Inside the NZ tax system overhaul that was too big to fail

Of all the projects that could be described as too big to fail, replacing a nation’s entire tax system would surely count as one of them. Greg James, a deputy director at Inland Revenue who runs that transformation project, describes it as a “total makeover”. More than a huge technology play, it’s a complete business transformation—reforming processes, legislation, and organisational design. “At the end of it, we haven’t upgraded anything; we’ve literally replaced everything,” he says.

According to its latest annual report, Inland Revenue collected revenue of $78.2 billion in 2019-2020, primarily from 3.9 million employees, 216,000 employers, and 377,000 companies. In addition to collecting tax, it administers, in partnership with other government agencies, social products such as child support, Working For Families Tax Credits, Kiwisaver, paid parental leave, and student loans.

The seven-year project to completely overhaul the tax system, known as the IR Transformation Programme, is entering its final year, and James is confident it will come in on time and below budget. “We will tie a bow around it, on or about 30 June 2022.” That’s in line with the approved proposal—and despite the replanning required due to the COVID-19 pandemic.

The initial budget approved by Cabinet was $1.5 to $1.7 billion, but James says its likely the final cost will be between $1.4 billion and $1.5 billion. About half that cost was financed accumulated depreciation, and the other half was new money to transform and renew, he says.

Relying on commercial tools for the long term

The project has involved moving every Inland Revenue product off the Cobol mainframe system called First, which was built in the late 1980s and early 1990s. It grew organically as the government’s demand on Inland Revenue increased, until it reached a stage when, from a practical standpoint, the IT team couldn’t turn any of the components off because of the complexity that had developed.

As Inland Revenue builds the new system, First has remained functioning, a job overseen by Accenture. While Accenture has piloted the old system, several vendors have been working on the new core tax system called Start, and the content management system called Stax. Fast Enterprises, a US-based company, has been the main supplier of the core tax system; the back-office technologies have been largely provided by Oracle; SAS is supplying the data and analytics capabilities; and Assurity Consulting has been used for testing.

Where possible, Inland Revenue has opted for commercial off-the-shelf products, in part to ensure that the system is future-proofed. James says this means Inland Revenue benefits from the research and development that commercial partners undertake, and it ensures that the new system is continually upgraded via the vendor’s regular software updates. “We don’t get back into a state whereby we are languishing many, many versions behind what is the current solution in the market place,” he says.

“With Fast Enterprises, we sit as part of their international customer base and we talk to them very regularly about the types of developments and innovation that we would like to see in the product. They are very good at listening and we then find that 12 to 18 months later, the conversations that we had where we said, ‘We’d like to do this in the digital channels’, they’ve already built it into their core next release for us.”

While Oracle is a much larger provider with less participation from each individual customer, James says that Inland Revenue benefits from the “millions of customers they have out there, and similarly their total focus on research and development and innovation of their product sets.”

Managing the balance between in-house staff and external contractors

Throughout the project, the number of staff has fluctuated, with 1,000 full-time staff employed during its peak. James estimates about 70% to 75% have been in-house and 30% to 35% were external contractors. “We’ve maintained that split all the way through. Which has been fantastic because we’ve been able to build a huge amount of capability in the [Inland Revenue] teams that have been involved all the way through the journey,” he says.

James says the advantage of external partners is that they can offer highly specialised skills that may be required at certain stages. “Most organisations don’t carry that level of bench strength, so you do need it.”

The key is to successfully managing external partners is to develop a “true partnering model”. As a result of that model, James says the quality assurance teams brought in to assess the project at different stages have commented that they’ve come back from meetings not being able to pick who is employed by Inland Revenue and who is employed by the vendor.

“We run a scoring system with our partners where we score them on a number of different dimensions. It’s a very open process. We share with them not only the scores but all the conversations and data points that we have about them, and then we talk to them about if they are off pace a little bit. We talk very transparently about we or they need to do to get back on the pace,” he says.

Every quarter, the vendors get to score the Inland Revenue team, and following that there are some “very direct conversations. You don’t go to bed at night and not sleep, festering about stuff that’s been left unsaid. It gets out on the table; we work collaboratively to solve it and get the best outcomes.”

Managing a large set of stakeholders

Every citizen has a stake in the tax system, so James has had multiple stakeholders—including the minister of finance, business groups, and employees. “The whole stakeholder management is huge,” he says.

The team has developed its strength in managing stakeholders bit by bit. For example, “our first release back in 2017 was GST [goods and services tax]. We used it to dip our toes in the water and get a bit of experience. Prove the product, but also prove processes and the implementation approach,” he says.

“One thing we learnt off the back of that was that the view that we had around how the accounting profession operated was not really in sync with practically the way they did and do operate.” So, after feedback from professional groups, they hired accountants from commercial practice directly into the programme to help them better understand the profession’s way of operation. James also invested in account managers who would “be the voice of the customer” by looking after various sector groups and providing feedback on each major release in the project.

Handling the COVID-19 curveball

When COVID-19 hit and the Level 4 lockdown shut down huge swathes of the economy, Inland Revenue was charged with facilitating the Small Business Cashflow Scheme, which paid out $1.4 billion during the first national lockdown. James says it was fortunate timing in that COVID struck a year after they’d had brought all of the tax products over to the new system during Release 3 of the project.

“One of the original tenants of the business case was to put flexibility back into tax system for successive governments. I think the COVID relief stuff really has highlighted that in a nutshell. An example is the small business cashflow scheme—that took us 39 days from idea to creation to be paying money into businesses bank accounts off the back of the application.” In the old mainframe system, to do the equivalent would have taken nine to 12 months, James says.

The Inland Revenue team have since gone on to facilitate the resurgence payments that have been dispensed following the subsequent two lockdowns. It has also assisted the Ministry of Social Development with the wage subsidy scheme that paid out $12.7 billion in the first national lockdown.

What’s been added, what remains to be done

Among the new solutions is an annual autohelp process that automatically assesses the tax liabilities and refunds for about 2.5 million taxpayers. There is also the new data and analytics capability that helps identify “pockets or sectors” where people are not paying their fair share of tax, or where people may be struggling to understand tax compliance.

“It’s helping us to understand the areas where tax is still too complicated for people and therefore helping us drive simpler processes and using some of these vehicles as educational tools to ensure people get it right from the start,” James says.

The final major release will take place during Labour Weekend in October 2021, where they will transfer across from the old mainframe system the last major tax product—child support—as well as release an upgrade of all Inland Revenue’s digital services. After that, it’s a matter of bedding in the new systems, closing down most of the old system, and finalising the organisational structure to manage the tax system into the future.

When that happens, James says he will have seen through his commitment to Inland Revenue. “We’ve got a fantastic young team that can then pick up the reins, and I’ll consider my options in terms of what I want to do, whether I want to pick up the tools or get more into the governance and advisory type services.”

James, who previously led Fonterra’s change programme, says what motivates him is leading projects that are too big to fail. “The reason I’m here is because I’ve seen so many large-scale programmes fail, and that frustrates me because I don’t believe that there is a need for programmes to fail. I don’t believe that any of the commercial technologies out there are bad. I believe that they are all capable of delivering, but you need to have absolutely the best teams around you to make sure you get the best outcomes,” he says.