Wednesday, January 25, 2006

Arlington, Virginia

Mr. Morales: Good morning, and welcome to The Business of Government Hour. I am Albert Morales, your host and managing partner of The IBM Center for The Business of Government. We created The Center in 1998, to encourage discussion and research into new approaches to improving Government effectiveness.

Mr. Grams: Good Morning, Al.

Mr. Morales: And joining us in our conversation, also from IBM, is Jeff Smith. Good morning, Jeff.

Mr. Grams: Be glad to, Al. As most if not all of your listeners probably know, the IRS administers our country's tax laws. In doing so, it collects the revenue that funds the operations of our federal government. We provide services to our taxpayers to help them understand tax laws and fulfill their obligations, but we also deter people who may be inclined to evade their tax responsibilities, and when necessary, we will vigorously pursue those who violate our tax laws.

In terms of a history of the IRS, Al, you may find it interesting to know that the first federal taxes that were collected in our country were authorized by President Lincoln in 1862, in order to pay the expenses for the Civil War. That authority, however, was later repealed, and the authority that we operate under today was put in place permanently in 1913, and that was the foundation for the tax system that we have today in the United States.

Mr. Morales: Can you describe for us your role as chief information officer? What are your official duties, and how do you spend a typical day?

Mr. Grams: As the CIO I am responsible for providing leadership and oversight for all of the IRS's information technology programs. And the IT at the IRS portfolio includes large-scale systems modernization, applications development, data center operations, customer service desk, customer field support, networks, telecommunications, security, investment portfolio, and business case developments. So as you can see, kind of by IT or CIO standards, we have a very wide and broad portfolio at the IRS.

When you ask about a typical day, boy, I'm hard pressed to think of any day in IT at the IRS as being typical. But to give you a sense of maybe an average day, I try to spend it driving our IT agenda and our IT priorities. And this is done mostly through meetings with my top senior team, with the commissioner and his leadership team, the leaders from our business units at the IRS, and in some cases our government's committees. I try to spend about 80 to 90 percent of my time in meetings that I have scheduled, so that I can ensure that we are trying to drive the IT agenda and priorities.

And I would just add one last note, Al: It's not what I'd call a daily activity, but I do spend a fair amount of time in the field, meeting and working directly with our IT employees and managers, as well as our customers in the business units. And the two and a half years that I've been in the job as the CIO of the IRS, I've held over 50 town hall meetings across the country, and that's really a good way to continuously learn by staying in touch with the IT field units and our customers. It gives me a more balanced understanding of what's going on out in the real world, if you will, and provides some critical data points that I can bring back for discussions inside the Beltway.

Mr. Morales: That's certainly an impressive outreach program -- 50 town hall meetings in a brief span. We understand that you came to this role after acting as the chief financial officer at the IRS. How has your experience in the financial side impacted your perspective as the chief information officer?

Mr. Grams: Well, the CFO position was actually an excellent position to hold, before moving over to be the CIO, for several reasons. In two years as the IRS CFO, I had a really good opportunity to work closely with the commissioner as well as the business-unit leaders. And in working with the business-unit leaders, it gave me the opportunity to better understand their business activities, their priorities, and hopefully I was able to earn their trust and respect during that time.

Also as CFO I was responsible for IRS's strategic planning, and therefore was intimately involved in the development of our agency's direction and priorities. Gaining that big picture understanding as CFO, I think, served me well as I made the transition over to the CIO role.

Mr. Smith: And Todd, we understand that you came to the IRS from the VA as the chief financial officer there, as well. How has that experience affected your role here?

Mr. Grams: Well, at the VA, Jeff, I spent most of my years as the CFO of the Veterans Health Administration. And in that position, I had the opportunity to lead a fundamental change in the financial policies that drove the agency's healthcare delivery. Our greatest achievement in that regard was tying resource allocation to desired healthcare practices. For example, if care could be more appropriately delivered on an outpatient basis, we revised the resource allocation system to reward that desired clinical behavior.

In doing so, we were actually in about a three-year-span able to significantly reduce the cost per veteran treated, treat more veterans in total, and at the same time increase the quality of care that veterans received. And so we kind of hit the trifecta there of healthcare: treating more, higher quality, lower cost. And what I got out of that, that I think I brought to the IRS, was that that success at the VA vividly demonstrated to me that an executive in the federal government could have a dramatic positive impact on public service at a large scale. And from that point on, I really set as a goal to drive dramatic change, not to settle for marginal improvement. That was a really good lesson to have learned.

Mr. Smith: It is impressive, yes. We understand you also spent over a decade at OMB. How has this affected your perspective coming to the IRS?

Mr. Grams: Jeff, OMB is a great place to work, especially with regards to learning how the federal government works. You have an opportunity to learn how the budget, legislative, and regulatory processes work, and in some cases don't work. You really learn firsthand how our system of government functions, especially in the context of the balance of power that exists, both between the executive branch and the legislative branch, and even the balance of power that exists within the executive branch.

I'd say one way that's affected my perspective as an executive is I developed a really acute appreciation for how, on any given issue on any given day, the final solution that you're more likely to reach is often the result of a compromise by all the parties that are involved. In other words, I learned that progress coming from compromising with others is better than remaining stuck in the status quo and adhering to your unchangeable right answer that you think you have.

Mr. Morales: Todd, can you tell us a little bit about the mission and scope of your office, specifically within the IRS? Can you give our listeners a sense of the scale in terms of budget and number of people?

Mr. Grams: Al, our mission in the CIO organization at the IRS is actually very simple. Our mission is to provide IT services and solutions that drive effective tax administration. That's it. It's short, it's sweet, it's focused. Everything we do, day in and day out, in the CIO's organization at the IRS should be focused on making tax administration better. If it's not, then we should stop doing it and do something that will help us reach that goal. As I mentioned earlier, the scope in the CIO organization at the IRS includes everything from large data centers to taking care of the telephones on our employees' desks.

Relatively speaking for an IT shop, the CIO portfolio at the IRS is very broad and inclusive. I think it's also important for our listeners to understand that the IT function at the IRS supports every aspect of tax administration at the IRS. Whether it's a customer service representative answering a taxpayer enquiry over the phone, or a revenue officer working with the taxpayer to settle their account, our IRS employees could not conduct business in today's world without the support of our 535 IT systems and over 11,000 applications that we maintain.

Mr. Morales: That's certainly a lot of applications. How is the IRS modernizing its systems? We will ask Chief Information Officer Todd Grams to share with us when the conversation about management continues on The Business of Government Hour.

(Intermission)

Mr. Morales: Welcome back to The Business of Government Hour. I'm your host, Albert Morales, and this morning's conversation is with IRS CIO, Todd Grams. Also joining us in our conversation is Jeff Smith.

Mr. Grams: Sure, Al. In terms of resources, our annual IT budget at the IRS totals about $1.8 billion. And we employ almost 7,000 employees nationwide in the CIO office, and just to give these numbers some kind of context, the IRS' annual operating budget is about $10 billion.

Mr. Morales: Let me transition over to modernization. I'd like of you to give us an overview of the IRS modernization program and can you give us a brief history of this program and the agency's computer systems?

Mr. Grams: Well, the IRS Tax Administration System, which collects almost $2 trillion in revenue every year is now heavily dependant on a collection of 40-year-old outdated computer systems that were put in place when John Kennedy was President. These antiquated systems are known to the IRS as the "master files," and they are the central taxpayer database for all taxpayer information, individual and businesses. Recognizing the need that the master file systems would have to be replaced, the IRS has actually made two previous attempts over the past 25 to 30 years.

The first attempt was in the 1970s. The effort failed and it was terminated. In the early 1990s, another attempt was made, and there was some progress made in that effort, but ultimately the replacement of the master files was not accomplished, and that project too was terminated. Building upon that, and recognizing the continuing critical need to replace these systems as well as the IRS's two previous unsuccessful attempts in the late 1990s, Congress created a special Business Systems Modernization Program, which we refer to as the "BSM Program" today.

Mr. Morales: We understand that this BSM Program was in a high-risk status when you were appointed chief information officer in June of 2003. Given this status, what steps did you take, and what did you learn from this experience?

Mr. Grams: Well, in 2003, the BSM Program was indeed at a critical juncture. Major systems that had been funded to date were not delivered, performance was inconsistent, and Congress and the Office of Management and Budget were, to be frank, losing patience with the program. When the new IRS Commissioner, Mark Everson, came on board in 2003, he sent a very firm message that if the program didn't deliver in 2004, that it would be terminated. At that time, he took a couple of steps related to personnel. He appointed John Dalrymple as the deputy commissioner for operation support over all modernization at the IRS, and he appointed myself as the chief information officer over systems modernization.

So as a first step with the new team in trying to get the program turned around, we commissioned several external studies to get an outside view from folks who didn't have a history with the program, or weren't wrapped up in the day-to-day attempts to deliver product. And we relied on those studies to give us an indication of what needed to be fixed. From those studies, and you can imagine with a program this large and this complicated, they literally had dozens and dozens of recommendations where we could improve, but there were four key areas that stood out that we thought were the major root causes of the problems we were experiencing in the program.

And those four key root causes were:

One, we bit off more than we could chew? We needed to right-size the program. The number of projects and the size of each project exceeded our capacity and our contractors' capacity to effectively manage them.

The second finding was that we weren't, from the IT side of the house, engaging the IRS business units enough in each of those projects. And we needed to get them more engaged, invite them in more, and have them take more of an ownership of the projects, since the ultimate purpose of this is to improve their operations on the business side of the house.

Third point was that we needed to improve contractor performance on cost, schedule, and functionality.

And, finally, the fourth point was that we needed to bring in some outside executives so that we would have the proper balance between professionals who knew how to get things done in the IRS, with a good blend of folks who had successfully delivered large-scale IT projects in the private sector.

Looking at each one of those, Al and Jeff, we've made significant progress. We now have a smaller portfolio. In fact the budget for the year after the summer where we made these findings we actually proposed over a 30 percent reduction in our own budget, which is very unusual in government.

But we recognized we had to do fewer projects. We had to get smaller, yet better, and then prove to people that we were worthy for growth in the future once we nailed the program down. In terms of engaging the business units, we did bring them in and married their role as an owner of the business unit with their annual commitments. The commissioner put in their annual performance commitments that they were now also responsible for delivering these projects. And we also took, a relatively smaller role in the governance process at the IRS on these projects.

And we asked the business units, and they responded wonderfully, to step up and actually take the chair positions on each of our executive steering committees for these projects, so that they were at the table helping to run and govern these projects as a team.

On the third point, improving contractor performance, I've been very pleased with what's happened there. The root cause of that particular issue -- you know, all this stuff can be somewhat complicated -- it was relatively simple. We were writing contracts that were open-ended. So we reconstructed the contracts where it was appropriate to be either performance-based or a fixed price. And that has been one of the key changes, I think, that has helped improve contractor performance in the program.

Last but not least, and this may have been the most important change, because if you get the right people working on a project or around you, they tend to take care of the other problems. So it was really key for us to bring in some outside executives to help improve and turn around the modernization program. And I would add, Al, that this is something that we've done not just in modernization, but across IT and across the CIO organization in the IRS.

We have been very fortunate to bring in a team from the outside, that includes Art Gonzalez, our deputy chief information officer, Richard Spires, who is heading up our modernization effort now, Linda Gilben, who runs our enterprise services organization, and they bring this expertise from the outside that is very helpful. And when you team up exceptional people like that with the IRS executives who are exceptional, who we have kept involved at the high levels of the CIO organizations -- Bob Albicker, Rick Skorny, Curt Turner, Cathy Jansen, folks like that.

This really has created a phenomenal team, and the success that we've had in the CIO organization over the last two or three years is I think directly attributable to having this team of solid leadership at the top. And that has been a very key thing in turning modernization in the right direction.

Mr. Morales: It certainly sounds like a best practice to bring in these external executives.

Mr. Grams: I would have to agree with that. When you marry that experience that they bring in, in running and delivering large IT projects or large IT organizations with the knowledge of the IRS and our systems, and how to get things done in government, when you have the right blend there, it really creates a powerful team.

Mr. Morales: At this point we can honestly say that you've turned around the modernization program, and in 2004 and 2005, these were the best years for modernization at the IRS. What systems were delivered?

Mr. Grams: In 2004 and 2005, I'll highlight our four major systems that we delivered.

The first was a new Integrated Financial System or IFS as we call it. That was delivered in 2004. It is now the IRS's accounting system of record for our administrative budget, which is the $10 billion I referred to earlier. Another achievement in '05 for IFS is that it was the first full year of running this new accounting system, and we did maintain our clean audit opinion. And that was a major accomplishment for us on the internal financial side of the house.

The second project that we delivered in '04, was expanding our electronic filing capabilities, and for the first time ever now, large corporations and tax-exempt entities can file electronically with the IRS.

Another effort that I would put under the title of e-government was a project called Electronic Services. And that created a suite of web-based applications for use of tax practitioners. These applications have exceeded all estimates of utilization and volume that was in our business case. They have been very positively received by the practitioner community. The bottom line here is these services simplify business for tax practitioners, as well as our IRS employees. So it really has been a win-win project.

And I would say last, but not least, we've delivered the first several releases of the master file replacement system that we talked about a few minutes ago. We call this project, CADE -- that's C-A-D-E and that stands for the Customer Account Data Engine. Now, there's still a long way to go to completely replace the master files. But the success we had in 2004 and 2005 demonstrated that we can deliver on these replacement systems, and that we were able to overcome some of the fundamental problems that plagued the earlier program in the '70s and the late '90s.

Mr. Morales: So, you've mentioned that CADE is the cornerstone project for the modernization effort. Can you expand a little bit about what the CADE system does and how it's effected operations at the IRS?

Mr. Grams: Yes. CADE will eventually replace the agency's 40-year-old master file systems, and become the single database to store and maintain all account and tax return data for individuals and businesses. The project is being developed in phases. It will be implemented over several years with releases now scheduled in six month increments.

And that was a major change that we made a couple of years ago. What we did before was try to hit one big release at one point in time during the year, which was right before filing season. So if we encountered major problems at the 11th hour, we had to err on the side of being conservative, because we have to have a successful filing season delivered.

And what we realized was if we did the major release work and had that scheduled for operation, or be ready to operate with that in June or July, we could then set that system aside, and then between June or July and January, the beginning of the filing season, we would simply look at upgrading what we had just delivered for any filing season change.

Mr. Morales: In tax law changes?

Mr. Grams: Exactly. Tax law changes. And so that change in the way we approached CADE has been very helpful -- to go to two releases a year instead of one big bang right before the filing season every year. So in '05, that was our system's first full year of production. We processed more than 1.4 million taxpayer returns. It is worth mentioning here that as you would expect, we are tackling the simplest tax returns first, and over time we will move to the most complex. The simplest are 1040EZs. And these are for taxpayers who are filing a 1040EZ, who don't have a balance due, or are simply getting a refund.

And there are some other ways we've simplified it, but that gives you a flavor of how we started out. In the old system we would process the information every weekend, in a batch. This new system, in running through CADE, this is more like the type of processing that goes on in, say, the banking industry or the financial industry. We are able to process this information now in a day -- in a 24-hour period. What that means is taxpayers are able to get their refunds much faster than they could before, if they happen to be those taxpayers that we are running through the CADE Program.

Taxpayers who file electronically and happen to be running through CADE receive their refunds even faster than that. So one of the benefits of this, of course, is to get the money that belongs to taxpayers back in their hands faster with CADE. We expect this year, filing season 2006, to process somewhere in the ballpark of probably just shy of 10 million returns in CADE, and our target for '07 is 30 million. So you can see the growth in the CADE program as we go over the next couple years.

Mr. Morales: How is the IRS's IT management similar to that of the private sector? We will ask CIO Todd Grams to explain this to us when the conversation about management continues on The Business of Government Hour.

Mr. Morales: Welcome back to The Business of Government Hour. I'm your host, Albert Morales, and this morning's conversation is with IRS Chief Information Officer Todd Grams. Also joining us in our conversation is Jeff Smith.

Mr. Grams: The modernization efforts impacted the culture at the IRS in several ways, Al. First, I would say, the fundamental shift from paper to electronic business has made those aspects where we have been able to apply that faster, more accurate and at a lower cost. In fact, the growth in e-filing has actually allowed us to shut down some of our submissions processing pipelines and devote those resources to other places in the IRS, where they were more needed.

So that really has been a good success story. I would say another way it's changed, and this is more from an IT perspective, but I believe in being able to deliver these systems over the last two years that the IT office has earned a higher level of credibility with the IRS business units. And they now actually expect us to deliver on our commitments to modernize their systems every year.

I think that was very evident last year when Commissioner Everson declared that for the 2006 filing season, which is the filing season we're in today, that large corporations and tax-exempt entities would have to file their taxes electronically. That is, it is now mandatory that large corporates and tax-exempt entities file electronically. Paper filing is no longer an option.

He couldn't have made that decision last year if we first hadn't been able to deliver the electronic filing capability in 2004 and second, if he and the businesses did not believe that we'd be able to deliver the additional capabilities that were necessary to put in place over the past year, which included electronic transfer of state return information to participating states. But to have the commissioner make a declaration like that when we didn't even have a solution in hand showed change from where we were three years ago in terms of the confidence in the program.

I would just say one last point on this. We're also changing the culture to have a more inclusive approach in involving business units with IT leadership and hopefully that's a theme that you're picking up here today. But one really good example of that is our current effort to recalibrate the modernization strategy for the next five years. The business units are full partners in this effort and we expect to release a new modernization strategy sometime in March, and that new strategy will guide our modernization plans and investments as we go forward.

Mr. Morales: Todd, you described your organization as having some 7000 employees with a budget of about $1.8 billion. That certainly is the size of many large organizations in the private sector. How are you managing your organization more as a business?

Mr. Grams: We start at the top in setting three goals for the IT organization: Improving customer service, delivering modernization, and increasing value. And I feel very strongly that you have to know what your customers want and need in terms of service as well as how effectively and efficiently you can deliver that service.

One of our greatest challenges to improving service and increasing value is leading and leveraging the various disparate components of the IT organization in a way that it becomes one organization rather than a telecom shop, a computing center shop, an applications development organization, an end-user support help-desk shop.

This has been a really big challenge, because until, I guess it was about seven or eight years ago, when Commissioner Rossotti was at the IRS, all of the IT functions were literally scattered across the country, and scattered across the business units at that time. So it wasn't until about six or seven years ago that all the IT functions in the IRS actually got pulled in from the field and were put under a corporate CIO.

So much of what was done in the past five years was spent sorting all of that out and coming up with a corporate help-desk, a corporate team of field support getting the data centers to operate on the same page. We're ready to go to the next level now, which is pulling those pieces together, to come up with one CIO organization. I think, maybe later we're going to talk a little bit about cost-accounting and performance metrics, and I think that will be a good time to build on this theme of how we're going to become one IT organization.

Mr. Morales: Todd, this is some times a sensitive subject, but we understand that you've undertaken a great deal of workforce restructuring during your tenure. Can you share some of these details with our listeners?

Mr. Grams: Sure. Al, this is one of our largest undertakings in the past two and a half years in IRS IT, and the good news is it's been one of our most successful, and it was critical to be successful in this effort. Over the past two years, we have restructured 15 percent of our workforce. That's about 1,000 positions. To do this, this large restructuring in this amount of time, we had to implement three reduction-in-forces or RIFs as they're commonly referred to, over the past year.

What led us to this were a series of studies that were actually done before I even came on board as the CIO, so these were on the shelf. They were ready to be acted upon. These studies showed some pretty dramatic things to us which included stuff like over 30 percent of our staff at our three computing centers were either administrative overhead or part of the management chain of command. You can't run a business with over 30 percent of your people behind the curtain and not devoted to your customer-facing activities.

Also in our field support and in our help desk, these studies showed that we didn't have the right grade levels or the right pay levels in place to attract the kinds of people we needed to. In some cases, we were overpaying what we would need to pay folks to do a job, and in other cases we were underpaying, and therefore we were not attracting the kind of talent that we wanted. So that had to be corrected.

To do that, knowing that we were going to have to run these RIFs, we approached NTEU, National Treasury Employees Union, to work with us on developing mitigation strategies, and this really is a phenomenal story, because Colleen Kelly, the president of NTEU, did not agree with the fact that we were going to run RIFs, which is understandable from her position. But when it became clear that we were going to run these RIFs, she stepped up and was very willing to work with me. We negotiated this personally to come up with the broadest set of mitigation strategies that could reduce the negative impact that the RIF may have on our employees.

And at that time, the negative impact could be measured by the fact that 1,000 people were going to lose their jobs and be laid off. So once we had made the decision to do this, we pulled out all stops to reduce that 1,000 to as small a number as possible. We were hoping with the mitigation strategies, early-outs, buyouts, job swaps, et cetera, we were hoping to get that number down to about 200 or 300.

But thanks to the dedication, the hard work, and the amount of effort that our employees and managers threw into the mitigation program, when we ran the RIFs in October of '05, we only laid off 21 employees. And for those 21 employees that's a very bad thing. But looking at it from the broader perspective of what was best for the IRS and IT in the IRS, being able to reduce those 1,000 jobs in jeopardy down to only about 20 actually being laid off, was something we were very proud off.

Mr. Morales: That's very, very impressive.

Mr. Grams: Well, Jeff, in addition to the frontline restructuring we just talked about, I had to make some radical changes in the structure of the top leadership team in the CIO organization. When I arrived two and half years ago, I had about seven or eight direct reports and they were predominantly over the administrative functions -- the internal stuff that we needed to run the CIO organization.

The actual customer support units that are why we exist as an IT organization were buried four levels down in the CIO shop. There were also two application development organizations at that time. And there was no office, that we've created now and called Enterprise Services, which was responsible for developing the policies and methodologies that we will use running IT at the IRS.

And then if you will, educate folks and police them to make sure things like enterprise lifecycle and enterprise architecture were being adhered to. Today we have a completely new structure. I've eliminated the layers between the customer support units and my office, so they are now direct reports to the CIO front office.

We have restructured, so that the administrative functions are under one associate CIO, who's responsible for management. So I've kept the same number of direct reports, but significantly changed the mix to be focused on the business of IT and not on our administrative functions.

We also created an enterprise services organization and we are in the processes, right now, of actually merging the two applications development organizations that we have, the business systems development organization and the business systems modernization organization, which will now be coming together to be an applications development organization.

Mr. Smith: So how did you keep employees engaged as all these major changes were taking place?

Mr. Grams: Well, that's another successful story that we're very proud of in the way our employees had stayed engaged, as we've put them through a lot of change over the last two years. And it sounds pretty simple, but our efforts at keeping employees engaged throughout these major changes is centered on three things.

First, a consistent message about our mission and goals.

Second, an unyielding commitment to tell the truth, even if that means we have to tell our employees we don't know the answer to something on any given day or we can tell them we know the answer but for some reason we just can't tell them right now and we will tell them later. And we have really adhered to that honest and open communication.

And finally, to have continuous streams of communication across all levels in the organizations.

Just to kind of quantify this, Jeff, our achievements in keeping employees engaged have come through in a Gallup program that we use across the IRS that annually measures employee engagement. It's called the Gallup Q12 program. In 2002 and 2003 in the CIO's organization our measures for employee engagement were either declining or were stagnant.

We just got the results for '05 and they're very encouraging, as were the results for '04. In '04 and '05, every component of our employee engagement program increased. The stagnant trends were overcome. The declining trends were reversed. And considering that these gains in engagement were made over a period of time when employees were in and the management team was in the midst of three reduction-in-forces, it really is a testament to their dedication to stay engaged and their dedication to wanting to continue to make IT at the IRS of value to our tax administration system.

Mr. Morales: What does the future hold for the IRS? We will ask CIO Todd Grams to discuss this with us, when the conversation about management continues on The Business of Government Hour.

Mr. Morales: Welcome back to The Business of Government Hour. I'm your host, Albert Morales, and this morning's conversation is with IRS Chief Information Officer Todd Grams. Also joining us in our conversation is Jeff Smith.

Todd, the IRS, like many federal agencies, is currently dealing with a reduction in budget. How will you incorporate these types of reductions with modernization planning and other IT efforts?

Mr. Grams: Well, our budget is declining, and that's been a consistent trend actually over the past several years. At the same time however the demand for our IT services, as you can imagine, has been increasing. So in that kind of environment it becomes even more important for us to drive the focus of increasing value throughout the organization so that we really leave no stone unturned in our efforts to become more efficient and effective.

I think a good example of that is the workforce restructuring. Those 1,000 positions that we restructured over the past two years, actually have a dollar value of over $100 million. So because we did that workforce restructuring we are spending today over a $100 million in a more effective and efficient manner than we were two years ago. And we have to keep the momentum going on initiatives like that as we go forward.

I will add this though. There's only so much you can do in a certain amount of time, within the rules and regulations of the federal government, to actually achieve major efficiencies on the scale of what I just talked about. So I don't think efficiencies alone are going to be enough, given the trending of our IT budget, along with the demands that are being placed on us. And that's fine. We just got to figure out a way to deal with it.

So we're working, again, exceptionally close with our business partners on this issue and that is to prioritize our IT services so that we can intelligently discuss potential trade-offs with them. So that when the efficiencies are fully tapped, that will mean that as we bring on new services, if we can't pay for them through efficiencies then we're going to want to talk to our business leaders about what old services, that are now a lower priority to them, we can either curtail or eliminate.

Mr. Morales: We understand that your office is taking steps to stabilize technology infrastructure. What activities are you currently undertaking and what have you learned from this process?

Mr. Grams: This is a really interesting and challenging area for us. It came out of some of my visits to our customers and IT employees in the field, where they frequently commented on issues they were having that dealt with outdated or old hardware, from printers to laptops to desktops; even servers, switchers, routers and the like. So it really is the whole hardware inventory that we're focused on in our current infrastructure initiative.

At the same time everybody knew we had a problem, no one could tell me what the size of it was or kind of what the root cause of it was. They just felt it and they knew it was there and it was having an impact on productivity at the IRS. So last year we had an effort underway to quantify it. And what we found out is that basically, by industry standards, an agency as large and complex as the IRS that depends so much on information technology, should be spending any given year between $150 million and $180 million on just replacing and replenishing our IT hardware. We are now spending about $45 million a year.

So what we did was we developed the policy that we're calling 369, and what that means is we're committed to saving and reallocating three percent of the IT budget every year, from somewhere besides hardware infrastructure and sending that money over to hardware infrastructure so that we can shore up that critical part of the IT budget.

So we're not asking for anyone to come in and save us on this by giving us more money. We are committing internally to come up with these savings. Now this is in the face of increasing demand and declining budget, so it does make it quite a challenge but it is absolutely the right thing to do.

Mr. Morales: Switching gears a little bit, Todd, we talk with many of our guests about the impact of the pending retirement wave with government employees. How are you handling the succession planning at the IRS?

Mr. Grams: That is another one of our top priorities for this fiscal year. We've taken several steps recently. For example, at the executive level, we recently completed a set of 360-degree evaluations, which has given us additional insight into the strengths, opportunities for growth and future potential for different or more responsibility for our current executive team.

We also recently completed a mapping of our executives, knowing what changes were in store, retirements, moves, things like that. We're actually getting to the point where, maybe for the first time in the CIO organization, we will have a mapping of who's leaving next June, who is going to take their place and what are we doing in the meantime to get them ready? And then when that person moves next June, and the second person is affected, then who's going to be the third person affected, and who's going to move into that job?

And what's especially critical was not only getting ready for that, but by doing that we identified places where we are confident we don't have anyone to fill those slots in the amount of time allowing for the changes that are coming. So in that area, we're going to be looking at either bringing other people from the outside which I talked about earlier with private sector experience, or from other federal agencies.

And that's actually one area that we have to get better at, is networking with other federal agencies and learning what talent's out there. So that when those folks at other agencies are looking for broader opportunities, we can tap into that at the IRS.

Mr. Smith: We also understand that you're focused on cost accounting and performance measurement. Can you tell us more about those activities?

Mr. Grams: Yes, as a former CFO, Jeff, this one is near and dear to my heart, and I genuinely love talking about it. This gets to the value question, you know. What are we spending? What are we spending on? And what are we getting in return for spending that taxpayer dollar? So it's a fundamental question that while we can answer it at certain levels in the organization today, we can't answer those kind of questions at a finite level of detail so that we can make some of the more day-to-day business decisions that we ought to be making in the CIO organization.

So by the end of this year, and this is in the commitments of every single one of the top executives, at least my direct reports, and it's in my own performance commitment this year, that by the end of this fiscal year we will have a cost accounting system in place in the CIO's organization. Not just a budget financial accounting system but a cost accounting system in place, as well as a performance measurement system in place.

And that's not to say that we haven't been able to measure performance in the CIO's organization in the past. It gets back to my point earlier about having kind of one CIO organization. We want to bring all of that together so that we're not measuring and looking at costs in stovepipes within the CIO shop, but we're looking at it across the organization. So we can make sure that the $1.8 billion is absolutely spent to generate the most value to make tax administration more effective and efficient.

Mr. Morales: Todd, you've certainly enjoyed a very successful career in government. What advice could you give a person who's interested in a career in public service?

Mr. Grams: First I would say: know and believe that you can make a difference, if you want to dedicate yourself to public service. And if that is important to you and more important than a bottom line or becoming a millionaire -- because I assure you, you will not become a millionaire working for the federal government -- but you will have an opportunity to have an impact for the good of our country.

I would say, second, it's about people. When you just start out in your federal career, try to attach yourself to some really good people. Learn from them. Hopefully they'll start to look out for you and help you get some opportunities that maybe you otherwise wouldn't have had. After you've been there a while, and your career progresses, then you've got to surround yourself with good people, so just don't forget the people aspect of it, because if you're going to achieve great change you will not do it on your own. That's a fact of life.

Third, set aggressive goals for yourself and your organization. Do not sell yourself short. Do not listen to people who tell you that a grand vision or a big push to change something cannot be done. And I would say last but not least, just be persistent. You know, not only day in day out, if somebody tells you something can't be done, continue to ask why, until you hear an answer that satisfies you. And in a lot of cases you won't. And you'll have that opportunity to push change.

And also, in the bigger picture, if timing's not right, still be persistent. If you can't push a given issue today, then find another one. Government agencies are large enough, we're never without issues that we can't work. We're never without opportunities for improvement.

So I guess I equate that persistence to almost kind of like being a running back in football. Right? You're going to hit the hole as you go to the goal line. If you get to the line and the hole that's supposed to be there isn't there, fine. Adjust. Keep your legs moving, keep the goal line as your focus. Just find a different hole to get through to get you there.

Mr. Morales: That's fantastic advice. We've reached the end of our time and that will have to be your last question. First, I want to thank you for fitting us into your busy schedule. Second, Jeff and I would like to thank you for your dedicated service to the public and our country, in the various roles you've held with the IRS, the VA and at OMB.

Mr. Grams: Thank you Al, it's a pleasure to be here; Jeff, good to see you again.

Mr. Smith: Thank you.