Crunch time: Will IRD adopt Rod’s big ideas to save half a billion?

The government is committed to making better use of information technology and data to deliver more productive public services, Bill English told an audience of 1000 accountants and partners at the Auckland leg of Xero's "Xerocon" conference series.

The finance minister also said the size of the Xero gathering was evidence of the strength of the local IT industry.

But was he willing to put his money where his mouth is and adopt some of Xero chief executive Rod Drury’s ideas for slashing the cost of IRD’s multi-year $1.5 billion software systems upgrade?

NBR put that to the finance minister shortly after his speech. But before I get to his response, a quick recap.

In a report released last week on the IRD systems upgrade, Auditor-General Lyn Provost summarised (in a broadly positive update to her agency’s ongoing monitoring):

The programme has been operating for about four years and has an anticipated further 8-10 years to go. It involves significant public spending [estimated to be between $1.3 billion and $1.9 billion, dependent on decisions to be made by ministers and by the cabinet], with $83 million spent as at the end of November 2014. The programme includes a large information technology component ... Strengths of Inland Revenue's governance of the programme include a comprehensive and clear governance structure, an established methodology, and an advanced approach to managing risks.

It raised eyebrows that the auditor-general had bumped her estimate of the total cost from $1.5 billion to $1.9 billion. But it’s barely a controversial call. IT projects involving New Zealand government agencies have a long history of blowing their budgets, from the Police’s INCIS disaster with IBM to the Ministry of Education’s debacle with Talent2 and Novopay to Auckland Council’s still unfolding transformation programme to Inland Revenue's upgrade of its IT system for child support payments, which ballooned from the forecast $120 million to $210 million (costs are still being finalised; Revenue Minister Todd McClay says they will be more like $163 million). It's the same story in the private sector. If you're aware of any IT project, anywhere, at any time during the history of man that has come in on budget, please name it in Comments below. I can’t.

In January, the first major decision was made on the IRD’s upgrade project as US-based multi-national Accenture was appointed IRD’s design partner.

A public consultation process is currently under way.

The next major milestone will be when commercial off-the-shelf software (or "cots") providers are named "for the core technology component of the new revenue system." The original deadline was March; an IRD spokesman tells NBR it should be by the end of this month [UPDATE: The provider has now been named.]

The key points of Rod Drury’s May 2013 opinion piece on the $1.5 billion upgrade were:

• To anyone in IT this is an obscene amount of money to spend on any software project.
• It seems like a slow moving train crash reminiscent of earlier Big Bang projects that always blow out – if they are ever delivered. It reeks of global consulting firms winning the business and then rapidly hiring a bunch of grads and putting them up in hotels for years. The modern approach is to tackle a big project in bite-size chunks.

He had four practical suggestions, which he said could save at least $500 million:

1. Start from the customer and work in, replacing the edges. Identify the key external interactions and publish those as web services.  Get the messages into a commodity system and connect these systems to the core FIRST servers [which run IRD's current system]. That will take load off, allow quick wins and lots of options. As the core engine is surrounded, it can be gradually replaced. A GST Return WebService would be an ideal place to start.

2. Don't build the retail tax front end. Just publish the rules and invest in just the core system. Let the private sector invest in the layer customers interact with. Certify providers that they met the requirements.  Payroll software pretty much works like that now. That offloads the investment to the private sector, which is happy to build.

3. Go out to the New Zealand service companies and get them to put up a consortium and carve up the opportunity and create the appropriate governance structure. Give them the challenge to save $500 million on a fixed-fee basis and transfer project risk to the private consortium.

4. Appoint an independent board of systems experts to review the project and provide ongoing governance over it.

In the interim, Mr Drury has had the chance to consult with the IRD, both formally and informally. IRD and the government have certainly listened to ideas from the IT industry. But has it been a polite ear or have some of the points sunk home? (Obviously not the one about allowing New Zealand companies to drive the process, given Accenture’s appointment despite a budget blow-out when it developed a tax platform for the Australian Tax Office. Still, there are many stages of the project to go.)

At XeroCon, Mr Drury continued to push these themes, calling on the IRD to think of itself as a wholesaler and allow the public sector to take care of public-facing online services.

I had a quick chat with Mr English directly after his XeroCon speech:

CK: Now that the rubber is really starting to hit the road with the upgrade, and major design decisions need to be made, do you favour private companies like Xero and its competitors building the front end?

English: Well the IRD is in pretty constant discussions with a range of people like Rod about the tax eco-system because, in general, we want solutions that use the technology available now and whatever’s going to become available as much as possible. We don’t want to have to run the whole engine and as private enterprise is pointing out to us we don’t have to.

CK: So you're open to Rod’s ideas?

English: Well, we just encourage the direction. The IRD has got to manage the actual … you know, if it adopts an idea, it's got to implement it. So we’re probably at a stage in the project now where any ideas are tested against the benchmark of “how and when they can be implemented and at what cost?” But certainly the IRD’s thinking has moved enormously from where it was three or four years ago – heavily influenced by the payment and taxation industry.

CK: It seems to me there are two issues. One is that government could learn from the way the private sector’s ideas and IT practices, and the other – which Rod’s putting forward – is that the government hand over functions private enterprise. Do you think there’s merit in that?

English: Well it depends on the function, right? So in tax you’ve still got to have the core, coercive capacity of government to actually make people pay their tax. But of course use any technology available to make that an efficient process; we’re keen on that. And there are whole other areas where that sort of partnership would be very useful to government. We want to create data platforms that enable a lot of non-government actors and non-government organisations to be able to see who our customers are and how we interact with them. Because they’ve all got pieces of the puzzle that we need to do a better job of it.

CK: Just to get down to nuts and bolts, I think what Rod’s saying let Xero and its competitors handle the front end but maybe we’ve reached a stage where the IRD is saying “We want to control the whole process.”

English: I’d be a bit surprised if that was the case.

I wouldn't be. Mr English projects a centralist, cautious attitude. As finance minister he has, after all, kept on core Clark/Cullen policies like KiwiSaver, the Super Fund and Working for Families, as well as Clark/Cullen pork like KiwiBank and free student loans. He tends to only tweak around the edges. The IRD taking a radical new approach would be at odds with his government's softly-softly approach. Still, we're talking software systems, not policy, so maybe there will be more freedom to manoeuvre. 

When will we know more? The IRD declined comment, saying senior managers were tied up ahead of the May 21 Budget. NBR has invited IRD commissioner Naomi Ferguson to front for an Ask Me Anything session. Hopefully that will be possible post-budget.

IRD spokesman Pete van Schaardenburg says a couple more milestone announcements will be made late this month or June that will “potentially tie in with the line that Rod was espousing.”

Mr Drury himself was upbeat this morning, telling NBR, "We’re getting a really good response from IRD. Another further opportunity to reduce costs is working out the appropriate use of platform-as-a-service type environments around the edges; I think we’re having a really good open dialogue about that.

"We've had really good opportunities and a good constructive relationship with IRD who have really bent over backwards to co-operate with the industry."