughness of the changes they made, and because they were one of the few examples of changes at a lab becoming institutionalized across an agency. In contrast with the formal lab application procedures at some agencies, Thompson describes his former unit as largely "self-anointed."

Thompson and his staff used their lab status to change from an assembly-line approach to claims processing to one in which each claim is handled from start to finish by no more than three employees. The office organized employees into self-directed teams and implemented a new performance measurement system that includes indicators of customer satisfaction and employee development. Key elements of the New York approach are now being introduced at VBA regional offices across the country under Thompson's direction in his new position as the Veterans Affairs Department's undersecretary for benefits.

Thompson argues that the key question is not whether the lab program is too highly structured, but whether "the people making decisions [at headquarters] are capable of supporting change and people [in the field] taking initiative." He notes that both structured and unstructured approaches can work "if you have a clear understanding of expectations on both sides." Thompson adds, however, "in my experience, there was a lot of resistance [at headquarters] to things that come out of field locations. There is a tendency to think that anything important, that fundamentally affects operations, needs to originate in Washington."

The Politics of Reinvention

A big part of the challenge the labs face is simply the internal politics of reinvention. Agencies take varying approaches for managing their lab efforts.

The Army has put in place a program that has significantly altered the balance of power between staff units at headquarters and reinvention labs in the field. Any request by a lab for a waiver from a departmental regulation must receive a response within five days. If the waiver is denied, the lab can appeal up the chain of command to the Secretary of the Army.

Although these rules strengthen the hands of the labs in dealing with headquarters, there are limits to the labs' power. The problem, noted one lab representative, is that while "the Secretary of the Army and Secretary of Defense Cohen are truly in favor of this, they've got Bosnia, Kosovo and Iraq on their plate. Reinvention isn't at the top of their list." As a consequence, responsibility for overseeing the reinvention effort gets delegated and bureaucratic culture sometimes takes over.

An example is a statement on submissions for waivers from regulations recently issued by Army Secretary Louis Caldera. While Caldera endorsed the lab concept in the statement, he also issued a set of revised reinvention procedures, one of which requires the "senior legal officer's formal review of the request." In the past, legal officers could sign off on requests without conducting formal reviews. The change makes the waiver process more cumbersome and gives the hierarchy a new basis for rejecting a request.

Col. William Jones, the Army's director of management and head of its reinvention program, insists that no change in policy or procedure was intended. He says that if some of the labs have misconstrued the new guidelines, "we will clarify it with them."

Changing the Rules

While battles over waivers and policy directives are the stuff of bureaucratic life, the very existence of such battles belies the intent of NPR, which was to change the rules of the game in basic ways. Bob Stone says he hopes for the day when "reinvention labs and model installations disappear because there is no need for them anymore." One agency that approximates such a state is the General Services Administration.

GSA's aggressive approach to reinvention arose out of necessity. The initial NPR report released in 1993 recommended an end to GSA's monopoly status in procuring office space and supplies for agencies. There was a recognition within the agency that fundamental changes were required if GSA was to survive. GSA set up 13 reinvention labs to kick-start the transformation process.

The lab in the Denver region was granted a charter authorizing the regional commissioner to waive any internal regulations not based in law. The result was a dramatic change in the leasing process. The office moved away from a checklist approach to a focus on customer service. Realty specialists were given substantial autonomy and told to negotiate lease deals using "common business judgment." As a result, the lab cut the average time to arrange leases by 50 percent-and 60 percent for projects under 10,000 square feet, which make up 70 percent of the office's workload.

In 1995, GSA's Public Buildings Service convened all 750 of its leasing specialists in Chicago for a conference called, "Can't Beat GSA Leasing." At that conference, the three regional offices (including Denver) that had been experimenting with new approaches to leasing shared their experiences with the others. Many of the agency's old leasing procedures were abandoned and a new model representing an amalgam of the ideas tested at the three labs was adopted agencywide.

"It changed the world," says Paul Prouty, who guided the changes to leasing procedures in Denver. "It is one of the most successful ventures of any agency. It was high-risk. We did the technical stuff but also did things to people's minds."

Whither the Labs?

In part because so few agencies have matched the extent of GSA's change in culture, NPR is now rethinking the lab program. Among the changes is a planned shift in authority for designating labs from NPR to individual agencies.

The rationale, according to Morley Winograd, Vice President Gore's senior staff assistant in charge of reinvention, is to encourage agencies to take ownership of the program. As an NPR initiative, he says, labs were too often regarded as "renegade operations."

Another factor is that NPR simply has too much on its plate to adequately attend to the lab program. A host of other reinvention initiatives over the years has drained limited staff time and energy. "NPR itself seemed to lose interest in these laboratories," says Alan Balutis, who was involved in identifying and selecting the reinvention labs at the Commerce Department, where he now serves as deputy chief information officer. "The whole reinvention effort has evolved to focus on high-impact agencies, performance-based organizations and a host of things like that."

A key question raised by delegating the lab program to the agencies is whether it will cause them to take the lab concept less seriously. Many agencies no longer even acknowledge the existence of reinvention laboratories. NPR's ownership of the program at least conveyed that the Vice President was interested in the idea. If NPR leaves the impression that it is getting out of the lab business, what little momentum the program has gained over the past five years could be lost.

James R. Thompson is an assistant professor of public administration at the University of Illinois-Chicago.

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To Boldly Go . . .

James R. Thompson and Ronald Sanders — Tue, 01 Apr 1997 00:00:00 -0500

hey are known as the Blair House Papers, after their place of origin-a historic red-brick building just across the street from 1600 Pennsylvania Avenue-and they purport to offer nothing less than the road map (dare we say a bridge?) to a post-reinvented 21st century federal government. Indeed, prepared in early January by the Vice President and his National Performance Review staff, they emerged as a centerpiece of the new Clinton administration's very first Cabinet retreat, held at Blair House just days before the President's second inauguration.

According to Gore, the Papers are intended as the Cabinet's "reinvention marching orders"-a somewhat ironic label for an enterprise that abhors top-down rules-and they may just contain the coordinates of a new paradigm for public management.

However, the Blair House Papers spend little time on such philosophical matters. Theirs is a more practical blueprint (indeed, the Vice President proudly disdains "paradigms" and other such staples of public administration), and we predict here that the Clinton administration will be criticized by theorists and traditionalists alike for it. The Papers may also be criticized-or worse, ignored-for the simplicity of their 15 principles: They include such nostrums as "Identify your customers" and "Expand competition," each supported by examples that many may find familiar. However, a careful reading reveals a more subtle-and as a consequence, potentially more powerful-model for reform, one that proposes a new, performance-based administrative architecture for the federal government. Thus, the Blair House Papers may represent a radically different public management model (you could even call it a new paradigm, but in deference to the Vice President, we won't).

That model is embedded in the very last (and least captivating) of the Vice President's prime directives: "Create Performance-Based Organizations." One should not be fooled by this seemingly bland and bureaucratic declaration. According to the Clinton administration, performance-based organizations (PBOs) and their kin may be the only way the federal government can effectively operate in a balanced budget world. Others suggest that they may violate the very canons of the Constitution, improperly elevating the power of bureaucrats at the expense of the elected. In either case, the model described oh-so-briefly in the Papers deliberately seeks to blast free an agency's program operations from the administrative orbit of its "policy-making and regulatory functions"-holding those who run those operations contractually accountable for bottom-line objectives and outcomes. And in exchange, it promises them relief from the myriad administrative laws and rules that can make their lives so miserable.

John Koskinen, deputy director of the Office of Management and Budget, says PBOs would be the government's "factories," licensed to perform their functions without any administrative ties to the executive branch-except a performance contract between their chief executive officers and their appointed policy masters in the Cabinet.

By accident or design, the Blair House Papers also suggest a revolutionary implementation strategy, one that is incremental in scope yet potentially far-reaching in substance, characterized by grand principles reached in small steps. In other words, a "domino theory" of institutional transformation. We all remember the domino theory. A relic of the Cold War and the allegedly inexorable spread of the Red Menace, the domino theory has been made respectable by the Vice President and his notion of a government that is transformed piece by piece, until the entire administrative edifice has been remodeled.

But what will government look like when the dust settles? We need not search too far to get a glimpse of a post-reinvention future, for the first dominoes have already fallen, sometimes with a Big Bang but more often with barely a whisper. For example, many people know about the Federal Aviation Administration, emancipated just over a year ago from the government's supposedly monolithic management scheme. (See "Up in the Air," June 1996) But there are others, less well known, who are trying to follow its path beyond reinvention.

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System Error

James R. Thompson — Sun, 01 Sep 1996 00:00:00 -0400

magine there was a tax system in which you could:

File a single return which would provide data to both the Internal Revenue Service and your state.
Choose your own filing method: paper, touch-tone phone, or modem directly from your personal computer to the IRS.
Resolve issues or problems with a single phone call to an IRS customer service representative.
Get answers to tax questions through an extensive computerized data bank available 24 hours a day, 7 days a week.
Get a refund in two to three weeks rather than the current four to six weeks.

If the IRS Tax Systems Modernization project is completed, not only will the taxpayers of the future enjoy these benefits, but the agency will be able to:

Capture 100 percent of tax return data using automation instead of the 60 percent currently captured through automation.
Reduce error rates in data captured to less than 1 percent.
Use additional data to target compliance efforts, allowing a greater proportion of taxes owed to be collected.

The IRS estimates its modernized tax collection system could provide the government $40 billion per year in additional revenue without increasing tax rates. Millions of hours of taxpayer effort would be saved by reducing erroneous notices and providing quicker, more effective service.

At $7 billion, the new system's cost would be less than one-quarter of the estimated additional revenue that would be collected each year. It sounds like a good investment, but seven years and approximately $3 billion into the Tax Systems Modernization (TSM) program, the project is in jeopardy. The Treasury, Postal Service and General Government Appropriations bill approved by the House in July would have provided $425 million for TSM, half the amount requested by the President.

The House made apparent its lack of confidence in the IRS' ability to manage the project, fencing the entire amount pending action by the IRS to contract out program development and delivery to the private sector. In a remarkable slap at the agency, the House bill's language required that the restructuring of the contractual arrangement with the private sector be handled by the Defense Department. Whether that provision remains in the final version of the bill is in doubt, however. The Senate Appropriations Committee version did not include similar language. The funding cuts do appear likely to stick, as the Senate Appropriations Committee approved only $402 million for the project. The committee did provide more funds than the House for information systems, however, some of which may relate to TSM. Funding cuts in fiscal 1996 and the near certainty of further cuts led IRS to announce in July that it plans to cut 5,000 jobs in fiscal 1997. Information services, which includes TSM, will bear the brunt of staff reductions.

How a program most taxpayers would regard as common sense got to this point is a story that many in government will regard as all too familiar. It is a story of internal politics, talented managers thwarted by the system and bureaucracy impeding change.

The Most Powerful Bureaucracy

With a professional core composed mostly of accountants and a mission conducive to mass-processing and assembly-line techniques, the IRS is one of the most conservative and bureaucratic organizations in Washington. Its reputation among citizens is formidable. Author David Burnham calls the IRS "the single most powerful bureaucracy in the world" and "the single most powerful instrument of social control in the United States," in his 1989 book about the agency, A Law Unto Itself.

Within the federal government, the IRS is generally regarded as well-run. Financial World magazine, in a 1994 evaluation of management at 10 large federal agencies, gave the IRS the highest grade-a B+. "The IRS is advanced in strategic planning and also leads in financial reporting," the magazine said.

Ironically, the Tax Systems Modernization program, which Financial World cited as evidence of the IRS' strategic planning, has put the agency's reputation in serious jeopardy. Before the congressional efforts to cut the program this summer, three important oversight bodies strongly criticized management of the program. In a June report, the General Accounting Office said TSM is "at serious risk due to pervasive management and technical weaknesses." A panel convened by the National Research Council (NRC) of the National Academy of Sciences used similar language, saying, "TSM is in danger of being ultimately ineffective because in the IRS there is a lack of technical expertise and experience in managing large-scale system development." Leonard Baptiste, senior assistant director of accounting and information management at GAO, says TSM is over budget, behind schedule, and below expectations.

Dealing With the Rust Factor

By any measure, Tax Systems Modernization is a massive undertaking. A recent report from the Treasury Department to the House and Senate Appropriations committees lists 27 separate TSM projects costing anywhere from $30 million to $670 million each.

TSM began in the late 1980s as a project to update the agency's antiquated computers, some of which were as much as 20 years old. The "rust factor" was so severe, according to officials, that the computers were in danger of literally falling apart. "The driving point for TSM was the tax processing system," says Michael Murphy, IRS deputy commissioner at the time, and now director of the Tax Executives Institute. "The pressure was the processing people coming to me and the commissioner and saying, 'This thing is being held together by a thread; we are not sure how much longer we can keep the system together to process returns.' "

A proposal to simply upgrade the computers and automate existing processes was rejected in part because of GAO and NRC recommendations. They argued that automating existing processes would capture only 10 percent of the project's potential benefits. Both groups recommended the IRS consider completely restructuring the way it does business.

Consistent with those recommendations, IRS leaders decided to couple the massive systems modernization project with a complete overhaul of the agency's business processes. The key to the new approach was the move from a paper-based system for processing tax returns to electronic methods. Modern information technology, including scanners, voice response units and laptop computers were to become part of the agency's way of doing business.

Significant operational changes were to accompany the technological advances. For example, highly specialized jobs such as revenue agent, taxpayer representative and revenue officer were to be combined into a single generalist position of customer service representative. The intent was to enable a taxpayer to resolve a problem with a single phone call to a customer service representative rather than calls to multiple individuals and offices.

Tensions Over Modernization

Joining modernization with a fundamental change in processes created a power struggle between IRS's information systems division and the key operations units-examination, collections and return processing. The information systems division initiated TSM to modernize the agency's computers, but operations units needed to take the lead on changing business procedures. "To make the system work right, operations has to control it," says David Blattner, former chief operations officer and a key player in the early days of the project. "It is being designed to produce operations results, not system modernization results."

Operations officials were reluctant to get involved because they lacked confidence in the information systems division. "Systems said, 'We will deliver.' They never did, and when they did it wasn't for priority needs that operations people had identified," says Phil Brand, a former IRS chief compliance officer.

As an example, Brand cites the consolidation of 70 telephone sites into 26. "The announcement was made and the sites were closed but there was no place to send the work. The technology was not there to integrate the call sites. They tried to do too much beyond their capability."

Henry Philcox, former IRS chief information officer and head of information systems, has a different perspective. "I had a lot of difficult issues to work through to gather requirements. The user had to define the needs. We had problems in pulling that together," he says. "I was a peer in that process. I needed resources from the operations units to make the next phase work. They would say, 'I don't have the staff and can't provide the people.' "

In an attempt to get the operations side more involved, the Office of Modernization Executive (ME) was created, and former Austin Service Center Director Larry Westfall was named to head it. But creation of the ME's office failed to solve the problem. The CIO, not the ME's office, continued to control TSM funds. "Nobody was in charge. Larry was a matrix manager without line authority. He tried to cajole and persuade," says a former modernization office staffer.

Eventually, at the insistence of Congress, the Modernization Executive's office was given control of the budget. In the fiscal 1995 Treasury appropriation, the House Appropriations Committee required the IRS to give the ME's office authority and responsibility for the project, including control over the budget. The change enhanced Westfall's control over the project but did not resolve all the internal tensions.

Organizational Obstacles

Part of the problem was cultural. The IRS's executive committee, consisting of the heads of the six major operating units, the commissioner and the deputy commissioner, has traditionally operated by consensus. According to Westfall, consensus decision-making was not well-suited to the modernization project. "When you are running a change agenda, consensus takes too long. There are too many competing agendas," he says. "My personal view was it was necessary for strong authority to be effected out of a central command structure." Brand agrees. "There is nothing wrong with collegiality but there is also nothing wrong with learning how to salute," he says. Philcox concurs, saying, "What we needed was strong leadership. Everyone has to come out of the room and be focused."

Deputy IRS Commissioner Michael Dolan is the top career employee in the agency, and would presumably be the source of that leadership. Dolan sees the problem not as one of operating style but as the fundamental difficulty of balancing "the huge demand by the business side" for resources against the need to invest in technology. Dolan says unpredictable budgets for the project have caused an "endless recycling of choice-making" between these competing demands.

One option would have been "to take it in the ear on short-term operational issues" as one official described it, in order to focus energies and resources on TSM. However, history and what officials describe as "the tremendous press of daily business" foreclosed that option. During the infamous 1985 filing season, refunds were delayed because of problems with new computers and the IRS came under severe criticism from Congress for its performance. The highest priority has been given to preventing that situation from reoccurring.

Overcoming functional divisions in the agency has been difficult. The key functional units-returns processing, examination and collection-are at the heart of the agency's ability to deliver services. The strength of those units, however, lies in part in their insularity, which has been an obstacle as Westfall and others tried to make operational changes. "The functional organizations have spent years building system support structures that work and provide a strong program base," Westfall says. "When you run a change agenda on top of that, it blurs functional lines and modifies processes in a cross-cutting way." The functional units resisted strongly, Westfall says.

IRS Insularity

Cultural and organizational issues are seen by some as the heart of IRS' technical problems. For example, both GAO and the NRC panel criticized the IRS information systems division for being incapable of developing software to meet industry standards or adequately overseeing software development by outside contractors. "Although Tax Systems Modernization is much needed, the IRS does not currently have a development organization capable of meeting the difficult challenge," the NRC panel said in its final report on TSM.

Much of the problem derives from IRS' insularity and the insistence on doing everything in-house, says Robert Clagett, retired professor of business administration at the University of Rhode Island and chair of the NRC panel. "In the early 1990s, we said, 'You've got to get people with experience in software design, systems design and project management,' " Clagett says. "They finally got a few people who were systems designers. They treated them as outsiders. They never enmeshed them in the IRS and in design."

The systems designers had been brought in to assist in the creation of a systems architecture-an overall set of common standards for data and technology and a map of work processes and information flows. The lack of such a blueprint for the project has been repeatedly criticized by the NRC, GAO and Congress. "IRS has not completed its integrated systems architecture and has not committed to a completion date. . . TSM systems continue to be developed without the detailed architectures and discipline needed to ensure success," the June GAO report says. "If you don't have data architecture to tell the systems designers how data is captured and stored, you are leaving it to the designers to come up with interim solutions," GAO's Baptiste says. When incompatible components are integrated, the system could crash, he adds.

IRS Deputy Commissioner Dolan says it's "disingenous" to suggest that the IRS has failed to produce a systems architecture. "We have an architecture," he says. "It is not as complete as needed, but the inference that we have gone off and put out projects that can't connect is bull. The notion that we drug our knuckles, that there is no architecture, is not a total or accurate story."

Dolan also takes issue with the GAO and NRC argument that an outsider should have been brought in as modernization executive. When Westfall retired last fall, the former head of returns processing, Judy Van Alfen, was appointed to the position. "She is a good manager; she has been in several parts of IRS but she has no project experience whatsoever," says NRC's Clagett. "There is nothing in her background to equip her to do the job."

TSM has such important implications for how the IRS operates that "we really needed somebody who understands the business," Dolan responds. He points out that the new CIO, Arthur Gross, was brought in from the outside, having headed a similar modernization effort in New York state.

Overcoming Obstacles

Many of the obstacles to TSM relate to the general nature of government: pay scales that preclude offering salaries sufficient to attract talented outsiders, procurement lags of 2 to 4 years in delivery of large systems, constant demands by oversight groups, and the need to plan a 10-year project around the annual congressional appropriations process.

Nevertheless, Clagett points out, other agencies have overcome some of these problems. The Defense Department has acquired significant expertise in developing large systems. "We do buy weapons systems that work, but DoD doesn't build them. They set rigid specifications for performance," Clagett says.

Dolan doesn't buy the DoD analogy. "You can't compare this to Defense procurement," he says. "It is not a turnkey system. You have to migrate the master files; you aren't doing something that is severable. That has added to the burden of delivery."

A Success Story

Dolan argues that "truckloads of business value" provided by TSM have been largely ignored by critics. One notable success is the Integrated Collection System, which has greatly increased productivity among IRS collection officers. Under the old system, revenue officers trying to track down delinquent accounts would work from paper files and would have to visit the Department of Motor Vehicles or the Credit Bureau to get information, says Mark Gray, formerly assistant director of negotiations at the National Treasury Employees Union, who helped implement the new system. With laptop computers, all necessary information is now at the revenue officers' fingertips, he says. "Previously, when the revenue officer would knock on the door and the taxpayer said, 'The check is in the mail,' there was no way to verify the information," says Gray. Now, revenue officers will have up-to-date information on deposits. The officer can punch up a taxpayer's name on a computer and see whether his check bounced. "We have seen 30 to 40 percent increases in revenue collection in the areas that are using it," Gray says

Former IRS Commissioner Fred Goldberg, who helped convince Congress to significantly increase funding for TSM in the early 1990s, says the key benefit of the program is saving taxpayers time and aggravation. Goldberg says the accuracy of the information being captured electronically has spared millions of Americans the irritation of erroneous notifications. "The psychic value of not getting an incorrect notice is huge," he says. "Take it to the bank that it has happened because of TSM."

Philcox emphasizes great progress in replacing antiquated computers. "There is no comparison between how the IRS looks and its computer capabilities now and when I came in 1986," he says. "We were within a hair of not being able to support the tax system. We have huge capabilities today."

Change Is Messy

The TSM story underscores the messiness of organizational change. It is replete with clashes of personality, culture, power and politics. GAO reports may be misleading when they suggest that change is a neat, linear process and that more careful planning is the solution to problems with TSM. As Westfall points out, "nobody has the answer in a neat little package."

That caveat may apply as well to the Treasury Department's report to Congress on TSM. Treasury recommends IRS contract out the system's integration and software development and give Treasury a more prominent oversight role. It will take at least two years to get a prime integration contractor on board, a critical period during which the project will be in limbo. Further, there is a question whether the IRS can adequately manage its contractors. According to GAO's June report, the Cyberfile project, a contractor-run effort to allow returns to be filed via modem from personal computers, "was not developed using disciplined management and technical practices" and "was not ready for planned testing during the 1995 filing season."

To enhance IRS technical capabilities, Treasury has worked with OMB to create the Presidential Technology Team (PTT) of technical experts from across government that the IRS will "borrow" to help with TSM. Ultimately, however, success may hinge on whether progress is made in changing the old cultural bugaboos. IRS will have to overcome its traditional hostility toward outsiders in order to take advantage of the technology team's assistance and functional units will have to compromise their traditional independence and defer to strong central leadership on a change agenda.

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The Reinvention Revolution

James R. Thompson — Wed, 01 May 1996 00:00:00 -0400

an a top-down system be changed from the bottom up? Can freeing front-line managers from internal constraints induce innovative approaches to delivering service? Is real change in how the government operates in the offing?

In March, 600 federal managers attended a conference co-hosted by Government Executive in Bethesda, Md., to discuss these and other questions with Vice President Al Gore, top administration officials and organizational change gurus. Representatives of the more than 200 "reinvention laboratories" set up around the government as part of the National Performance Review (NPR) met their counterparts from other departments. They presented evidence both of successes achieved and problems that remain. General Accounting Office evaluators described results of the lab experiments to date as "extremely encouraging," citing multiple examples of improved service, reduced costs and an enhanced quality of work life for employees. Yet many lab representatives told of the obstacles presented by re- calcitrant officials and antiquated systems.

The Blob

Of central interest was identifying the impediments to the type of bottom-up change occurring at the labs. The biggest problem, said Gore, is the "old bureaucratic system," which he described as "the blob that keeps coming back at you like a character in a horror movie." Gore cited the example of credit cards being used by the government to purchase small items. He said some agencies have violated the spirit of the new approach by insisting that employees spend a week in training before they can get cards and by requiring them to submit "all sorts of new paperwork" each time the card is used. Gore told delegates to let the NPR staff know "where you have to have help, where you have bumped into obstacles that have to be removed."

An official from an Army Research and Development lab took up Gore's challenge, complaining that plans to implement more flexible personnel policies at the R&D labs were being held up in staff offices at the Pentagon. The official pointed the finger at the political appointees in charge of those offices, telling Gore that while he was encouraging others to break through barriers, "your own people are saying no."

Gore promised that NPR staff would follow up on the complaint, but other problems cited by lab representatives were not so easily solved. An Air Force official protested that "the entire function for managing civilian personnel has been taken out of the hands of managers." He argued that the Defense Department's Priority Placement Program, which guarantees laid-off employees the first right of refusal on new openings, had prevented him from hiring a computer specialist with the needed qualifications.

While the Air Force official and others complained about the Priority Placement Program, others urged that more programs like it be set up for employees threatened with job loss. One group recommended the President's Management Council (PMC) guarantee retraining, transition opportunities and portable benefits to the victims of downsizing. The conferees suggested that employees would be more likely to "buy in" to reinvention with such protections in place, but they also urged the PMC to "buy out those who will not buy in."

Another dilemma confronting conferees was how to institutionalize change. GAO's Curtis Copeland argued that the true value of the labs would be apparent only when changes spread beyond the lab sites. He argued for creating a clearinghouse to collect performance data to justify expanding innovations. A Voice of America employee objected, describing as "frightening" the prospect of "collecting data and sending it to a central processing point."

Changing Systems

The debate over institutionalizing change was but one facet of a larger exploration of whether real change can occur within existing systems or whether the systems themselves must be changed. David Osborne, co-author of Reinventing Government (Addison-Wesley, 1992), told conferees that the success of change in the public sector requires "intervening at the systems level." Osborne observed that most of the changes to budget, personnel and procurement systems proposed as part of the NPR had gotten hung up in Congress, adding that the Clinton Administration had made a "terrible mistake" in not enlisting Congress as a partner in the reinvention effort. Calling the labs "islands of innovation in a sea of bureaucracy," Osborne said the overall success of the NPR is threatened because the systemic changes made to date "haven't forced the system to accommodate you."

Elaine Kamarck of Gore's staff took the position that the real obstacles to change are as much cultural as structural. She noted managers' reluctance to give even their worst employees less than "outstanding" performance ratings, making discharge almost impossible. She said few managers are aware of the flexibilities allowed in personnel procedures and suggested creating an underground newspaper to publicize them.

Whither Reinvention?

Speakers offered a variety of suggestions as to the future direction of reform. Former Oregon governor Barbara Roberts emphasized the need for agencies at all levels of government to collaborate in addressing social problems that cross agency boundaries. Roberts cited her state's "Benchmarks" program, which sets specific goals for state agencies to reach, as an approach to "collaborative, results-driven" change that has allowed citizens to participate in identifying public priorities.

An Environmental Protection Agency representative provided an example of how collaborative models can work in a regulatory environment. EPA has achieved dramatic success in reducing the emission of toxic chemicals by taking advantage of companies' aversion to bad publicity. EPA's Chris Tirpak said companies identified as the largest polluters in the agency's Toxic Release Inventory had voluntarily approached the agency about getting assistance in reducing their emissions. As a result, the agency's goal of achieving a 50 percent reduction in emissions was met a year ahead of schedule, Tirpak added.

The Brick Wall

Politics looms in the way of many reinventors. "Congress is not an impediment but a brick wall," said one lab representative. "If they are not on board, all is lost." Lab representatives told of how Congress has impeded change by refusing managers the flexibility to move funds between line items and by not allowing agencies to keep a portion of the savings from improved efficiencies, for example.

The political system as a whole is "dysfunctional," argued Osborne. "It doesn't have the qualities that produce effective organizations." As an alternative, he urged the adoption of an array of market-based approaches to change, such as "customer redress" efforts. As an example, he cited British Railways' policy of providing riders with a 20 percent rebate when trains are delayed an hour or more.

Carolyn Lukensmeyer, a former NPR official, addressed political obstacles, telling conferees that "government reform and political reform are inextricably mixed." President Clinton, she said, had endangered the success of the NPR when he "walked away from political reform" efforts such as campaign finance reform early in his term.

If the obstacles to continued reform appeared daunting, spirits at the conference still were high. For lab representatives who have been struggling against the bureaucratic "blob" or who have been trying to punch through the Congressional "brick wall," the conference provided an opportunity to "reflect and reassess goals" and to develop new strategies, said Lukensmeyer.

In the next phase of battle, reinventors will gain the advantage of specific interventions by the Vice President and his staff. Following the presentation of recommendations by conferees to representatives of the President's Management Council, Kamarck promised a series of initiatives including:

A meeting with mid-level political appointees to "give reinvention a boost;"

Making management ability a criteria for hiring "where management is a big part of the operation;"

Introducing reinvention criteria in the Presidential Rank Awards.

The conferees left with few illusions as to the difficulty of their task. They went away "rejuvenated but realistic about what's out there," as one attendee put it.

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The Town Hall Wall

James R. Thompson — Wed, 01 May 1996 00:00:00 -0400

ne feature of the reinvention conference was a huge "town hall wall" on which conference participants could post their thoughts. Some of the entries on the wall:

"Set the bar high. Pick out the tough ones. When you solve the hard ones, people will notice [and] support you."

"I am very concerned about what will happen to team members including myself who have had the opportunity to participate in and experience the thrill and responsibility of "empowerment." The feeling shared by all of us is that we will be forgotten by our agencies."

"If no one is questioning you about what you're doing, that means you're probably not doing what you should to create movement toward the changes needed."

"Don't reinvent the wheel; plagiarize and steal everything from best practice success stories. It's a testimony to their success-they'll love the publicity."

"What incentives do stakeholders in the status quo have to reinvent?"

"[My agency has] a truly committed assistant secretary, yet obstructionist SESers."

"Congress is indifferent about performance planning and measurement when making decisions about appropriations."

"Many political appointees just don't get it. They tend to make arbitrary change for unknown reasons."

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Organizing the Conference

James R. Thompson — Wed, 01 May 1996 00:00:00 -0400

n a letter and a personal appearance on March 25, Vice President Gore saluted organizers of The Reinvention Revolution: Reports from the Federal Front Lines, the first large-scale conference devoted to exploring the experience of some 225 "reinvention laboratories" created under the aegis of the National Performance Review. He thanked Government Executive, the Syracuse University Maxwell School Center for Advanced Public Management, the Council for Excellence in Government and the staff of the NPR for designing a program that could help define the future direction of the reinvention movement.

Members of this unusual public-private partnership, in turn, expressed their thanks to the National Institutes of Health for making available its state-of-the-art Natcher Conference Center and to four companies whose sponsorship of the event contributed to its success: Computer Sciences Corp., KMPG Peat Marwick, Sybase Inc. and Texas Instruments Inc.

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The Town Hall Wall (Sidebar to "Reinvention Revolution")

James R. Thompson — Wed, 01 May 1996 00:00:00 -0400

May 1996

REINVENTING GOVERNMENT

The Town Hall Wall (Sidebar to "Reinvention Revolution")

By James Thompson