AMS Win To Yield Tax Processing System Returns

By Nick Wakeman, Staff WriterA $123 million project to build a new tax system for the commonwealth of Virginia should net returns for American Management Systems Inc. beyond the borders of its home state, company officials said."We think we will be able to build the next generation of tax processing systems," said Steve Shubella, AMS vice president and manager of the Fairfax, Va., company's tax and revenue project.But besides the incentive of taking what it learns in the Old Dominion to other states, AMS has a bottom-line incentive for making sure the new Virginia tax system works: If it doesn't work, AMS doesn't get paid.AMS won the contract in July, beating out Andersen Consulting for the project. AMS' teammates include Oracle Corp. of Redwood Shores, Calif., FileNet Corp. of Costa Mesa, Calif., Mitchell Systems Corp. of Annandale, Va., Sterling Institute of Fairfax, Va., and International Public Access Technologies of Cincinnati.The five-year project, which will include new systems for electronic filing and new compliance and auditing procedures, won't cost Virginia a dime. AMS' fee will be taken from the extra revenue collected by the new systems and procedures the company puts in place.This type of benefits, or performance-based contracting, is gaining favor among the states, according to Lesley Kao, an analyst with G2R Inc., a research firm in Mountain View, Calif.AMS and integrators such as Andersen Consulting of Chicago and Electronic Data Systems Corp. of Plano, Texas, have been at the forefront of encouraging these types of projects, she said. Other companies, such as IBM Corp. of Armonk, N.Y., Unisys Corp. of Blue Bell, Pa., and Oracle also are beginning to pursue benefits-based contract opportunities, Kao said. "For state and local governments, it makes products and services available that they couldn't otherwise afford," she said.The Virginia Department of Taxation had to face budget realities when it began looking to migrate its 1970s- and 1980s-era mainframe computers to more modern systems, said Danny Payne, commissioner of the department. "We knew it would be difficult to get a direct appropriation for a project of this magnitude," he said. Payne's department collects about $9 billion a year in revenue.Instead of requesting money, Payne asked the state legislature for permission to enter into a benefits-based contract with a systems integrator, he said. The state sent requests for proposals to about 1,000 companies, six of which Virginia prequalified to compete for the final bid. But only two, AMS and Andersen Consulting, took the last step of submitting proposals, he said.As part of developing their proposals, the two companies spent about six months inside the state Department of Taxation, looking at its processes, learning its systems and identifying problems, Payne said.In-depth and open communication before a final proposal is made is critical to a successful project, Shubella said. "Getting on the same page and forming a strong partnership is absolutely critical," he said.Because AMS is putting up the initial funding for the system, it has to have a clear understanding of what the problems are and what the state's expectations are before it can assume the risk of the project, Payne said."There has to be a mutual understanding between the client and the vendor of what are the benefits and what are the risks," said Martin Cole, managing partner for Andersen Consulting's Americas state government practice. There are several critical areas to focus on when trying to reach this level of understanding, Kao said. Chief among those is defining the benchmarks against which success will be measured, she said. Other areas including deciding what performance areas to measure and what is good performance, she said.A challenge to bringing about more benefits-based contracting is changing attitudes among government agencies, Cole said. "A lot of times, the government culture is not conducive to the arrangement," he said. "To do this requires a shift in thinking."But that shift is happening, Cole said, noting states like California and Massachusetts are leading the way. The Virginia project is focused on improving customer service and increasing compliance with tax codes, Shubella said. "Danny Payne is very keen that the project implement new processes so it is easier for people and businesses to pay their taxes," he said. "Virginia was looking for a project that was much more than a technology program."So while AMS will be migrating Virginia's mainframes to client-server systems, the company also will be developing processes for filing tax returns over the Internet and by telephone, putting in applications that can help better direct who gets audited and installing software that analyzes past behavior to predict future compliance with tax codes, Shubella said.As these systems come online and generate extra revenue, AMS will begin earning its fees. After the company has earned $123 million, all the extra revenue goes to the state, he said."The beauty of this project is the improvements will generate money year after year" for Virginia, Shubella said.AMS has about 30 people on the project but expects that number to rise to 80 to 100 when the project is in full swing after Jan. 1. "We are in the very early phases right now," he said.Don Upson, who was appointed this summer as Virginia's first secretary of technology by Gov. Jim Gilmore, has called the Department of Taxation project a model for other state agencies to follow.Shubella said AMS also is looking at states such as New Jersey and Michigan that are exploring the possibility of revamping their tax systems. The company also is negotiating a contract with Hawaii for its new tax system."We'll bring a lot of our ideas to Virginia, but we are going to come away with a lot of new ideas, too," he said. The Virginia experience will be used to win business in other states, Shubella said. "We've done that in the past," he said. Before the Virginia project, AMS did benefits-based contracts in the states of California and Kansas, Shubella said.AMS' state and local practice is expected to generate about $200 million of the company's $1 billion in 1998 revenue, company officials said.Kao said she can envision benefits-based contracting expanding beyond tax systems to systems for the departments of motor vehicles, Medicaid fraud and public safety, such as emergency dispatching. But measurements of performance must be clear, she said.