[Senate Hearing 114-391]
[From the U.S. Government Publishing Office]


                                                        S. Hrg. 114-391

    DEPARTMENT OF DEFENSE REFORM: OVERCOMING OBSTACLES TO EFFECTIVE 
                               MANAGEMENT

=======================================================================

                                 HEARING

                               BEFORE THE

                      COMMITTEE ON ARMED SERVICES
                          UNITED STATES SENATE

                    ONE HUNDRED FOURTEENTH CONGRESS

                             FIRST SESSION

                               __________

                           NOVEMBER 17, 2015

                               __________

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                      COMMITTEE ON ARMED SERVICES

                     JOHN McCAIN, Arizona, Chairman

JAMES M. INHOFE, Oklahoma            JACK REED, Rhode Island
JEFF SESSIONS, Alabama               BILL NELSON, Florida
ROGER F. WICKER, Mississippi         CLAIRE McCASKILL, Missouri
KELLY AYOTTE, New Hampshire          JOE MANCHIN III, West Virginia
DEB FISCHER, Nebraska                JEANNE SHAHEEN, New Hampshire
TOM COTTON, Arkansas                 KIRSTEN E. GILLIBRAND, New York
MIKE ROUNDS, South Dakota            RICHARD BLUMENTHAL, Connecticut
JONI ERNST, Iowa                     JOE DONNELLY, Indiana
THOM TILLIS, North Carolina          MAZIE K. HIRONO, Hawaii
DAN SULLIVAN, Alaska                 TIM KAINE, Virginia
MIKE LEE, Utah                       ANGUS S. KING, JR., Maine
LINDSEY GRAHAM, South Carolina       MARTIN HEINRICH, New Mexico
TED CRUZ, Texas

                   Christian D. Brose, Staff Director

               Elizabeth L. King, Minority Staff Director

                                  (ii)

  
                          C O N T E N T S

                               __________

                           november 17, 2015

                                                                   Page

Department of Defense Reform: Overcoming Obstacles to Effective 
  Management.....................................................     1
Walker, Hon. David M., Former Comptroller General of the United 
  States.........................................................     5
Punaro, Major General Arnold L., USMC (Ret.), Member of the 
  Defense Business Board.........................................    10
Spencer, Richard V., Former Member of the Defense Business Board.    30
Bisaccia, Lisa G., Executive Vice President and Chief Human 
  Resources Officer, CVS Health Corporation......................    34

Questions for the Record.........................................    60

                                 (iii)

 
    DEPARTMENT OF DEFENSE REFORM: OVERCOMING OBSTACLES TO EFFECTIVE 
                               MANAGEMENT

                              ----------                              


                       TUESDAY, NOVEMBER 17, 2015

                                       U.S. Senate,
                               Committee on Armed Services,
                                                    Washington, DC.
    The committee met, pursuant to notice, at 9:35 a.m. in Room 
SD-G50, Dirksen Senate Office Building, Senator John McCain 
(chairman) presiding.
    Committee members present: Senators McCain, Inhofe, Ayotte, 
Fischer, Cotton, Rounds, Ernst, Sullivan, Lee, Reed, Nelson, 
McCaskill, Manchin, Gillibrand, Blumenthal, Donnelly, Hirono, 
Kaine, King, and Heinrich.

            OPENING STATEMENT OF SENATOR JOHN MCCAIN

    Chairman McCain. Well, good morning, all.
    Before we begin, I'd like to briefly address recent events 
of profound consequence to the work of this committee. Over the 
past few weeks, the massacre in Paris, attacks in Beirut, 
Baghdad, and Ankara, and the likely bombing of a Russian 
airliner, now confirmed by the Russians, over Egypt have 
signaled the beginning of a new phase of ISIL's [the Islamic 
State of Iraq and the Levant] war on the civilized world. This 
committee has held several hearings on U.S. strategy against 
ISIL over the past several months, yet no administration 
witness to date has presented a plausible theory of success to 
degrade and destroy ISIL. With ISIL determined to launch more 
attacks across the globe, we cannot afford more of the same 
insufficient strategy. And in the coming weeks and months, this 
committee will continue to focus our oversight on the urgent 
development of a new strategy to achieve the decisive and 
lasting defeat of ISIL.
    The committee meets this morning to continue our series of 
oversight hearings focused on defense reform. Today, we will 
focus on reforming the management of the Department of Defense. 
This is a perennial and enormously costly problem, precisely 
because it's one of the most difficult. But, if the Department 
is to meet the diverse and complex national security challenges 
that our Nation confronts around the world both now and in the 
future, it must make far more effective and efficient use of 
its resources, especially when budgets are tight.
    We're very fortunate to have a distinguished group of 
witnesses to discuss how to overcome the obstacles to better 
management in the Department of Defense: The Honorable David 
Walker, former Comptroller General of the United States, who 
has a long and very productive relationship with this 
committee; Major General Arnold Punaro, member of the Defense 
Business Board, as well as former Staff Director of this 
committee, which he did a terrible job while he was a member--
--
    [Laughter.]
    Chairman McCain. Mr. Richard V. Spencer, a former member of 
the Defense Business Board with a decades--with decades of 
experience in the private sector; and Lisa Bisaccia, Executive 
Vice President and Chief Human Resources Officer at CVS Health 
Corporation. I'd like to point out that, while CVS has the 
misfortune of being headquartered in the State of Rhode Island, 
it does have more than 6,000 employees and over 500 pharmacists 
working in Arizona, administrating some of our Nation's--
administering some of our Nation's most important Federal 
health programs. And we're thankful for the work that they do.
    The United States military is without peer in delivering 
combat capability anywhere on the globe. Our soldiers, sailors, 
airmen, and marines are the greatest fighting force the world 
has ever seen. However, it's also the case that the management, 
what is sometimes called the ``back office'' of the Department 
of Defense, is in dire need of improvement. In constant 
dollars, our Nation is spending about the same as we did three 
decades ago. However, for this money today, we're getting 35 
percent fewer combat brigades, 53 percent fewer ships, 63 
percent fewer aircraft squadrons, and a lot more overhead. How 
much more is somewhat unclear, because the Department cannot 
even produce complete and reliable data on its overhead 
expenses.
    What we do know is, these reductions in combat power have 
occurred while the Department's overhead elements, especially 
its contracted workforce, have exploded. Nearly 1.1 million 
personnel now perform overhead activities in the defense 
agencies, the military departments, and the service staffs. And 
the money spent on these overhead functions is staggering. 
Indeed, of the top 10 entities that contract for business with 
the Department of Defense, half of them are the Department's 
own agencies. In annual dollars, the Defense Logistics Agency 
does nearly twice as much business with the Department as 
Lockheed Martin.
    A few years ago, an analysis by McKenzie & Company found 
that less than one-quarter of Active Duty troops were in combat 
roles, with a majority instead performing overhead activities. 
Recent studies by the Defense Business Board and others 
confirmed that little has changed in this regard. The United 
States tooth-to-tail ratio is below the global average, 
including such countries as Russia, India, and Brazil. For 
years, decades in some cases, the Government Accountability 
Office [GAO] has identified some of the major overhead and 
headquarters functions of the Department of Defense at being at 
high risk of waste, fraud, abuse, and duplication of effort. 
Business systems modernization and transformation, supply chain 
management, contract management, infrastructure management, and 
financial management have all been on GAO's high-risk list for 
years. And yet, these problems have grown through 
administrations of both party, and persist to this day.
    It is not as if the Department has not tried to address 
these problems. Indeed, it has spent billions of dollars to 
bring so-called, quote, ``private-sector best practices'' into 
the Department of Defense through the adoption of commercial 
off-the-shelf information technology programs. Unfortunately, 
these efforts have little to show for them. Information 
technology programs intended to create lasting business 
transformation at the Department have either collapsed from 
their own weight and size, such as the Air Force's 
Expeditionary Combat Support System, or were merely 
reconfigured, at great cost, to replicate the inefficient and 
outdated business processes that the Department of Defense was 
already employing.
    In order to improve its management skills and transform its 
business process, the Department has also paid consultants and 
contractors billions of taxpayers' dollars to conduct analysis 
of problems in the areas of supply chain, logistics, financial 
management, and contract management. Here, too, there is 
precious little to show for the effort, which has persisted 
over decades. But, despite this spending, none of the high-risk 
areas that GAO has identified have been removed from that list. 
What's worse, it's hard to address management problems when you 
lack basic data that are essential to understanding and 
diagnosing those problems. And yet, that is the case with the 
Department of Defense.
    Here is how former Secretary of Defense Robert Gates 
described the dilemma. He said, quote, ``My staff and I have 
learned that it was nearly impossible to get accurate 
information and answers to questions such as, 'How much money 
did you spend?' and, 'How many people do you have?''' The 
result is not just greater inefficiency and wasted resources, 
it also harms the effectiveness of the Department of Defense; 
and thus, our national security.
    The result of these shortfalls in information, as Secretary 
Gates has explained, is that Department leaders and their 
overseers in Congress cannot measure the results of our 
national security policies or make judgments about priorities 
for our military or accurately assess the tradeoffs involved in 
different courses of action. If the Department cannot do these 
basic things, it will struggle to be effective. We cannot 
afford to continue on this way. The stakes are too high, and 
the consequences of failure are too dire.
    I thank our witnesses for helping us to better understand 
these defense management problems and how to overcome them.
    Senator Reed.

                 STATEMENT OF SENATOR JACK REED

    Senator Reed. Well, thank you very much, Mr. Chairman.
    Let me join you in thanking our witnesses for coming here 
to the panel and to testify, with their great expertise, on the 
difficulties of managing the largest organization in the world, 
the Department of Defense, and how, more importantly, such 
management can be improved, which it must be, as the Chairman 
has pointed out.
    Each of our witnesses has a unique perspective, both inside 
and outside the government, and will help significantly improve 
the committee's review of possible reforms to the Department of 
Defense. Thank you all.
    I'd like to extend a special welcome to Lisa Bisaccia. Lisa 
is an Executive Vice President and Chief Human Resources 
Officer for CVS Health Corporation, which the Chairman noted is 
headquartered in Rhode Island, but it has a much larger 
presence in Arizona. So, that's why they're--she--he's--she's 
here today, I think.
    Chairman McCain. I understand why they moved there.
    Senator Reed. Yes, yes. Yeah.
    [Laughter.]
    Senator Reed. CVS is also the recipient of the 2015 
Secretary of Defense Employer Support Freedom Award for its 
support of employees who serve in the National Guard and 
Reserves. So, thank you for joining us today, Lisa, very much.
    The Pentagon, with its fundamental mission being the 
defense of our Nation, is not a business, in a classic sense, 
and it's unrealistic, in some respects, to believe it would 
completely operate like a business. However, there may be 
important process and organizational lessons learned from the 
private sector that can and must help the Department to 
accomplish their mission and our objective, which is make them 
more effective in the face of new threats, globalization of 
technology, and budget uncertainty.
    Although DOD [Department of Defense] and commercial 
industry measures success in different ways and we are under 
different constraints, in terms of laws and regulations and 
congressional oversight--that is, the Department of Defense--
there are still many challenges that the Department of Defense 
shares with the commercial world. For example, both DOD and the 
commercial sector are continuously striving to reinvent 
themselves against external competitors. Both are trying to 
attract and grow the best talent. And both are trying to find 
the best partners so that their goals can be achieved as 
efficiently and effectively as possible.
    During last week's hearing, Jim Locher proposed that DOD 
adopt the concept of cross-functional teams, a private- sector 
innovation that is designed to integrate representatives with 
relevant organizational components to rapidly address a 
specific problem or set of problems. Mr. Locher made the point 
that there is currently no place in the DOD where such 
functional expertise can be brought together quickly by the 
Secretary or Deputy Secretary of Defense. I hope today's 
witnesses will build upon that discussion by relating examples 
from their corporate experiences that will help us better frame 
the question we need to ask, the scope and the changes we need 
to make, and the likely resistance we will face when we do so.
    Specifically, I hope that our witnesses will touch on 
organizational individual incentives that encourage a culture 
of continuous improvement and innovation in the DOD workforce. 
For example, Can such an effort be supported through changes in 
management policy, organizational structures, hiring, training, 
and compensation practices or increased engagement with the 
commercial sector? I hope, also, that our witnesses will shed 
light on methods for attracting and employing the most 
effective workforce for all DOD missions, ranging from 
operational warfighting, to performing cutting-edge research, 
to managing a huge and complex defense enterprise.
    I think that the common thread connecting these issues is 
the importance of good, modern, innovative management and 
governance. And I'm confident that DOD and this committee can 
learn a lot from the commercial experiences in these areas. And 
I look forward to your testimony.
    Thank you, Mr. Chairman.
    Chairman McCain. I welcome the witnesses.
    Mr. Walker, welcome back.

 STATEMENT OF HON. DAVID M. WALKER, FORMER COMPTROLLER GENERAL 
                      OF THE UNITED STATES

    Mr. Walker. Chairman McCain, Ranking Member Reed, members 
of the Armed Services Committee, thank you for the opportunity 
to be here today.
    My testimony will be based upon my experience as head of 
GAO, a former member of the Defense Business Board, and a 
senior strategic advisor with PricewaterhouseCoopers today. 
But, these will be my personal views.
    Chairman McCain. Before you continue----
    Mr. Walker. Yes, sir.
    Chairman McCain.--all the written testimony of the 
witnesses will be made part of the record.
    Please proceed.
    Mr. Walker. Thank you. Thank you, Senator. I will move to 
summarize.
    As you mentioned, Mr. Chairman, DOD has seven high-risk 
areas directly. It also shares two other high-risk areas. DOD, 
in its latest January 2015 report, noted that they are making 
progress to differing degrees, but yet none of the items have 
come off the list in recent years. GAO has consistently stated 
that the responsibility for the overall business transformation 
effort needs to be a full-time endeavor, and it needs to be led 
by a person with an appropriate level of expertise and prior 
experience. The new Under Secretary of Defense for Management 
and Information position is at a higher level, but I am 
concerned that the way that it's structured will not maximize 
the chance of success, nor will it maximize the ability to 
integrate a number of other submanagement functions within the 
Department of Defense.
    Specifically, I believe that the new position should be at 
the Deputy Secretary level and that all key DOD-wide management 
functions should report to this position. By doing so, it would 
result in a reasonable separation of duties and span of control 
for the two resulting deputies. Specifically, the existing 
Deputy would be focused on policy and external matters, and the 
new Deputy would focus on internal and management matters, 
including all business transformation initiatives. The new CEO 
[chief executive officer] should be appointed based upon 
specific statutory qualification requirements. In my view, it 
is highly preferable that that CMO [chief management officer] 
have both public- and private-sector experience. And ideally, 
the new Deputy for Management and CMO would have a term 
appointment of 5 years, with a performance contract. The above 
approach is much more consistent with what GAO and I 
recommended 10 years ago to help accelerate and better 
institutionalize the large, complex, and multidimensional 
business transformation effort within DOD.
    Importantly, it will take more than one person. Any--one 
CMO is not going to make the difference to achieve sustainable 
success. DOD needs to review and reconsider its approach to the 
appropriate appointment process and reporting lines for the 
military services and fourth-estate CMOs, as well. In my view, 
all military service and fourth- estate CMOs need to be 
appointed by the Secretary of Defense, with the advice of the 
new DOD Deputy for Chief Management Officer. These appointments 
should be based, also, on statutory qualification requirements, 
and should involve a requisite period of time with a 
performance contract.
    Based on my past experience, the DOD is currently organized 
and operating under management models that were prevalent in 
the 1950s, and it's been doing so for many years. It's also 
clear that an increasing portion of DOD's budget is being 
allocated to administrative and overhead costs, and DOD still 
has far too many uniformed personnel in civilian positions. As 
a result, there needs to be a fundamental review and 
reassessment of the current organizational structure, 
operational and personnel practices within DOD. Specifically, 
there needs to be a baseline review of all current 
organizations and key positions to determine their continued 
appropriateness.
    In addition to that, we know that more and more of the 
budget of DOD is being spent on healthcare, disability, and 
other types of costs. These programs also need to be reviewed 
and reconsidered.
    I can--I have firsthand experience in making 
transformational change happen in the government. At DOD--
pardon me--at the GAO, for example, we engaged in a similar 
transformation effort. The result was as follows. We reduced 
our footprint by a third. We eliminated a layer of management. 
We consolidated 35 organizational units into 13. We upgraded 
our management, information, and knowledge- sharing system. We 
revitalized our recruiting, training, and succession planning 
functions. We infused new talent from the private sector and 
elsewhere in government into the agency. We restructured our 
performance management reward systems. We reduced our personnel 
by 13 percent. And, despite that, our outcome-based results 
were tripled during that period of time. This approach is 
transferable and scalable within government if you have the 
right people in the right jobs for the requisite amount of 
time, which we don't in DOD at the present point in time.
    The DOD culture is very mission-focused and chain-of- 
command-oriented. When a decision is made to take a specific 
action, no matter what the nature of the action is, and when 
it's no longer realistic or when there have been changes in 
conditions on the ground or within the Department, there is a 
hesitancy to change course. There's also a hesitancy to tell--
to state the ground truth with regard to where things are. And, 
as a result, there are significant expectation gaps that exist 
within the Department with regard to major management and other 
activities. These expectation gaps result in additional cost 
and other adverse outcomes.
    In summary, DOD personnel are capable, caring, and totally 
committed to the mission of protecting the national security 
interests of the United States. We have good people in a bad 
system. We also have the best military capabilities in the 
world, and no one else is close at this point in time. At the 
same point in time, the Pentagon has become a bloated 
bureaucracy, and overhead costs are way too high. There are too 
many layers, players, and hardened silos in the DOD. This is 
both undesirable and unsustainable. The Pentagon needs to be 
streamlined and simplified in order to free up resources for 
direct mission- critical activities. This will involve deciding 
what needs to be done, who needs to do it, and how best to 
accomplish the objective between public- and/or private-sector 
personnel, as well as how we measure success.
    We can succeed in this effort, but we need to have the 
right people in the right job for the requisite period of time, 
and we need to change our performance measurement reward 
systems to incent innovation and to hold people accountable for 
real results or the lack thereof.
    Thank you again, Mr. Chairman. More than happy to answer 
the questions of this committee.
    [The prepared statement of Mr. Walker follows:]

               Prepared Statement by Hon. David M. Walker
    Chairman McCain, Ranking Member Reed, and members of the Senate 
Armed Services Committee, thank you for the opportunity to testify 
today. My testimony is based on my past positions of Comptroller 
General of the United States and head of the U.S. Government 
Accountability Office (GAO), as a prior member of the Defense Business 
Board (DBB), and my current position as a Senior Strategic Advisor for 
PricewaterhouseCoopers' (PwC) Public Sector Practice. While my comments 
are based on my experience in all of these positions, they represent my 
personal views and not the views of the respective organizations.
    Today's hearing is on business transformation and management 
challenges within the U.S. Department of Defense (DOD). As you know, 
DOD has by far the most items on the GAO's High Risk List. 
Specifically, DOD has seven direct high risk areas (i.e., Business 
Transformation, Systems Modernization, Infrastructure Management, 
Supply Chain Management, Financial Management, Weapons Systems 
Acquisition, and Contract Management). DOD also shares certain 
Government-wide High Risk items (e.g., Human Capital, Real Property). 
These high risk areas cost the DOD and American taxpayers many billions 
of dollars every year in waste and inefficiency.
    Importantly, GAO has noted in its most recent High Risk Report 
Update that progress is being made on these High Risk areas to 
differing degrees. GAO also noted that the leadership within DOD has 
been much more supportive of the needed transformation efforts in 
recent years, especially in connection with the financial management, 
supply chain management and contract management areas. However, 
according to the GAO's latest High Risk Report dated January 2015, the 
DCMO office had a limited impact on accelerating the business 
transformation process up to that point in time. Importantly, there has 
been significant turnover in this office since its creation. Peter 
Levine was confirmed as the current DCMO in late May. He has been fully 
engaged in a range of business transformation efforts. GAO has not 
issued a report on the DCMO office's activities since his confirmation.
    GAO has consistently stated that the responsibility for the overall 
business transformation effort is a full-time endeavor that needs to be 
led by a person at an appropriate level with requisite prior 
experience. The new Under Secretary of Defense for Management and 
Information position has the potential to make a bigger difference if 
the right type person is appointed. However, I am concerned that this 
new CMO (PAS Level 2) position is not structured to maximize the chance 
of success or in a manner that could help to facilitate a needed 
delayering and integration of the key management functions within DOD.
    Specifically, I believe that the new position should be at the 
Deputy Secretary level and that all key DOD-wide management functions, 
including the Comptroller, AT&L, Personnel and Readiness, Information 
Management, etc. should report to this position. By doing so, it would 
result in a reasonable separation of duties and span of control for the 
resulting two Deputies. Specifically, the existing Deputy would be 
focused on policy and external matters and the new Deputy would focus 
on internal and management matters, including all business 
transformation initiatives
    The new CMO should be appointed based on specific statutory 
qualification requirements. Such requirements should include the 
individual having significant leadership and operational management 
experience as well as a demonstrated track record of achieving 
transformational change. In my view, it is highly preferable for the 
new CMO should have both public and private sector experience given the 
nature of the DOD and its key stakeholder groups. Ideally, the new 
Deputy would have a term appointment (e.g., five years) with a 
performance contract. Under this approach, you would also have an 
opportunity to reconsider the proper level and titles for various 
positions that report to the new Deputy - CMO.
    The above approach is much more consistent with what GAO and I 
recommended about 10 years ago to help accelerate and better 
institutionalize the large, complex and multi-dimensional business 
transformation effort within DOD. I respectively suggest that Congress 
reconsider the nature of this new Level 2 position and the related 
possibility for restructuring related management positions and 
functions so they could be effective at the beginning of the next 
Administration. Importantly, it will take more than one key person (DOD 
CMO) to achieve sustainable success. DOD needs to review and reconsider 
its approach to the appropriate appointment process and reporting lines 
for the Military Services and ``Fourth Estate'' CMO's as well.
    In my view, all Military Service and Fourth Estate CMO's need to be 
appointed by the SecDef with the advice of the DOD CMO. These 
appointments should also be made based on statutory qualification 
requirements and should be for a specified term with a performance 
contract. The SecDef should be able to use his/her temporary 
appointment authority to fill these positions in a timely manner but 
that authority should be modified to be able to make such appointments 
for up to five years. This approach would help to enhance the quality 
and consistency of DOD CMO's while also increasing continuity within 
these key positions. The resulting CMO's should have dual solid line 
reporting authority to the head of the Service or Fourth Estate entity 
and to the DOD CMO. Any resulting conflicts would be resolved by the 
SecDef, as and if necessary.
    Based on my past experience, the DOD is currently organized and 
operating under management models that were prevalent in the 1950s and 
has been doing so for many years. It is also clear that an increasing 
portion of DOD's budget is being allocated to administrative and 
overhead costs. For example, according to the Congressional Budget 
Office (CBO), Defense Health Agency, BAH and housing, and total 
civilian compensation costs, costs grew by 101 percent, 59 percent and 
35 percent in excess of inflation during the period 2000-2014, 
respectively. The DOD still has far too many uniformed personnel in 
civilian oriented positions. In addition, DOD's escalating health care, 
disability and other employee benefits related costs are crowding out 
the ability to enhance force structure and modernize weapons systems. 
As a result, there is also a clear need to restructure these programs 
in a fair and equitable manner.
    Given the above, there needs to be a fundamental review and 
reassessment of the current organizational structure, operational and 
personnel practices within DOD. Specifically, there needs to be a 
baseline review of all current organizations and key positions to 
determine their continued appropriateness. Some need to be eliminated 
and others need to be consolidated. This fundamental review and 
reassessment needs to be driven from the top with the clear support of 
the Secretary of Defense (SecDef) and the committees of jurisdiction in 
Congress.
    I have some first-hand experience making this type of 
transformational change a reality in the federal government. For 
example, when I was Comptroller General we undertook a comprehensive 
review and reassessment of GAO's organization and operational 
practices. The objective of this effort was to modernize GAO's 
organization and operations to improve performance in a time of 
resource constraints. Among other things, I wanted GAO to maximize its 
mission related resources with adequate but controlled mission support 
capabilities. My philosophy was to minimize the number of layers, 
players and organization entities in order improve both flexibility and 
accountability. This transformation effort resulted in, among other 
things, an elimination of 1/3 of GAO's footprint, elimination of a 
layer of management, the consolidation of 35 organizational units into 
13, an upgrade of our management information and knowledge sharing 
systems, a revitalization of GAO's recruiting, training and succession 
planning functions, an infusion of new talent within the agency, a 
fundamental restructuring of GAO's performance management and reward 
systems, and a 13 percent reduction in the number of personnel. At the 
same time, GAO's outcome-based results more than tripled during my 
tenure. This type of transformation effort is transferable and scalable 
within government, including within DOD, but it takes a commitment from 
the very top, the right type people to lead it, and adequate time and 
resources to achieve sustainable success.
    Importantly, some progress is being made in certain business lines 
within the DOD that has resulted in real cost reductions and service 
improvements. For example, major process improvements and 
accountability mechanisms within USTRANSCOM have resulted in about $1.5 
billion in real savings and 10-20 percent service level improvements. 
This type of cost reduction focused process improvement and performance 
enhancement is also transferable and scalable. Progress has been made 
in other business lines in the past, including NAVSEA. The real 
question is - ``How can we best proliferate and sustain these business 
transformation efforts and promote continuous improvement within DOD.''
    Despite the above, the American people continue to see periodic 
examples of clear waste and mismanagement within the federal 
government, including within the DOD. One recent example is the multi-
million dollar warehouse in Afghanistan that was built even though it 
was not needed and is still not being used. While this does not involve 
a lot of money given the size of the DOD budget, it is symbolic of a 
systemic problem within the DOD that needs to be addressed.
    The DOD culture is very mission focused and chain of command 
oriented. When a decision is made to take a specific action, no matter 
what the nature of the action is, efforts are undertaken to do so even 
when the action is not realistic or no longer makes sense. Many people 
within DOD hesitate to speak candidly and to advise their superiors to 
change course when current conditions and subsequent events dictate 
that a change in course is clearly called for. In addition, there are 
too many cases where DOD leaders are told what people think they want 
to hear rather than what that need to hear based on the ``ground 
truth''. As a result, there are too many cases where expectation gaps 
exist and bad news comes as a surprise. Furthermore, when failure and 
mismanagement occurs, there is rarely anyone who is held accountable. 
This is simply unacceptable and it serves to undercut the American 
people's trust and confidence in government.
    Another key cultural challenge is the fact that too many people in 
DOD think they have a ``veto'' over key cross organizational 
initiatives within the department. Additional steps need to be taken to 
make it clear that the responsible official for major DOD 
transformation issues has the full support of the SecDef and playing 
``rope a dope'' or attempting to exercise ``pocket vetoes'' are 
unacceptable practices that will not be tolerated. This includes people 
at all levels, including PAS positions. My previously mentioned 
recommendations to establish a second Deputy level CMO position and to 
integrate and modify the reporting lines for various internal 
management functions can help to address this problem.
    In my view, these cultural and accountability issues need to be 
addressed head-on in the recruiting, training and performance 
management systems within the DOD. These changes need to be combined 
with enhanced incentives, transparency and accountability mechanisms 
for major business transformation projects within the Department. 
Individuals who make strong contributions should be recognized and 
rewarded and those who fail to do their part or act irresponsibly 
should be held accountable, including being demoted or fired in 
appropriate circumstances.
    I believe that additional steps need to be taken to gain additional 
private sector expertise within the DOD in connection with major 
transformation efforts. This would be a supplement to rather than a 
substitution for the CMO positions noted previously and selected 
independent contractor efforts. DOD could accomplish this through using 
the temporary appointment authority that the SecDef has to appoint 
persons at any civilian level to perform specified functions. This 
could be particularly helpful in connection with addressing highly 
technical information technology, financial management and other 
operational matters. I had similar authority when I was Comptroller 
General. I used it to fill critical mission and mission support 
positions in a timely manner with qualified personnel. It clearly made 
a difference in connection with the GAO's transformation effort and it 
can make an even bigger difference in connection with the DOD's 
transformation efforts.
    Furthermore, adequate resources and control mechanisms need to be 
provided to the individual who is responsible and accountable for any 
major transformation initiative. As has been said, individuals must 
have the authority, as well as reasonable levels of human and financial 
resources in order to get the job done if they are to be held 
accountable.
    With regard to financial management and audit issues. I am 
concerned that an ``expectation gap'' may exist regarding the current 
state of the audit readiness efforts and when and how a successful 
audit of DOD's consolidated financial statements can best be achieved 
in a reasonably timely and cost-effective manner. One possibility is to 
use the SecDef's temporary authority to bring in a retired audit 
partner from a major CPA firm on a full-time basis to help with the 
Department's FIAR efforts. I am confident that DOD could find a 
qualified person who would be willing to give several years of public 
service to his/her country in connection with this important 
initiative. I am also confident that there are similar people in other 
disciplines who would be willing to do the same in connection with 
other key DOD business transformation initiatives if this approach was 
made a priority within DOD. These could be great Capstone opportunities 
for successful private sector leaders who have achieved financial and 
other success and who want to do something for their country.
    The new Chairman of the DBB recently asked me to suggest a few 
areas that the DBB might best address. I suggested several, including 
the FIAR and related financial management and reporting issues (e.g., 
financial reporting and the DOD audit, internal controls, cost 
accounting and performance management information, and related 
governance issues); DOD bureaucracy streamlining and shared service 
opportunities; DOD/VA coordination and selected integration, and; 
disability and retirement program reforms, especially retiree health 
care for individuals who are working with no service related injuries 
or serious impairments in light of the ACA. The Chairman has stated 
that he would like to meet with me in the near future to discuss these 
areas further.
    The truth is, DOD personnel are mission focused and totally 
committed to the mission of protecting the national security interests 
of the United States. We have the best military capabilities in the 
world and no one else is close to us at this point in time. At the same 
time, the Pentagon has become a bloated bureaucracy and overhead costs 
are way too high. There are too many layers, players and hardened silos 
within DOD. This is both undesirable and unsustainable.
    The Pentagon needs to be streamlined and simplified in order to 
free up resources for direct mission critical activities. This will 
involve deciding what needs to be done, which DOD entity should be 
responsible, how best to accomplish the objective, whether it should be 
performed by public and/or private sector personnel, and how we should 
measure success. In addition, effective internal controls and related 
performance management systems and accountability mechanisms need to be 
in place to ensure the economy, efficiency and effectiveness of DOD's 
ongoing activities. When the new CMO position is filled and 
operationalized, that person needs to bring a ``tough love'' attitude 
to DOD. They will also need to support of the Congress, the President, 
and the SecDef in order to achieve sustainable success. We can succeed 
in this effort with the right people and approach; however, it will 
take years.
    Thank you again for the opportunity to testify today. I would be 
happy to answer any questions you may have.

    Chairman McCain. General Punaro.

   STATEMENT OF MAJOR GENERAL ARNOLD L. PUNARO, USMC (RET.), 
              MEMBER OF THE DEFENSE BUSINESS BOARD

    General Punaro. Mr. Chairman, Senator Reed, members of the 
committee, I, also, want to thank you for the privilege of 
testifying on the urgent need to get the full cost of DOD's 
massive overhead and infrastructure identified, analyzed, and 
ultimately under control, but, most importantly, reduced from 
both a cost and people standpoint.
    Mr. Chairman, as part of my prepared statement you put in 
the record, I included a presentation that I made as chairman 
of the Defense Reform Task Force to Secretary Don Rumsfeld in 
March 2001 with a series of recommendations on how to control 
DOD's infrastructure, which, at the time, was $100 billion. 
Today, it is $240 billion, and larger than the GDP [Gross 
Domestic Product] of the country of Ireland. So, the growth in 
defense infrastructure has been continuous. The tendency has 
been to add, rather than subtract. As we have added more staff, 
more layers, and more infrastructure, we have slowed the 
decision process, expanded the number of players, and made the 
over system more risk-averse at a time when we need to take 
more risk and make quicker decisions. If we wait for certainty, 
we will have waited too long and imperiled our warfighting 
forces as they continue to decrease.
    We must distinguish between working hard and working well. 
And with the fiscal pressures we face, with the strategic 
challenges erupting all around us, with the operational demands 
accumulating on the force, we can no longer afford the luxury 
of a growing imbalance between what we must feel operationally 
and what we feel managerially. We need to generate more combat 
power from our military end strength and the fiscal resources 
associated with it, not less. And today we are fielding less in 
what I have called the ever-shrinking fighting force.
    So, I applaud the committee for taking a hard look at this 
problem. But, any Pentagon reforms will be insufficient without 
serious reforms in the Congress as well as reforms in the 
National Security Council and OMB [Office of Management and 
Budget]. And I've put a long list of my recommended reform in 
these areas in my prepared statement.
    A major problem in defense today, as you pointed out, Mr. 
Chairman, is the internal composition of the defense budget, 
how the internal Pac-Man of growing costs in personnel, 
acquisition, and overhead are gobbling up our warfighting 
forces. In constant dollars, we are spending more today than we 
spent at the peak of the Reagan buildup, roughly 30 percent 
more, but the warfighting forces are 40 to 50 percent smaller. 
You've made this point very clear. However, defense-wide 
spending has gone from 5 percent to 20 percent of the budget. 
And again, infrastructure running about 240 billion, with over 
a million people. The defense agencies have grown in number, 
scope, and cost. And they're not just defense agencies, these 
are large business enterprises that account for over 20 percent 
of all the money that DOD spends. And you have the ballooning 
of the defense agencies, the OSD [Office of the Secretary of 
Defense], the combatant commands, and many other overhead 
organizations. The Office of the Secretary of Defense alone, we 
believe, has 5,000 people. Some argue it's even higher. The 
Defense Department would probably argue it's lower. And there 
are too many layers in the bureaucracy. Twenty-eight layers 
of----
    Chairman McCain. Excuse me. You said the Office of 
Secretary of Defense has 5,000 people?
    General Punaro. Mr. Chairman, all our analysis shows that 
if you add the number of military, civilians, contractors, it's 
roughly between 5- and 8,000. Typically on their books at 
Washington Headquarters Services, they tell you it's either 
2,200 or 3,000. And so, if you add in the DOD IG [Inspector 
General] and associated, it could be 10,000 people.
    Chairman McCain. Thank you.
    General Punaro. Twenty-eight layers, way too many.
    Another problem is--David Walker has pointed out--too many 
of our Active Duty military personnel, over 330,000 Active Duty 
military, are performing commercial activities that could be 
done by civilians or contractors, and frankly, many not done at 
all. So, before listing my recommended course of actions, you 
need to address the basics of DOD infrastructure and overhead. 
How big is it? How much does it cost? What size do you want it 
to be? Questions are easy. The answers are very difficult. Let 
me give you my suggestions on some of the answers:
    Number one, establish a firm benchline of headquarters 
organizations and activities, including OSD, JCS [Joint Chiefs 
of Staffs], combatant commands, defense agencies and field 
activities, service headquarters and commands, including the 
layers of management. Mr. Chairman, we have got to come to an 
agreement on the definitions and the baseline.
    Number two, then require DOD to report, in the Annual 
Defense Manpower Requirement Report, all categories of 
personnel in the overhead and infrastructure functions.
    Number three, also require DOD to report the Annual Defense 
Manpower Requirements Report, the fully burdened and lifecycle 
costs of all categories and personnel. Not the budgeted costs, 
but what the true cost to the taxpayer is over the lifecycle of 
these personnel for Active Duty, Guard and Reserve, defense 
civilians, defense contractors, and federally funded research 
and development. These are the people that work in the 
overhead.
    Number four, legislate end strengths for military, 
civilians, and contractors to be assigned to and employed by 
the various overhead and infrastructure functions once these 
headcount costs are firmly established. And I know there will 
be a lot of pushback when you say, ``Let's legislate end 
strengths for overhead.'' But, in the late '70s, there were no 
end strengths for Active Duty, personnel, or Guard or Reserve. 
This committee put them into law, and they've worked pretty 
well, so I believe that's something that you could do.
    Number five, reduce the number of senior officials to 
include the number of Under Secretaries, Principal Deputies, 
Deputy Assistants, Deputy Unders, and other layers, while 
improving the supervisor-to-led ratios.
    Number six, review the Goldwater-Nichols legislation in the 
context that the joint approach is now accepted and our most 
senior military leaders no longer need all the strictures of 
the legislation. Organizations, processes, and restrictions 
brought in by that legislation could be eliminated.
    Number seven, approve another round of BRAC [Base 
Realignment and Closure] using an improved process. Carrying 
excess facilities costs billions of dollars every year.
    Number eight, reauthorize the A-76 process. Congress should 
lift the moratorium on A-76 public/private competitions, but 
revise the procedures to make it fair.
    Number nine, eliminate duplications. There are numerous 
places in the Pentagon----
    Chairman McCain. Let me----
    General Punaro.--where we have significant----
    Chairman McCain. Let me--for the benefit of the record, 
describe A-76.
    General Punaro. Mr. Chairman, I'm not a--the A-76 is the 
opportunity where a local base commander will look at a 
commercial function and decide whether it ought to be done by 
government employees or it ought to be contracted out. And they 
will have a competition. The way the Office of Management and 
Budget has written the rules, there's always tilted towards the 
government. They get a 10- to 20-percent advantage on cost. So, 
most of big companies don't even want to go through with it, 
because it's kind of rigged. And Congress doesn't like 
outsourcing the government jobs, so they put a moratorium on 
them. So, we don't even do the competitions anymore.
    Chairman McCain. Thank you.
    General Punaro. Eliminate duplications. There are numerous 
places in the Pentagon where we have significant duplications 
of effort. An obvious place is the overlaps that exist between 
OSD and the Joint Staff. Also in the military departments 
between the military and civilian staff.
    Number ten, reduce the 28 management layers. Between OSD, 
the Joint Staff, Service Secretaries, military staff, the 
combatant commanders and their staffs, and the various standing 
groups and committees, such as the Joint Requirements Oversight 
Council, Command Action Groups, there are far too many 
management layers populated by well-meaning official and 
officers who feel they have a major role in any issue, large or 
small.
    And the last two, number eleven, carefully examine best 
business practices. The DOD needs to learn from world-class 
organizations which have to compete in the global economy, keep 
costs low, and deliver products on time and on cost. I've 
listed a chart that outlines these: focus on core functions, 
use flat structures, use performance goals, and control 
headcounts.
    And finally, Mr. Chairman, revise the executive branch and 
Senate processes for recruiting, confirming, and appointing 
personnel that need to go in these very key top management 
positions. The Packard Commission said all of their key 
provisions that they put in were tied to getting individuals in 
government with significant experience in running large, 
complex organizations and technical programs. And it's very, 
very difficult to both recruit those kind of individuals now or 
get them through the vetting process.
    So, thank you, Mr. Chairman and Senator Reed and the 
committee, for giving me this opportunity. And I'll look 
forward to your questions.
    [The prepared statement of General Punaro follows:]

             Prepared Statement by General Arnold L. Punaro
 the urgent need to reform and reduce dod's overhead and infrastructure
    Mr. Chairman, Senator Reed, members of the committee, I want to 
thank you for the opportunity to appear today to discuss the urgent and 
overdue need to get the full costs of the Defense Department's massive 
overhead and infrastructure identified, analyzed, and ultimately under 
control, but, most importantly, reduced from both a cost and a people 
standpoint.
    Using DOD's own definition, its overhead and infrastructure is over 
40 percent of the total annual DOD budget--$240 billion. If these 
overhead costs were a gross domestic product, it would rank ahead of 
the country of Ireland. DOD's infrastructure has more people working in 
it than the entire population of Senator Reed's home state of Rhode 
Island--one million.
    At the same time, we need to reverse the trend of what I have 
called the ``ever shrinking fighting force.'' We need to increase the 
size, readiness, and response time of our war fighting forces while 
developing 21st century command and control of these forces.
    I appear exclusively as a private citizen and not as a member of 
the Defense Business Board, or Chairman of the Secretary of Defense 
Reserve Forces Policy Board, or Chairman of the National Defense 
Industrial Association. I believe, however, my personal experience is 
relevant to your inquiries. I have 24 years working with the Senate 
Armed Services Committee, 35 years in the United States Marine Corps (4 
active, 31 reserves), 14 years as a senior executive of a Fortune 250 
company, and six years as a small business owner advising Fortune 50 
companies. I have both chaired and served on multiple commissions 
analyzing these issues and making recommendations in the areas of your 
focus today.
    Let me emphasize that my comments today do not reflect any 
criticism of current or past Administrations or Congresses. This is not 
a report card on individual leaders--these problems have built up over 
decades. And despite many serious efforts in the Pentagon and in 
Congress over the years, the bureaucratic and antiquated processes have 
proven more resilient than the recommended reforms. Though we have 
hard-working and dedicated military and civilian personnel ensuring our 
nation's security every day, as a former Secretary of Defense told me 
recently, ``Bad processes will trump good people every day.'' And we 
have a proliferation of bad processes both in the Pentagon and in the 
Congress.
    A good example of this occurred after I left the SASC [Senate Armed 
Services Committee] in 1997. I was asked by then Secretary of Defense 
Bill Cohen to chair the Defense Reform Task Force. The other members 
included Rhett Dawson, Jim Locher, Dov Zakheim, Kim Wincup, David Chu, 
and Michael Bayer. Secretary Cohen wanted to bring world-class business 
practices to the management side of the Pentagon. After eight months of 
review, we reported to the Secretary that DOD needed to focus on core 
functions, reduce multiple layers of management, eliminate the 
duplication between OSD and the Joint Staff, control the headcounts in 
the headquarters, and streamline the defense agencies among other 
recommendations. Secretary Cohen was delighted with our results, saying 
that this was exactly what he was looking for. But I pointed out to him 
these were actually the conclusions of a Commission set up by President 
Eisenhower in 1956, which included notable members such as General Hap 
Arnold and Vannevar Bush, with Henry Kissinger serving as staff 
director. Our Task Force came to the same conclusion they had some 40 
years earlier and presented Secretary Cohen with five major studies on 
how to reform OSD, JCS, the defense agencies, the military departments, 
and the health care agencies. Because of the length of the original 
study, I have attached a summary of a presentation we made to Secretary 
of Defense Donald Rumsfeld in 2001. You will find recommendations to 
reduce the size and duplication in OSD and the JCS, reducing the number 
of senior personnel and multiple layers of management, streamlining the 
defense agencies and installing performance-based management, and 
divesting or eliminating non-core activities.
    Almost twenty years after the work we did for Secretary Cohen, and 
sixty years after the work Henry Kissinger did for President 
Eisenhower, the management chain-of-command in DOD still requires 
significant improvements, since the tooth is getting smaller while the 
tail is getting larger and more expensive.
    I know this Committee is willing to take up such a daunting 
challenge. This is the Committee that passed the sweeping changes that 
created the national security establishment after World War II, that 
addressed its problems in 1956, that shifted the military from the 
draft to the All-Volunteer Force in 1973 and then saved the AVF when it 
needed reforms in the late 1970s, that passed Goldwater-Nichols and 
Special Operations legislation, and continues to tackle the problems 
with the acquisition process. We know from history that large 
institutions like DOD cannot make significant organizational and 
process reforms from within. This Committee has an enviable history in 
solving major defense problems. The SASC will need to be the battering 
ram of reform once more.
    You do have a real advantage because the leaders in the Department 
today are willing to change. In Secretary of Defense Ash Carter, you 
have what I call a ``bureaucracy buster.'' He is committed to genuine 
reform, evident from his groundbreaking push for the Force of the 
Future to his unrelenting drive to bring innovation into the Department 
and implement Better Buying Power. I know he shares the concerns about 
significantly improving the management of the Department. While many in 
the Pentagon below his level may resist any change, this Committee has 
key allies working with the Secretary, including Deputy Secretary Bob 
Work and Deputy Chief Management Officer Peter Levine.
                      revisiting goldwater nichols
    Thirty years ago many of us on the major defense committees were 
working hard on what became the Goldwater-Nichols Act. The act focused 
primarily on the operational chain of command and basically had the 
objective of improving defense processes in nine areas:

    1.  Strengthen civilian authority
    2.  Improve military advice to civilian authorities
    3.  Place clear responsibility on combatant commanders
    4.  Ensure commensurate authority for the combatant commanders
    5.  Enhance the effectiveness of military operations
    6.  Improve joint officer management
    7.  Increase attention to strategy and contingency planning
    8.  Provide for more efficient use of resources
    9.  Improve DOD management

    As my friend and former colleague Jim Locher testified last week, 
the attention of the committees back then focused on the first six 
items, and accordingly spent considerably less time and effort on the 
last three. I believe most of us share the view expressed by Jim that 
the first six elements have resulted in significant improvements, while 
the last three have changed little, if at all. It is in these remaining 
areas that I believe we must concentrate future efforts. If there is to 
be something called Goldwater-Nichols II, it needs to seriously address 
those areas that were never sufficiently addressed in Goldwater-Nichols 
I. I will also have some recommendations for needed changes in some of 
the first six. After thirty years, they should be revisited in light of 
today's threats and the fact that GNA has improved joint-ness, making 
some of its provisions no longer necessary.
                   congressional reform is necessary
    Any Pentagon reforms will be insufficient without serious reforms 
in the Congress as well. The Pentagon and Congress are drowning in 
budget detail and duplicative processes and procedures. Congress should 
consider re-establishing the Joint Committee on the Organization of the 
Congress, which has produced major recommendations three previous 
times. The last time was in 1993 when it was chaired by Congressman Lee 
Hamilton and Senator David Boren with ranking members Senator Pete 
Dominici and Congressman Dave Dreyer. Congress should move to a two-
year budget: the first year Congress would make decisions on the 
request and the second year would be reserved for extensive 
Congressional oversight and fact-of-life changes. We did this in the 
early 1990s with the defense authorization bill. Congress should 
consider reducing the three processes, budget, authorization, and 
appropriations, into two by combining the authorization and 
appropriations committees. Congress should authorize and appropriate in 
the same bill. The chairs and rankings of the new combined 
authorization and appropriation committee could constitute the budget 
committees and set the overall framework for the revenues, spending, 
and whether we are in surplus or deficit, including estimates on long-
term entitlement spending. If collapsing the committees is not 
possible, then stricter procedures should be adopted to preclude 
unauthorized appropriations in both defense and domestic accounts. And 
Congress needs to complete its work on time. Consideration should be 
given to move the fiscal year start to the calendar year start on 
January 1, but the budget for the next fiscal year would still be 
submitted on February 1. The joint committee should have a presumption 
of reducing the size of Congress' staffs and support agencies as well. 
In a world where events move in nanoseconds, DOD needs significantly 
more flexibility from Congress in how it spends it money to adjust to 
changing circumstances. To credibly reform the Pentagon, Congress needs 
to reform itself as well.
              white house and omb reform is also necessary
    Pentagon and Congressional reforms must also be coupled with 
reforms in the White House. It must reduce the proliferation of 
executive offices and staffs, and establish controls on a National 
Security Council that is widely known to have trouble distinguishing 
between its ``coordination'' role and the ``operational'' functions of 
the line cabinet officers. We need to return the NSC to the Andrew 
Goodpaster and Brent Scowcroft model, both in approach and size. And 
the Office of Management and Budget needs to spend much more time on 
government-wide management and much less time on budget micro-
management, which is more prevalent for the domestic agencies than DOD.
                     close the strategic disconnect
    I want to compliment this Committee for the leadership role it 
played in delivering the budget compromise recently enacted by Congress 
and signed by the President. It sets national security spending near 
the levels that both the Administration and the budget and defense 
committees indicated. The increased resources flowing to defense will 
have a near-term, positive impact on readiness, modernization, and 
quality of life. I hope that this will be a precursor to wider actions 
that set aside artificial spending caps and will end the threat of 
sequestration, an approach to budget control that has few merits and 
even fewer advocates. Nonetheless, sequester remains the law for Fiscal 
Year 2018 and beyond, but it should be given a quiet burial.
    The idea behind the Budget Control Act of 2011 was to get control 
of the deficit through a broad approach. Even former Chairman of the 
Joint Chiefs of Staff Admiral Mike Mullen called the nation's long-term 
deficits our number one national security threat. In the BCA, capping 
discretionary spending was the first step. The joint committee was 
supposed to come up with revenue increases and entitlement reductions 
to reduce the deficit as well, but it was not successful.
    When a new Administration and Congress are sworn in 2017, they 
should immediately work on the grand compromise that addresses all 
elements of spending, revenues, and entitlements.
    We need to ensure that DOD resources are sufficient and stable to 
deal with the current chaotic strategic environment. The past drawdowns 
of our fighting forces and defense resources, most recently after 
Vietnam, after the Cold War, and adjustments tied to the drawdowns in 
Iraq and Afghanistan have been driven by a perceived improvement in the 
strategic environment.
    The resources we devote to national security must be driven by the 
challenges the nation faces and those challenges are increasing: the 
growing chaos in the Middle East; the rise of religious extremism and 
non-state actors; an irredentist, aggressive, and in the words of some, 
``reckless'' Russia; an emboldened China, a state that is quickly 
expanding both its conventional and unconventional military 
capabilities and flexing its muscles in often novel ways; and the 
continued provocation of an unpredictable and persistently 
irresponsible regime in North Korea.
    Yet, in the face of all these immediate challenges, under the BCA 
and the sequestration regime, we are reducing our war fighting forces. 
As you have suggested yourself, Mr. Chairman, it may be no coincidence 
that we are seeing increased global challenges as we reduce our 
capabilities and lower our regional profiles. Such a reaction by such a 
diverse set of international players may not be proven, but neither can 
it be dismissed.
                          defining the problem
    Senator Russell Long had a saying: ``You should not solve a problem 
for people before they know they have one.'' The major problem in 
defense today is the internal composition of the defense budget--how 
the internal PAC-Man of growing costs in personnel, acquisition and 
overhead are gobbling up our war fighting forces. As the chart below 
shows in a telling way, even as we have continued to spend more on 
defense--matching historically high levels--each dollar supports a 
significantly smaller active duty military end strength. The $600 
billion we spent on defense in 1953--a draft era force--supported 3.5 
million troops. In the All-Volunteer Force era--at the peak of the 
Reagan buildup, $600 billion supported 2.2 million active troops. 
Today, $600 billion supports 1.2 million--the same amount of money for 
one million less active forces.
      
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    Mr. Chairman, the chart you included in your kick-off to these 
hearings demonstrated that the rising all-in costs of personnel over 
the last thirty years have gone up 270 percent. In just the last ten 
years, they have risen almost 100 percent for a slightly smaller force.
    The Military Compensation and Retirement Modernization Commission, 
in its oft-overlooked interim report on what programs actually cost, 
included a chart that showed that the total cost for pay, benefits, 
health care, retirement, was over $400 billion a year and that there is 
a $1 trillion unfunded liability over the next ten years in the 
military retirement fund that is not in any budget. The commission 
challenged the notion put forth by some that military compensation 
represents 30 percent of the budget, and is therefore not a concern. 
The commission said:

        The fact that military compensation costs consistently 
        represents roughly one-third of the DOD budget does not provide 
        evidence of fiscal sustainability. The commission considers the 
        growth rate in Gross Domestic Product (GDP) to be the maximum 
        rate at which compensation funding, holding force size 
        constant, can grow while representing the same share of 
        national income.

    When they looked at this comparison from 1998 to 2014, growth in 
military pay, quality of life, retired pay, VA and DOD health care far 
exceeded both the GDP and the Employment Cost Index. This is why the 
immediate three former Secretaries of Defense--Gates, Panetta, and 
Hagel--have said publicly that this cost growth is unsustainable. 
Secretary Carter has expressed similar concerns.
    The main objective of the Defense Department, and its management 
processes, is to produce as much combat capability and power as 
possible with the resources available. Unfortunately, we spend too much 
time focusing on how much we spend, rather than on how well that money 
is spent and what the results are. In short, as an old phrase described 
it best: we need ``more bang for the buck''--the nation needs, 
especially in the current strategic and fiscal environment, more 
``trigger-pullers'' in operational units and fewer ``paper-pushers'' in 
back-office management. I believe we all share that aspiration, but the 
trends are not moving us in that direction as seen in the chart below:
      
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    In constant dollars, we are spending more today than we spent at 
the peak of the Reagan buildup--up by 30 percent, but the war fighting 
forces are 40 to 50 percent smaller. We see this trend for three major 
reasons: 1) the all-in costs for the all-volunteer force and its 
support structure, as well as the costs of the retired force; 2) the 
$400 billion we spend annually on goods and services, supplies, and 
equipment where the outcome can best be described as ``spend more, take 
longer and get less''; and, 3) DOD's massive overhead and 
infrastructure, with defense-wide spending going from 5 percent of the 
budget to 20 percent of the budget and the combined OSD, JCS, Defense 
Agencies, combatant commands, and other HQ with over 250,000 people 
costing $120 billion a year. We are not getting the defense capability 
we should for the dollars we spend and, if uncorrected, we will not 
have the military we need in the years ahead.
    Recent Army plans, for example, indicate the Army will reduce its 
number of active duty soldiers between 2010 and 2017 by 20 percent 
(567,000 to 450,000), and it will reduce its active brigade combat 
teams by 33 percent (45 to 30). In other words, the number of combat 
brigades is being reduced proportionately more than the reduction in 
the number of soldiers would suggest--meaning trigger-pullers are 
leaving and paper pushers are staying. There are examples like this 
throughout all the services.
    This one data point is merely suggestive of a broader issue: the 
enduring size of the defense infrastructure that has so far been 
resistant to reductions. Efforts to tame the tooth-to-tail ratio have 
never resulted in the outcomes we had envisioned, and over the years 
the ratio has, if anything, grown worse.
      
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    That raises a major issue. Overall, when it comes to defense 
infrastructure, we simply don't know how big it actually is. Likewise, 
we don't know what it actually costs. In some areas we have the data, 
but disagree over the definitions; in other areas we agree on 
definitions, but don't have the data. Getting to the bottom of this 
problem merits intense study and close attention. We must better 
understand why it appears we can't afford Army brigade combat teams, 
Air Force Tactical Fighter Squadrons, and Navy Battle Force ships, but 
we have larger management staffs within the Pentagon than ever before.
    Let me elaborate briefly using only one example, though there are 
many to choose from. When Congress passed the National Security 
Reorganization Act of 1947, it created the structure that basically 
exists today. Among the organizational structures created was the Joint 
Staff, and legislation capped the staff at 100 officers. The 1949 
Amendment, which created the office of the Chairman of the Joint Chiefs 
of Staff, more than doubled the Joint Staff manpower to 210. The 
Department of Defense Reorganization Act of 1958 doubled the Joint 
Staff again to 400. So what do we have in joint staff numbers today?
    As the chart below shows, the Joint Staff today, including the 
separately reported Office of the Chairman, numbers nearly 4,000--
military, civilians, and contractors. Since 1958 the size of the Joint 
Staff has increased by a factor of 10. When Secretary Gates 
disestablished the Joint Forces Command in 2010, the military assigned 
there--over 2,000--were reassigned to the Joint Staff. This is one of 
the reasons there is no accurate headcount: when one agency goes down, 
another one is created to absorb the shock.
      
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    When we look at the staffing of the combatant commands, the total 
number of those assigned to Joint billets is over 40,000--yet another 
increase by a factor of 10. The combatant commands have expanded from 
lean, war fighting headquarters to sprawling mini-Pentagons with 
thousands of staff members. They no longer fight wars themselves, but 
must create new joint task forces to accomplish that mission. The 
regional combatant commanders have evolved into political-military 
ambassadors who focus heavily on peacetime engagement. Given the 
inability of other parts of our government to fulfill their proper 
role, this is a very important mission. Yet Goldwater-Nichols 
specifically resisted the notion of adding requirements to the 
combatant commanders, such as budgeting and acquisition, so they would 
not lose focus on their primary duty--war fighting. The proper role and 
size of the combatant commanders, their service component commanders, 
and the standing ad-hoc joint task forces should be the subject of your 
careful review
                   defense agencies are big business
    The defense agencies have also grown in number, scope, and costs. 
They are not just defense agencies; these are very large business 
enterprises.
    If one looks at the staffing of the various defense agencies that 
have been established over time, the trend is similar. Today the 
various defense headquarters and agencies have a headcount of over 
400,000 active duty military, defense civilians, and contractors. To 
put this in perspective, the manpower of these activities is well over 
double the active duty size of the United States Marine Corps, and, 
should current Army plans continue, is approaching the size of the 
active duty Army.
    Many people will incorrectly guess that the largest government 
contractor is Lockheed or Boeing or one of the other large primes. It 
is, in fact, one of DOD's own agencies: the Defense Logistics Agency. 
DLA does over $44 billion a year of business with DOD compared to 
Lockheed's $28 billion. In the top ten largest businesses, five are the 
department's own agencies, not including several of the intelligence 
community agencies. Most of the defense agencies would rate in the 
Fortune 250 and several are in the Fortune 50. Yet they are not managed 
as businesses--even though one is, in fact, a grocery business. Another 
is a worldwide communications provider and another is one of the 
world's largest and most expensive health care providers.
      
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    * Contractor data is prime contracts with DOD from federal contract 
database.

    The number one reason these defense agencies should be managed more 
as a business is that their total expenditures are in excess of 20 
percent of the entire defense budget. Worse yet, for the most part, 
they are supervised by OSD civilian political appointees whose day-to-
day jobs do not provide them with ample time for management and 
leadership. These entities lack strong, disciplined business 
leadership, performance management systems and several perform 
functions that are non-core to the essential missions of the 
Department.
    where is private waldo: active military in commercial activities
    We also need to focus on DOD's most important employees: its active 
duty military personnel. They are the most expensive personnel, whether 
from a recruiting, training, and retaining standpoint or from a life-
cycle standpoint. Our military should be at the pointed end of the 
spear as much as possible--they are the only ones who can perform that 
role. And yet, we continually hear about the strains on the force, not 
having sufficient dwell time, and needing to cross level personnel to 
make up units.
    Of those 1.3 million serving on active duty, some 220,000 are 
currently stationed overseas or forward deployed in the Middle East or 
Afghanistan. So what are the other one million doing? Where is Private 
Waldo? Some are just back from deployments; some are getting ready to 
deploy. But the 2014 Department of Defense's Federal Activities 
Inventory Reform (FAIR) Act Inventory report reviewing the number of 
active duty military serving in commercial activities showed over 
330,000 active duty military personnel--our most expensive personnel 
asset by far--in jobs that could be done by civil servants or 
contractors. There are several hundred unique descriptions for 
commercial activity positions in the FAIR Inventory reports. Some 
examples include budget support, commissary operations, ambulatory care 
services, contract administration and operations finance and accounting 
services, and stateside supply services. We should not have our most 
capable and expensive military in the rear with the gear instead of at 
the tip of the spear.
      
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    This is another area the Congress and the Department must correct. 
Here, we are using the most expensive personnel to perform activities 
that could otherwise be performed by less expensive personnel or not 
done at all. Furthermore, freeing-up the uniformed personnel makes them 
more available for the inherently governmental and military activities. 
The charts below show the number of military personnel in each 
component serving in commercial activity positions. By conservative 
estimates, if by removing even 10 percent of the 330,563 active duty 
from this category, the Department could free up $5.3 billion for 
combat purposes. This estimate is based on the programming figure for 
active personnel. If you use the fully-burdened annual costs, you would 
save over $10 billion. DOD works hard to improve in this area, but 
unfortunately there are more active military working in commercial 
activities in this most recent report than the previous one.
      
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                              dod overhead
    Let me draw particular attention to the more than 5,000 people 
employed in the Office of the Secretary of Defense, as seen in the 
chart below. We would all agree that serving as the Secretary of 
Defense in the current world is a most difficult and demanding 
undertaking, but we must ask ourselves if he truly needs a staff of 
over 5,000 people. In the early 1960s, when DOD had 2.8 million active 
duty personnel and 1.6 million reservists, there was one Deputy, no 
Unders, and only three Assistant Secretaries. Today, with about half as 
many total military personnel, there is still one Deputy, but five 
Unders, and seventeen Assistants with a proliferation of Deputy Unders, 
Deputy Assistants, Principal Deputies, and so on. And GAO says they do 
not have confidence in the size of OSD as carried on DOD's books. There 
are some estimates that it could be as high as 8,000. For example, the 
chart below differentiates between OSD, OIG, PFPA, and WHS--all which 
could arguably be defined as part of OSD. Altogether, this would put 
the count over 10,000.
      
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    In his 1984 autobiography, Lee Iacocca, the legendary CEO of 
Chrysler Corporation, who successfully turned that company around from 
the brink of extinction in the late 1970s, noted that he had a very 
small headquarters staff at Chrysler--much smaller than he had as a 
senior executive at Ford. But Iacocca argued that with a smaller staff, 
the headquarters was forced to focus on the big issues, did not have 
time to micro-manage, and could not present him with a decision to be 
made with any greater than 80 percent certainty. Iacocca felt that it 
was his job to provide, with his experience and intuition, the 
remaining 20 percent. At Ford, he stated that senior management used 
its much larger staff to provide 95 percent certainty. Iacocca argued 
that achieving such certainty was made by sacrificing speed and 
increasing the cost of overhead, and with a company that was initially 
in serious financial distress, he could not afford the cost burden of 
additional overhead.
    That experience is worth some serious consideration. One could 
strongly argue that the current management structure in the Pentagon is 
too large, too complex, too layered, and heavily invested in overseeing 
processes that are, in general, too slow. In terms of just the number 
of personnel in OSD, the Joint Staff, the Combatant Commands and the 
Defense Agencies there are nearly a quarter million--240,000 people--
and this does not include the very large contractor counts. The costs 
for these people are $113 billion. These organizations have shown 
consistent growth from 2000. Secretary Gates, in his ``overhead 
reduction'' efforts, subsequently supported by Secretary Panetta, 
identified these areas for reductions. However, the ratio of the 
overhead accounts to the combat side of the military is still adverse. 
The tooth-to-tail ratio--which was poor when both Secretaries began 
pushing to improve this area--has unfortunately gotten worse.
      
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    We have also known for years that the military structure of DOD 
institutionalizes layers of management. When you have so many senior 
personnel, more layers follow. For example, when you have the top 
person in a layer, the ``head dawg,'' that person will have a ``deputy 
dawg'' and the ``deputy dawg'' will have a ``deputy, deputy dawg'' and 
so on. DOD needs to cut out some of these management layers--by some 
accounts, there are 28 layers from the action-officer in the military 
department to the Secretary of Defense. This drives huge staffs and 
support personnel which continue to increase.
      
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                             dod logistics
    Another area ripe for review is the overall activity in logistics. 
DOD operates one of the largest logistics enterprises in the world: its 
annual cost is over $170 billion, including supply, maintenance and 
transportation. DOD has over 100,000 suppliers, $96 billion in 
inventory, and is supported by 18 maintenance depots, 25 distribution 
depots, and over 49,000 customer sites. Our logistics enterprise does 
provide a real war fighting advantage, a fact that must be kept in 
mind. Despite much effort to bring DOD's logistics enterprise up to the 
level of today's world-class business practices, it has a long way to 
go. I am currently chairing a task force of the Defense Business Board 
reviewing this area to make recommendations to the Secretary of Defense 
in early 2016.
                       real property maintenance
    DOD also maintains one of the largest property books in the world--
with over 562,000 facilities, on more than 4,800 sites, in all 50 
states, 7 U.S. territories, and 40 foreign countries. The annual cost 
to operate and maintain these facilities is estimated at over $30 
billion a year, but GAO has stated that here, as well there, is 
significant room for improvement. DOD is currently conducting surveys 
to establish how much real estate is needed and how much is excess.
  bringing world class business practices to the department of defense
    It is often pointed out when one suggests that DOD needs to 
significantly improve its management chain of command that DOD is not a 
business--this is correct. But there are world-class business practices 
that are definitely applicable to government, as outlined in the chart 
below:
      
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    This chart lists certain world-class business practices that are 
applicable to DOD, how OSD stacks up against those practices and how 
they could be applied to OSD. This list is very consistent with 
multiple studies that have been done in this area over the decades. 
Several of the points above I have touched on earlier in my testimony, 
such as the need to focus on core functions, reduce layers, tightly 
control overhead personnel, and use performance goals to incentivize 
change, are underscored here.
                         essential first steps
    So what should be done? We must first take three preliminary steps 
to address this problem of large, and seemingly growing, defense 
infrastructure and overhead before any further actions can be taken.
    Step 1: You must establish a definitional agreement on what defense 
infrastructure actually is. Many will argue that some of those problem 
areas mentioned previously are actually tooth, not tail. Others, like 
Business Executives for National Security, will argue the overhead is 
much larger than DOD admits. We need consensus on what is counted as 
infrastructure and overhead. Having addressed the definitional 
challenge, we then need to determine where this infrastructure and 
overhead resides. In other words, where do the people work? And it 
needs to include active military, defense civilians, guard and reserve, 
defense contractors, and FFRDC personnel.
    A particular challenge to this exists in determining total 
contractor personnel in overhead and infrastructure. Currently, there 
is not a data source that fully and accurately captures the exact 
numbers of contractors or where they work. While some data exist, 
contractors are typically paid from O&M accounts. Therefore, their 
exact numbers are not as easily derived as are military personnel--with 
their own appropriations, and civilian FTEs--who are paid through the 
Defense Finance and Accounting System.
    Step 2: After determining who and what comprises infrastructure and 
overhead, and determining with much higher confidence where they work, 
we then need to know what they cost. Not just their salary, but the 
fully-burdened and life-cycle costs of active military, government 
civilians, guard and reserve, contractor personnel, and FFRDC personnel 
supporting these activities.
    It is imperative that we reach an agreement on what constitutes the 
fully-burdened and life-cycle costs of the All-Volunteer Force, taking 
into account all cost elements, including education, health care, and 
future retirement costs. Of equal significance is that the defense 
retiree population is growing and is now at 2.4 million people. They 
are living longer, and their health care costs are growing, and under 
the current system their retirement income is inflation indexed. This 
means that it will be difficult to afford the force of tomorrow as we 
continue to pay large amounts for the force of yesterday. DOD does not 
know and does not track the fully-burdened and life-cycle costs of 
active military personnel, defense civilians, guard and reserve 
personnel, defense contractors, and FFRDCs. Some say because it is too 
difficult--it is difficult--but some suspect that DOD does not want do 
the calculations to reveal the actual costs because of the sticker 
shock.
    The Reserve Forces Policy Board did a year-long study as a FACA 
body, deliberating in open sessions, coordinating in the Department and 
with outside experts like GAO and CBO and made a lengthy report to the 
Secretary of Defense with six major recommendations. The following two 
charts outline what the RFPB found:
      
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    Step 3: Once we have agreed upon definitions, determined work 
locations, and calculated fully-burdened costs, we need to determine 
the right size for the various activities. This is difficult, and we 
might not get it right the first time, but it is not enough to just 
study the issue. With headquarters size, we need to make the same tough 
decision about how much is enough just like with force structure. 
Certainly we should all agree that we cannot allow the status quo to 
continue. There are too many people--active duty, defense civilians, 
guard and reserve, FFRDCs and contractors--working in OSD, JCS, the 
combatant commands, and the fourth estate.
             concrete actions for the committee to consider
    After taking the steps above to establish definitions, identify 
infrastructure, and agree upon metrics, costs, and size, several 
additional steps should follow:

     1.  Establish a firm baseline of headquarters organizations and 
activities including OSD, JCS, Combatant Commands, defense agencies and 
field activities, service headquarters, and commands including layers 
of management and measure reductions through annual reporting of all 
categories of personnel, end strength, and average strength. The FY15 
Defense Manpower Requirements Report (DMRR) provides a breakout of 
personnel strength. It could provide a starting point for validation of 
the baseline. The FY15 estimates could be used as a ceiling for Fiscal 
Year 2016 and beyond, but at a more detailed level. The key is to 
establish a firm baseline and not allow DOD to constantly change it. 
This baseline needs to be the ``allin'' count which does not exist 
today.
     2.  Require DOD to report in the annual Defense Manpower 
Requirement Report all categories of personnel in the overhead and 
infrastructure functions following the agreements reached on 
definitions, size, and cost.
     3.  Require DOD to report in the annual Defense Manpower 
Requirements Report the fully-burdened and life-cycle costs of all 
categories of these personnel in the functions in step 2 above.
     4.  Legislate end-strengths for military, civilians, and 
contractors to be assigned to, and employed by, the various overhead 
and infrastructure functions, once these headcounts and costs are 
firmly established. This is, of course, never a popular undertaking and 
one that DOD will resist. It should be done after careful consideration 
of the potential impacts on outputs required elsewhere, but it is an 
effective way to get numbers down and force the exploration of 
efficiencies. In budgeting, we have found that caps force hard 
discussions about tradeoffs--if decision makers want more money to go 
to one area they must make cuts to others. This discussion about 
priorities needs to happen with overhead personnel as well. Once 
Congress has determined there is sufficient discipline in this area, 
any caps could be eliminated.
     5.  Reduce management layers in all HQ and overhead functions; 
reduce the number of Undersecretaries, Principal Deputies, Deputy 
Assistants, Deputy Unders, and other layers, while improving the 
supervisor to led ratios. Eliminate the new Undersecretary of 
Management and Information and the two Deputy Undersecretaries before 
they go into effect in January 2017. In their place, create one 
Assistant Secretary for Command, Control, Communication, Computers and 
Cyber. In a pilot program, take several of the defense agencies and 
replace active duty military leaders with proven civilian private 
sector leaders with contract performance goals and incentives.
     6.  Review the Goldwater-Nichols legislation in the context that 
the joint approach is now accepted and our most senior military leaders 
no longer need all the strictures of the legislation. I also recommend 
the terms of the Chairman and Vice Chairman be converted to one four-
year term (vice two two-year terms) to ensure their independence and 
ability to always offer their professional military judgments. I would 
stagger the terms so they do not turn over at the same time and that 
will require either an extension or a short-tour for one at some point. 
As part of the additional flexibilities and non-traditional career 
options that are reported to be part of the Force of the Future 
initiative, apply more flexibility to joint duty management and joint 
education by removing some of the highly restrictive gates.
     7.  Approve another round of BRAC using an improved process. As 
difficult as this is, and as unpopular, DOD needs to get rid of its 
excess facilities. Despite earlier BRAC rounds, DOD believes the excess 
to be in the range of 20 percent. Carrying those unneeded facilities 
costs billions of dollars every year.
     8.  Reauthorize and revise the A-76 process. Congress should lift 
the moratorium on A-76 Public-Private Competitions. But even before the 
moratorium, we had many governmental commercial operations and depots 
that were protected by the A-76 process. In brief, contractors bidding 
for work had to report and account for the fully-burdened costs of 
their work force, but in general the government did not--giving it an 
advantage in such competitions. At the very least, if the moratorium is 
lifted, the playing field for such competitions needs to be leveled. As 
an inherently OMB function, over the years they have written rules and 
regulations that decidedly favor the government. Therefore, fewer and 
fewer A-76 studies were done and potential contractors did not want to 
waste money and time bidding on something where the ``fix was in.'' 
Congress did not want to take any chances on outsourcing, so the ban 
went into effect.
     9.  Eliminate duplications. There are numerous places in the 
Pentagon where we have significant duplications of effort. An obvious 
place is in the overlaps that exist between OSD and the Joint Staff. 
For example, there is overlap between OSD Policy and J-5 on the Joint 
Staff, as well as other areas including J-1, J-6, and J-8. In addition, 
there is the common view that the formal requirements process takes too 
long. Accordingly, eliminating the JROC should be considered as it adds 
a significant burden to the process and produces little of value with 
its highly bureaucratized and complex JCIDS process. All the personnel 
and paper work and bureaucracy associated with these activities should 
be deleted. Creating the JROC was an aspiration of the Goldwater-
Nichols Act, but in my view it would be one of those areas where, as 
John Hamre mentioned, we just did not quite get it right despite 
serious efforts by recent Vice-Chairmen to improve it.
    10.  Reduce management layers. Between OSD, the Joint Staff, 
Service Secretariats, Military staffs, the Combatant Commanders and 
their staffs, and the various standing groups and committees, such as 
the JROC and the Command Action Groups, there are far too many 
management layers populated by well-meaning officials and officers who 
feel they have a major role in any issue--large or small. In general, 
with such rich staffing there is a natural tendency towards micro-
management where macro-management is required. As stated earlier, the 
trend in the private sector, and one quite visible in the major players 
in the defense industry, is towards small corporate staffs that provide 
the oversight and guidance that can only come from the top, but a 
transfer of basic management authority to line units. On the 
battlefield the services have learned that modern conflict requires 
that authority, and responsibility, be pushed down to lower levels. 
They call it ``powering down.'' It needs to be practiced more widely in 
the Pentagon. At a minimum, we ought to put a statutory limit on the 
number of Deputy, Under, and Assistant Secretaries in OSD and in the 
services, and collapsing the service staff would remove some 
duplication. Any increases must be offset by decreases.
    11.  Carefully examine business best practices. In so many ways, 
the Department of Defense is a unique organization. It is, by far, the 
largest department of government. Defense infrastructure costs are 
essentially larger than the GDP of all but forty countries. But, there 
are private firms that also have large scale operations, such as Wal-
Mart, diverse international operations, such as Exxon, and extensive 
supply chains supporting highly distributed product lines, such as 
Trader Joe's. The DOD needs to learn from these organizations, which 
have to compete in the global economy, keep costs low, and deliver 
products ``on time and on cost.'' Several years ago a senior Army 
general asked his head logistician what was the order-to-ship time for 
a repair part. The logistics officer proudly announced it had been 
reduced to 15 days, to which his superior replied, ``General Motors' 
time is 15 hours. So why can't we do that?'' Although the incentive 
structures between the public and private sectors are much different, 
performance objectives in similar functions should produce positive 
results.
    12.  Revise the executive branch and Senate processes for 
recruiting, confirming, and appointing personnel for key management 
positions. One of the major tenets of the Packard Commission, in 
addition to streamlining the decision processes, reducing layers, and 
eliminating paperwork and regulations, was recruiting and confirming 
personnel who had extensive experience running large, complex 
organizations and technical programs for the key management positions 
in the Department. We need to remove all the disincentives for 
personnel with those qualifications to serve.
                               conclusion
    I want to close by reiterating that none of my comments are meant 
as criticism of the dedicated, patriotic people who come to work every 
day across the Department of Defense with the intention of doing their 
part to keep the country safe. One senior officer recounted that on 
September 12, 2001, hundreds of military and civilian employees 
reported to work at the Pentagon even though the building was still on 
fire. They went to their offices to salvage what they could, gather up 
classified materials that had been scattered about by the explosion, 
and essentially, as we say in the military: ``Charlie Mike--Continue 
Mission.'' We are all proud that such people serve the nation. And this 
dedication is mirrored in the Congressional staffs as well.
    I applaud the Committee for taking a hard look at this problem. As 
I mentioned, the growth in defense infrastructure has been quite 
similar and continuous through both Republican and Democratic 
administrations. The tendency has always been to add rather than 
subtract. And as we have added more staff, more layers, and more 
infrastructure, we have slowed the decision-making process, expanded 
the number of players, and made the overall system more risk-averse at 
a time where we need to allow the assumption of more risk. We need to 
reverse the process. The test for making infrastructure reductions 
should not be ``beyond a reasonable doubt'' as it is today, but a 
``preponderance of the evidence.'' We need to take some risks to make 
reductions, recognizing that some may not stand the test of time. But 
if we wait for certainty, we will have waited too long and imperiled 
our war fighting forces as they continue to decrease.
    We must distinguish between working hard and working well. And with 
the fiscal pressures we face, with the strategic challenges erupting 
all around us, with the operational demands accumulating on the force, 
we can no longer afford the luxury of a growing imbalance between what 
we must field operationally and what we field managerially. We need to 
generate more units--more combat power--from our military end-strength 
and the fiscal resources associated with it, not less. And today we are 
fielding less.
    Thank you very much for offering me the opportunity to share my 
views with you.

    Chairman McCain. Thank you.
    Mr. Spencer.

 STATEMENT OF RICHARD V. SPENCER, FORMER MEMBER OF THE DEFENSE 
                         BUSINESS BOARD

    Mr. Spencer. Chairman McCain, Ranking Member Reed, 
distinguished members of the committee, I'm really invigorated 
to be here to testify before the Senate Armed Service Committee 
addressing the topic of managing the DOD.
    My testimony today is based on my time in the private 
service--sector, but, more recently, 6 years on the Defense 
Business Board [DBB], most recently as vice chairman.
    You have asked what primary attributes make an outstanding 
organization sustainable. In a recent task completed by the DBB 
2 years ago, we interviewed about 24 Fortune 250 CEOs who had 
led critical turnarounds for their respective companies. In the 
clear supermajority of cases, they stated that their success 
was based upon laser-like focus on the mission of the 
organization.
    When it comes to the subject of enhancing the operation of 
the Department of Defense, my point of view is concentrated on 
one thing: the mission. The mission of the Department of 
Defense is to provide the military forces needed to defer a war 
and to protect the security of our country. The Department is 
charged to protect the citizens of the United States of 
America. The Department is not an entity to support full 
employment nor a petri dish for managerial or social 
experimentation. And today it certainly cannot afford to be all 
things to all people as it strives to support its missions.
    When corrective or construction actions are applied within 
the Department, we must keep the mission clearly in focus. 
Recent studies have shown there are numerous operational areas 
within the DOD where equal, if not better, external solutions 
can be provided more effectively and more efficiently, but they 
will involve heavy lifting and, in many cases, unsavory 
political decisions. From my point of view, fortitude and 
leadership are the two most important ingredients needed to 
enhance the operation of the DOD.
    As an early outsider attempting to understand the building 
and its attendant issues of an ecosystem so immense in size, 
diversity, and span, it was akin to drinking from a fire 
hydrant. One walked away with an appreciation for the 
organization's communications systems, neurosystems, digestive 
and equally important immune systems. What impressed me the 
most, both historically and in the present, is the core 
competency of the Department's ability to solve problems 
associated with its mission. Since inception, the Department 
has been tasked with the excruciating and amazing goals--
daunting goals. In the early years, they were trailblazers, 
providing unique successful solutions for their organization 
that was similar to none. But, therein lies the rub today. 
Progress in the private sector has increased at a logarithmic 
rate. The solutions that were applied inside the building, in 
many cases, were immortalized, with no call for current 
benchmarking or impact assessment. And, as the private sector 
became equally as good, if not better, industry-specific 
problem-solvers, there was little ability in the building, nor 
cultural inquisitiveness, to compare core competencies.
    Cases in point. The commissary system was a solution to 
provide basic consumables to bases and posts that were off the 
beaten path. DOD [Department of Defense] education was a 
solution for dependent education during the days of 
segregation. DLA [Defense Logistics Agency] was borne from a 
diverse cabal of buyers and distributors of resources. 
Maintenance depots, created to repair unique systems. Research 
labs, personnel management, the cases are numerous. That was 
then. This is now.
    Rather than attempt to boil the ocean, let's look at a few 
example of actions that can be taken internally and externally:
    You heard, earlier this month, that one should not expect 
candlestick-makers to develop electricity. In many cases, 
external forces are needed to motivate or--for organizations to 
change. There are few example of groups that have voluntarily 
downsized themself or self-selected to cease doing business. 
This committee and the Congress have the ability to provide 
some elegantly clean solution to certain issues at hand while 
freeing resources to be used more--on more meaningful 
initiatives within the DOD.
    Here are some topics to consider:
    Depot maintenance. The uniqueness of depot-maintained 
equipment has devolved to the sum of the standardized systems: 
the engine in a tank, the transmission in a tug. Let those 
organizations having expertise in the systems provide the 
needed maintenance. The mission of the DOD is security, not 
repair.
    Commissaries. The attachment that was circulated to you all 
in the Washington Post had a response from one retailer who was 
asked if they could provide a sustainable solution for the 
commissary networks in CONUS [Contiguous United States]. Here 
is an example of an organization with a well-developed core 
competency being able to offer an equal, if not better, service 
more efficiently than the existing system. The mission of the 
DOD is defense, not retailing.
    Defense Logistics Agency. Arguably one of the better- run 
organizations in the DOD, but there's room for improvement. The 
DBB group addressing DOD logistics interviewed a multitude of 
organizations that were highly dependent upon their supply 
chain: retailers, manufacturers, assemblers. And their 
responses were constant. Supply-chain management is a critical 
contributor to the value of the enterprise. As an example, upon 
restructuring their supply chain and instituting strategic 
sourcing, IBM believes their logistical efficiency adds $16 
billion in the value to the--of their enterprise while 
providing a competitive advantage over others in their 
industry. In every case, we saw there was one person ultimately 
responsible for the organization's logistics. The DOD should 
strive for the same efficiencies and have a chief logistic 
officer combining both the acquisition and distribution 
resources under one command. The mission of the DOD is to deter 
war, not to maintain the status quo.
    DOD Education Activity [DODEA] in CONUS. It can be said 
that DODEA CONUS is the largest school district in the country. 
It has served its purpose well. But, is it needed now? The 
argument has been put forward that there would be mutual 
benefit from having military families integrated with their 
civilian counterparts in communities. The mission of the DOD is 
security, not education.
    BRAC. Anytime the DOD needs to dispose of assets, it should 
be considered and acted on appropriately. It is the right thing 
to do. The DOD mission is to protect citizens of the United 
States, not provide local employment.
    Let me quickly address what I believe is one of the largest 
internal issues within the Department. Successful organizations 
state that the quality of their employees is the driver for 
their performance. Human capital is a critical component of 
success. The DOD, still using the 1950 departmental title of 
``Personnel,'' needs to address this issue in earnest. I don't 
want to steal any thunder from my colleague from CVS, who is an 
expert in the area, but we do owe it to the Department to put a 
light on the topic.
    On the civilian side, we need to adopt meaningful 
management performance measurement tools and educate managers 
on how to use those tools in order to craft a high- performance 
government service and senior executive service cadre. To quote 
a hard-charging GS-14 we interviewed, How can the building 
compete for the best and brightest when the strategy for long-
term success and promotion is, ``Just don't die"?
    On the uniformed side, P&R [Personnel and Readiness] needs 
to provide the tools and technologies, such as performance-
based benefits optimization, to the services so they have the 
ability to understand and react to the needs of the 
servicemember on a realtime basis, just as it's done in the 
private sector today.
    These topics are simply the tip of the iceberg. We must 
move the conversation to action in order for the Department to 
effectively and efficiently support their mission.
    I stand by to assist in any way.
    [The prepared statement of Mr. Spencer follows:]

                 Prepared Statement by Richard Spencer
    Chairman McCain, Ranking Member Reed, distinguished members of this 
committee, I am invigorated to testify before the Senate Armed Services 
Committee addressing the topic ``Managing the DOD''.
    Upon graduating from a liberal arts college with a degree in 
economics in 1976 I entered the Marine Corps and spent six and a half 
years on active duty. I then transitioned out and entered the private 
sector building a career that was focused on .finance and operations. 
In February of 2008, after regular prodding from fellow Marine and 
friend Sen. Jim Webb, I found myself in the SecDef's Conference room as 
a member of the Defense Business Board. The following six years proved 
to be one of the most exciting and educational experiences to which I 
have been exposed. I was involved with task group assignments ranging 
from logistics to technology to personnel. I was ``lucky'' enough to 
chair reviews of the uniformed members benefits and retirement systems. 
The outcomes range the full gambit from success to silence, but in 
every case the conversation was started, and as this committee hearing 
proves, the conversation continues.
    You have asked what primary attribute makes outstanding 
organizations sustainable. In a recent task completed by the DBB two 
years ago we interviewed about 20 Fortune 250 CEO's who had lead 
critical turn arounds for their respective companies. In the clear 
super majority of cases they stated that their success was based upon a 
laser like focus on the mission of the organization. When it comes to 
the subject of enhancing the operation of the Department of Defense my 
point of view is concentrated on one thing: the mission. The mission of 
the Department of Defense is to provide the military forces needed to 
deter war and to protect the security of our country. The Department is 
charged to protect the citizens of the United State of America. The 
Department is not an entity to support full employment, nor is it a 
petrie dish for managerial or social experiments, and today it 
certainly cannot afford to be all things to all people as it strives to 
support its mission. When corrective or constructive actions are 
applied within the Department we must keep the mission clearly in 
focus. Recent studies have show that there are numerous operational 
areas within the DOD where equal if not better external solutions can 
be provided more effectively and more efficiently, but they will 
involve heavy lifting and in many cases unsavory political decisions. 
From my point of view fortitude and leadership are the two most 
important ingredients needed to enhance the operation of the DOD.
    As an early outsider, attempting to understand ``The Building'' and 
the attendant issues of an ecosystem so immense in size, diversity and 
span was akin to drinking from a .re hydrant. One walked away with an 
appreciation for the organization's communication, neuro, digestive and 
equally important immune systems. What impressed me the most, both 
historically and presently, is the core competency of the Department's 
ability to solve problems associated with it's mission. Since inception 
the Department has been tasked with the execution and support of 
daunting goals. In the early years they were trail blazers, providing 
unique, successful solutions for their organization that was similar to 
none. But therein lies the rub today. Progress in the private sector 
increased at a logarithmic rate. The solutions, in many cases, were 
immortalized with no call for current benchmarking or impact 
assessment, and as the private sector became equally as good if not 
better industry specific problem solvers there was little ability in 
the Building nor cultural inquisitiveness to compare core competencies. 
Cases in point: the Commissary system was a solution to provide basic 
consumables to bases and posts that were off the beaten path, DOD 
Education was a solution for dependent education during the days of 
segregation, DLA was born from a diverse cabal of buyers and 
distributors of resources, maintenance depots created to repair unique 
systems, research labs, personnel management the cases are numerous. 
That was then, this is now.
    Rather than attempt to boil the ocean lets look at a few examples 
of actions that can be taken internally and externally. You heard 
earlier this month that one should not expect candlestick makers to 
develop electricity. In many cases external forces are needed to 
motivate organizations to change. There are few examples of group's 
that have voluntarily downsized themselves or self selected to cease 
doing business. This committee and the Congress have the ability to 
provide some elegantly clean solutions to certain issues at hand while 
freeing resources to be used in more meaningful initiatives within the 
DOD. Here are some topics to consider:
    Depot Maintenance--The uniqueness of depot maintained equipment has 
been devolved to the sum of the standardized systems (the engine in a 
tank, the transmission in a tug). Let those organizations having 
expertise in the systems provide the needed maintenance. The mission of 
the DOD is security not repair.
    Commissaries--The attachment is a response from one retailer who 
was asked if they could provide a sustainable solution for the 
Commissary network in CONUS. Here is an example of an organization with 
a well developed core competency being able to offer an equal if not 
better service more efficiently than the existing system. The mission 
of the DOD is defense not retailing.
    Defense Logistics Agency--Arguably one of the better run 
organization in the DOD community, but there is room for improvement. 
The DBB task group addressing DOD Logistics interviewed a multitude of 
organizations that were highly dependent upon their supply chain 
(retailers, manufacturers, assemblers) and their responses were 
constant; supply chain management is a critical contributor to the 
value of the enterprise. As example, upon restructuring their supply 
chain and instituting strategic sourcing IBM believes their logistical 
efficiency adds $16B in value to the enterprise while providing a 
competitive advantage over others in their industry. In every case we 
saw that there was one person ultimately responsible for the 
organization's logistics. The DOD should strive for the same 
efficiencies and have a Chief Logistics Officer combining both the 
acquisition and distribution of resources under one command. The 
mission of the DOD is to deter war not retain the status quo.
    DOD Education Activity (CONUS)--It can be said that DUODENA (CONUS) 
is the largest school district in the country. It has served its 
purpose well, but is it needed now? The argument has been put forward 
that there would be mutual benefit in the having military families 
integrated with their civilian counterparts. The mission of the DOD is 
security not education.
    BRAC--Any time the DOD is need to dispose of assets it should be 
considered and acted on appropriately. It is the right thing to do. The 
DOD mission is protect the citizens of the United States not provide 
local employment.
    Let me quickly address, what I believe is, one of the largest 
internal issue within the Department. Successful organizations state 
that the quality of their employees is the driver for their 
performance. Human capital is a critical component of success. DOD, 
still using the 1950 departmental title of Personnel, needs to address 
this issue in ernest. I do not want to steal any thunder from my 
colleague from CVS who is an expert in this area, but we owe it to the 
Department to put a light on topic. On the civilian side we need to 
adopt meaningful management performance measurement tools, and 
education managers on how to use the tool in order to craft a high 
performance GS and SES cadre. To quote a hard charging GS-14 we 
interviewed ``How can the Building compete for the best and brightest 
if the strategy for long term success and promotion is ``Just Don't 
Die''? On the uniformed side P&R needs to provide the tools and 
technology, such as performance based benefits optimization, to the 
services so they have ability to understand an react to the needs of 
the service member on a real time basis just as the private sector does 
today.
    These topics are simply the tip of the iceberg. We must move the 
conversations to action in order for the Department to efficiently and 
effectively support their mission. I stand by to assist in any way 
possible.

    Chairman McCain. Thank you.
    Ms. Bisaccia.

  STATEMENT OF LISA G. BISACCIA, EXECUTIVE VICE PRESIDENT AND 
     CHIEF HUMAN RESOURCES OFFICER, CVS HEALTH CORPORATION

    Ms. Bisaccia. Thank you. Chairman McCain, Ranking Member 
Reed, and distinguished members of the committee, thank you for 
the opportunity to testify today.
    Chairman McCain. Would you correct my pronunciation, 
please?
    Ms. Bisaccia. ``Bizotchia.''
    Chairman McCain. ``Bizotchia.'' Thank you very much.
    Ms. Bisaccia. Thank you.
    It's an honor to be able to speak to you about some of the 
organizational and operational best practices at CVS Health, 
and our hope is, it will may--it may provide some key learnings 
as you consider reform of the Department of Defense.
    As our company has grown from a regional drugstore to a 
fully integrated national pharmacy healthcare provider, we've 
learned valuable lessons about how to make a complex 
organization nimble and effective.
    To give you a glimpse into how our company developed into 
the diverse enterprise that it is today, let's consider where 
we began. In 1963, we started out selling name-brand health and 
beauty merchandise at discount prices when brothers Sid and 
Stanley Goldstein opened our first store in Lowell, 
Massachusetts. In 1967, we began building trusted relationships 
with patients when we opened our first CVS pharmacy in Rhode 
Island, where we are still headquartered today.
    In addition to our 7,900 retain drugstores, today CVS 
Health brings together CVS/Caremark, our pharmacy benefit 
management business; MinuteClinic, our 1,000 walk-in retail 
clinics; Omnicare, our senior pharmacy care business; and our 
expanding specialty pharmacy services. In all, we employ more 
than 215,000 colleagues, with major hubs in Scottsdale, 
Arizona; Irving, Texas; and Northbrook, Illinois; in addition 
to our home in Rhode Island. We work in almost every State 
represented here today.
    It's worth noting that CVS Health is a proud employer of 
veterans following their service, as well as those still 
serving in the National Guard and Reserve. We recognize the 
value of military service and know that our veterans' skills 
and experience are unparalleled. And, as Senator Reed noted, 
earlier this year we were honored to receive the Secretary of 
Defense Employer Support Freedom Award, the highest honor the 
Department gives to employers for outstanding support of 
employees who are National Guard and Reserve members.
    As we think about the drivers behind our success, we know 
the quality of our workforce, including our colleagues who are 
veterans, has been an important driver of that success. What 
have been some of our other key lessons learned? First, 
developing a culture around our company's purpose. Our 
president and CEO, Larry Merlo, made this concept real for all 
of our colleagues when he championed our purpose, which is 
helping people on their path to better health. This simple 
purpose, just eight words, has had the power to unite our 
colleagues behind a common cause. Our purpose has permeated our 
organization, improved colleague engagement, which, in turn, 
improves all of our business outcomes. Embracing our purpose 
from the top down has been an example of the type of leadership 
we prioritize in career development for our colleagues, which 
is another core principle for us.
    Cultivating a pipeline of leaders who can inspire is woven 
into our business processes. We hold our current leaders 
responsible for coaching the next generation of talent. And 
we've created programs to develop those leaders and keep them 
engaged in their careers at CVS Health. With more than 50 
development and training programs focused on career 
advancement, we've made producing high-quality leaders a long-
term investment. We use coaching, mentoring, and classroom 
programs to hone problem-solving, strategic thinking, and 
leadership capabilities for the next generation of CVS Health 
leaders.
    As we've grown, a third fundamental lesson has been the 
value of adopting an enterprisewide viewpoint. Seeing ourselves 
as one pharmacy innovation company rather than as separate 
businesses under one roof has helped us take advantage of the 
synergies in our business, and has helped us to innovate. For 
example, when two of our lines of business came together, it 
gave us a different perspective on our plan members, and we 
were able to deliver what they want: the choice of receiving 
their maintenance medications by mail or picking them up at any 
of our CVS pharmacy retail locations for the same price. 
Although there were significant logistics to work out on the 
back end, creating our maintenance choice program was the 
successful result of an enterprise wide mindset that pioneered 
a new way to serve our customers.
    At CVS Health, we deeply value purpose, leadership, and 
enterprise thinking. And I hope that there are ways that these 
lessons can benefit this committee as you consider the best 
ways to motivate, develop, and inspire the men and women who 
serve our country at the Department of Defense.
    Thank you, Mr. Chairman. And I'm happy to answer any 
questions.
    [The prepared statement of Ms. Bisaccia follows:]

                  Prepared Statement by Lisa Bisaccia
    Chairman McCain, Ranking Member Reed, and distinguished Members of 
the Committee, thank you for the opportunity to testify today.
    It is an honor to be able to speak to you about some of our 
organizational and operational best practices that may provide some key 
learnings as you consider reform of the Department of Defense.
    As our company has grown from a regional chain drug store to a 
fully integrated national pharmacy health care provider, we've learned 
valuable lessons about how to make a complex organization nimble and 
effective. To give you a glimpse into how our company has developed 
into the diverse enterprise it is today, consider where we began.
    In 1963, we started out selling name-brand health and beauty 
merchandise at discount prices, when brothers Sid and Stanley Goldstein 
opened our first store in Lowell, Massachusetts.
    In 1967, we began building trusted relationships with patients when 
we opened our first CVS/pharmacy in Rhode Island, where we are still 
headquartered today.
    In addition to our 7,900 retail drugstores, today CVS Health brings 
together: CVS/caremark, our pharmacy benefit management business; 
MinuteClinic, our 1,000 walk-in retail clinics; Omnicare, our senior 
pharmacy care business; and our expanding specialty pharmacy services.
    In all, we employ more than 215,000 colleagues, with major hubs in 
Scottsdale, Arizona; Irving, Texas and Northbrook, Illinois, in 
addition to our home in Rhode Island. We work in almost every state 
represented here today.
    It is worth noting that CVS Health is a proud employer of veterans 
following their service, as well as those still serving in the National 
Guard and Reserve. We recognize the value of military service and know 
that our veterans' skills and experience are unparalleled.
    Earlier this year CVS Health was honored to receive the Secretary 
of Defense Employer Support Freedom Award, the highest honor the 
department gives to employers for outstanding support of employees who 
are National Guard and Reserve members.
    As we think about the drivers behind our success, we know the 
quality of our workforce--including our colleagues who are veterans--
has been an important driver of success.
    What have been some of our other key lessons-learned? First, is 
developing a culture around our company's purpose.
    Our President and CEO Larry Merlo made this concept real for all 
our colleagues when he championed our purpose which is ``helping people 
on their path to better health.''
    This simple purpose--with just eight words--has had the power to 
unite our colleagues behind a common cause. Our purpose has permeated 
our organization and improved colleague engagement, which in turn 
improves our business outcomes.
    Embracing our purpose from the top down has been an example of the 
type of leadership we prioritize in career development for our 
colleagues, which is another core principle for us.
    Cultivating a pipeline of leaders who can inspire is woven into our 
business processes. We hold our current leaders responsible for 
coaching the next generation of talent. And we've created programs to 
develop those leaders and keep them engaged in their careers at CVS 
Health.
    With more than 50 development and training programs focused on 
career advancement, we've made producing high-quality leaders a long-
term investment. We use coaching, mentoring and classroom programs to 
hone problem solving, strategic thinking and leadership capabilities 
for the next generation of CVS Health leaders.
    As we've grown, a third fundamental lesson has been the value of 
adopting an enterprise-wide viewpoint. Seeing ourselves as one pharmacy 
innovation company, rather than as separate businesses under one roof, 
has helped us take advantage of the synergies in our business model and 
innovate.
    For example, when our two lines of business came together, it gave 
us a different perspective on our plan members and we were able to 
deliver what they want: the choice of receiving their medications by 
mail, or picking them up in any of our CVS/pharmacy locations for the 
same price.
    Although there were significant logistics to work out on the back 
end, creating our Maintenance Choice program was the successful result 
of an enterprise-wide mindset that pioneered a new way to serve our 
customer.
    At CVS Health, we deeply value purpose, leadership and enterprise 
thinking, and I hope that there are ways these lessons can benefit this 
Committee, as you consider the best ways to motivate, develop, and 
inspire the men and women who serve our country at the Department of 
Defense.
    Thank you, Mr. Chairman. I'll be happy to answer any questions.

    Chairman McCain. Thank you very much.
    You know, one of the things that confounds some of my 
constituents when I tell them is that we've never been able to 
get an audit of the Department of Defense. I guess I have two 
questions. One, isn't that a fundamental requirement if--for 
reform? And how do we get it? Do we have to go to Silicon 
Valley? And, second, which is connected to that, How do we 
get--how do we motivate qualified people to leave very well-
paying, comfortable positions in private industry and come and 
be part of the Department of Defense? Without them, I'm not 
sure we can successfully implement many of the reforms that are 
advocated here.
    I guess we'd begin with you, David.
    Mr. Walker. Thank you, Mr. Chairman.
    Well, as Richard mentioned, I think the mission of the 
Defense Department is to protect the national security 
interests of the United States. And I think the people in the 
Defense Department have been focused on that, first and 
foremost. And, quite frankly, they haven't been focused as much 
with regard to economy, efficiency, effectiveness, and 
accountability, including with regard to financial management. 
They've taken it more seriously within the last several years. 
They've made more progress within the last several years than 
they did, you know, for the decade prior to that. At the same 
point in time----
    Chairman McCain. I've only got 5 minutes, now, David.
    Mr. Walker. Sure.
    [Laughter.]
    Mr. Walker. At the same point in time, they do not have--
they have thousands of nonintegrated legacy information systems 
that do not communicate with each other, they do not have 
adequate internal controls. And you touched on a very important 
point. They don't have an adequate number of people within the 
Department of Defense who have the requisite knowledge and 
experience to know what needs to be done and to get it done. Do 
you need contractor assistance? Absolutely. But, you need a 
certain number of people within the Department who have the 
relevant experience, who can manage it on a day-to-day basis.
    One of the things I mentioned in my testimony is, the 
Secretary has the authority to appoint people for term 
appointments. And I think that, in the area of financial 
management, as an example, information technology being 
another, you should use that authority to try to take people 
who have had successful business careers--for example, partners 
in international accounting firms who may have auditing 
experience and financial management experience, who have made 
money, and who want to spend a period of time--let's say 3 
years to 5 years--to serve their country. I think there are 
supplies of people like that, that could be tapped to be 
embedded within the Department of Labor--pardon me--Department 
of Defense. And I think that that's something that needs to be 
pursued much more aggressively than it has been in the past.
    Chairman McCain. Thank you.
    General?
    General Punaro. Mr. Chairman, on the ``How do you get good 
people in government in these top positions?"--I believe you 
could recruit a Dave Packard or Norm Augustine if you told 
them, ``We're going to bring you in, you're going to run this 
$48 billion logistics enterprise called DLA''----
    Chairman McCain. You know--go ahead, but--I think you could 
get the head guy, but what about others that--you know, you 
need more than----
    General Punaro. Well, if you----
    Chairman McCain. Go ahead.
    General Punaro. Mr. Chairman, if you get the head guy, and 
you give them--allow them to put a lot of their assets in a 
true blind trust, which I believe you could do, have different 
divestiture rules and things like that, a more speedy vetting 
process in the executive branch, they would be able to bring in 
other people below the levels to do the same kind of things. 
But, the most important thing would be, they have to understand 
they're going to be able to have a meaningful job and make 
meaningful reforms. And I truly believe you would motivate 
people like that to come in. There's too many disincentives 
now.
    Chairman McCain. What about the audit?
    General Punaro. On the audit, I mean, you've got to the 
audit expert right here. I know the Department is struggling 
with that.
    Chairman McCain. For 15 years.
    General Punaro. Right. And they have not been even able to 
get the Statement of Budgetary Resources audited. And when 
Peter Levine testified before this committee, I think he gave 
the honest answer that he was very skeptical that the 
Department would be able to meet their internal deadlines. And 
I think the Congress has just got to keep that unrelenting 
pressure on them.
    Chairman McCain. Doesn't that mean bringing in some outside 
organization, like a good, crack outfit in Silicon Valley, to 
try to tackle it themselves? I don't--obviously, internally, it 
hasn't worked.
    General Punaro. The external audit firms that audit the 
for-profit companies have tremendous amount of expertise and 
could be brought to bear to help the Department, in my 
judgment.
    Chairman McCain. Mr. Spencer.
    Mr. Spencer. I would echo both David and Arnold's comments. 
Having simply been exposed for my first time, coming on the 
Defense Business Board, the disclosures and the--which, at the 
Defense Business Board, aren't nearly a onerous, but, I mean, 
we have to streamline the ability for private sector to come 
into the system. They're out there. The people are out there. 
They want to help. We've been wandering around, looking for 
candidates on the Board. They are there. When they look at what 
is encumbering to enter the system, they shy away.
    Chairman McCain. And the audit?
    Mr. Spencer. The audit, we talked a little bit about this 
earlier. I think a streamlined way is just to do the actual 
consolidated audit. We're working on building up to the final 
audit, which is the way it is done in the private sector. But, 
I think, for the matter of expedience, what you really want as 
a tool is the audit of the consolidated entity, and that's what 
should be audited, without getting into too much technical 
jargon in auditing. But, we're spending so much time and money 
working our way up--you can do a buildup and then audit the 
actual consolidated entity. And it is needed for control and 
management.
    Mr. Walker. Mr. Chairman, as a CPA [Certified Public 
Accountant]----
    Chairman McCain. I've got to----
    Mr. Walker.--could I come back on that real quick?
    Chairman McCain. I've got to go to Ms. Bisaccia, and then--
--
    Mr. Walker. Sure.
    Chairman McCain. We'll come back.
    Mr. Walker. Yes, sir.
    Chairman McCain. Thank you.
    Ms. Bisaccia. So, what we have found at CVS Health, 
although we are a private company that certainly has more 
compensation levers to pull than the government might, we have 
found that the motivators that really drive change in our 
organization are not compensation, but, in fact, are much more 
intrinsic: the desire for public--professional development, the 
desire to be part of something bigger than yourself to align 
with a purpose and make a difference and make an impact, the 
desire to have full accountability for something and to own 
something. So, what we encourage with our executives and with 
our emerging leaders is to feel accountable for enterprise 
results while delivering on your local portfolio. And we 
stress, in fact, the need to align yourself with the company's 
purpose and connect it to your work.
    In terms of the audit, we are a metric-driven company. It 
is not just financial, it's operational; it's people results, 
as well. And our leaders are only successful if they own all 
their metrics, if they know their numbers, if they're able to 
speak to their whole portfolio of numbers, and, more 
importantly, explain any variances and do something about them. 
So, what that has required is a significant investment in 
measurement tools, including outside support from big-four 
accounting firms and other partners. But, the ownership is 
internal.
    Chairman McCain. Very quickly, David.
    Mr. Walker. Thank you, Mr. Chairman.
    As a CPA, I know a little bit about auditing. I believe 
that one of the things that needs to be considered is to look 
at auditing the consolidated financial statements of the DOD 
rather than individual services and rather than the individual 
fourth-estate entities. You have to have a comprehensive audit 
plan that looks vertically at the organizations, horizontally 
at the line items and the systems. But, if you approach it this 
way, then, (a) you're going to eliminate a lot of 
intragovernmental activities; secondly, you're not going to 
have to define reporting entities; thirdly, the level of 
materiality is going to be much higher with regard to the work 
the auditors have to do. And I think that it would be easier to 
accomplish, and we'd be able to free up resources for 
performance management, cost accounting, internal controls, the 
things that, quite frankly, are most important in order to 
accomplish the objectives of the Department.
    Chairman McCain. Senator Reed.
    Senator Reed. Well, thank you very much.
    It strikes me that the Department of Defense today is the--
an industrial model, and we're in a post-industrial age. And it 
was quite effective in the '50s, you've pointed out. And so, 
how do we sort of make that transition? The--my sense--and 
again, the industrial model is hierarchical. And, guess what? 
The military is hierarchical. It's a lot different.
    So, starting with Ms. Bisaccia, you know, How do--you have, 
I would assume, a much more sort of flat organization, the 
ability to work around, versus the military. So, you might 
comment, and then everyone else can comment, Is that one of the 
big problems we're facing, even if we change some rules of this 
hierarchy?
    Ms. Bisaccia. At CVS Health, what we found is, we moved 
from a pharmacy drugstore chain that had a very hierarchical 
model, in terms of vice presidents, regional managers, district 
managers--that, once we expanded our business commitment and 
once we came more diverse, we needed to look horizontally as 
well as vertically, and we needed to realize that the key to 
success as an enterprise was collaboration and shared 
resources, that we could no longer count on owning everything 
we needed to get our particular portfolio done, that, in fact, 
we needed to share resources across the enterprise and 
frequently make difficult decisions about what to prioritize. 
And, in fact, some businesses found that their needs had to be 
subordinated to those initiatives which benefited the 
enterprise. It's a difficult process. It goes beyond budget. 
But, what we have focused on is what's best for the company as 
a whole and then, as a leadership team, aligning behind that, 
in terms of making the decisions to support those priorities.
    Senator Reed. Mr. Spencer--I'll go right down the line--Mr. 
Spencer, please. And----
    Mr. Spencer. I think you----
    Senator Reed.--I have one other question.
    Mr. Spencer.--you hit the nail on the head, Senator. If you 
were to just take a look at one probably big lever that you 
could really change the organization over across the river, 
performance metrics on the civilian side. The military has had 
it for years. The fitness report system. Yes, it has some 
flaws, but it works. Yes, there's a performance management 
system on the civilian side, but I think there needs to be a 
retool of that and an education of the managers on how to use 
that. If you take the old adage of Jack Welch, every single 
manager ought to have a list in his back--his or her back 
pocket anytime, having the A, B, and C players, because, at any 
one time, you want to challenge the A's, you want to nurture 
the B's up to A's, and you probably want to get rid of the C's. 
We have to start doing that actively in the organization. It's 
going to cause, I think, more energy to be focused in the 
appropriate places, and get the right people in there.
    Senator Reed. Thank you.
    General.
    General Punaro. We're talking about DOD significantly 
improving its management chain of command. And many times, 
critics will say, ``Well, wait a minute. It's not a business.'' 
Correct. And every business--world-class business practice is 
not applicable to government or DOD, but many are. And let me 
list them. And I would say the staff could look at, ``Here are 
the world-class business practices that are applicable. Assess 
where DOD is today, and then say, What's the application?"
    Focus on core functions. That is a world-class business 
practice that ought to be put into DOD. Today, they have a 
diffused work effort. If you did that, they would define and 
focus on core functions, and you would divest other activities.
    Flat, flexible structures. All--everything in business now 
is flat. DOD is layered and rigid with their 28 layers. So, you 
would delayer and consolidate. This is tough, because you're 
going to get rid of a lot of principal deputies and deputy 
deputies and deputies to the deputies.
    In companies today, you have widely shared information and 
knowledge, and they don't do that in the Department, so you 
need a powerful CIO [Chief Information Officer]. I believe you 
need to get rid of some of the unders and bring back the 
Assistant Secretary for Command, Control, Communication, 
Computers, and Cyber to have that kind of cross. And you need 
performance goals. They don't have them.
    And finally, every business has tight controls over 
overhead personnel. And, as we've seen, DOD does not have that. 
They can't even tell you with precision how many people they 
have in overhead. So, you have to establish an effective 
overhead control system.
    Senator Reed. Mr. Walker, please.
    Mr. Walker. There are way too many organizations. When I 
was Comptroller General, I had the good fortune of being able 
to participate in the Capstone program for flag officers. One 
of the things I was shocked to find out, as an example, is, in 
order to activate and deploy 25 members of the Guard and 
Reserve, over 20 units within the Pentagon had to sign off on 
that. So, way too many organizations, way too many layers. As 
General Punaro said, there are 28 layers in the Defense 
Department. We had eight at GAO [Government Accountability 
Office]. And we have to have much more from the standpoint of 
performance metrics, outcome-based performance metrics that we 
are holding people accountable for. So, it's layers, players, 
and hardened silos. That's what we have to do.
    Senator Reed. Let me just quickly follow up, if the 
Chairman will allow, for one question to you, Mr. Walker. 
Sometimes I get the impression that, you know, we look across 
to the river, and it's their problem, but many times it's our 
problem. The way we do budgets, for example, it looks cheaper 
to hire lots of contractors than to hire one civilian long-term 
with pension benefits and other benefits. Would it be useful 
for us to look the way we sort of do the budget or give them 
credit, in terms of to incentivize them, to bring more full-
time government employees, rather than hiring contractors left 
and right to do the problem? That's----
    Mr. Walker. I do think that you have to look at how you 
keep score. I do think that we have to have an understanding as 
what is inherently governmental, what should be done by the 
government, and what could be done by the private sector. I 
agree with General Punaro that we ought to revitalize the A-76 
process. I also agree that we need to look at fully absorbed 
cost accounting. Okay? We have to have a level playing field. 
What is it costing for an outside contractor? Frankly, what is 
it costing for a government worker, including pensions----
    Senator Reed. Right.
    Mr. Walker.--retiree healthcare benefits----
    Senator Reed. Right.
    Mr. Walker.--and all these other things. So, how we keep 
score matters, and the way we keep score now does not 
facilitate sound decisionmaking, in my view.
    Senator Reed. Thank you.
    Thank you, Mr. Chairman.
    Chairman McCain. Senator Lee.
    Senator Lee. Thank you, Mr. Chairman.
    Thanks, to all of you, for appearing today and offering 
your helpful testimony. I want to thank the Chairman for 
holding this hearing, which covers an important topic, one that 
we need to address from time to time.
    You know, there's no question that the Department of 
Defense needs to be reformed so that we can prepare it to 
address 21st century realities. And this includes a different 
security situation that existed 30 years ago, certainly. It 
also includes, you know, the need to address fiscal and 
economic realities, realities that many experts today believe 
present national security threats in and of themselves.
    Mr. Walker, I'd like to speak--like to ask you some 
questions first. You spoke, in 2008, about the striking 
similarities between America's current circumstances and the 
circumstances that led to the decline of the Roman Empire. Now, 
it's a pretty big assertion. And you backed it up by analyzing 
a number of factors that you think warrant the comparison. You 
mentioned, I believe, that we're experiencing declining moral 
values and political civility domestically, and an overextended 
military in foreign lands, combined with fiscal 
irresponsibility by the central government. And you identified 
all of those as characteristics displayed by the late Roman 
Empire, and characteristics that we can see within the United 
States today.
    Can you elaborate on what some of the precipitating factors 
are, specifically with regards to having an overextended 
military abroad that can lead to a country's decline? And tell 
us a little bit about how the overextension of our military 
might lead to some of the mismanagement problems that we're 
experiencing today.
    Mr. Walker. Senator, I think what I said was that we had a 
decline in moral and ethnical values, we had fiscal 
irresponsibility by the central government, we had an inability 
to control our borders, and we had an overextended military 
around the world. I think those factors are relevant, and I 
think they're a reality.
    Senator Lee. Have we solved all those problems since----
    Mr. Walker. Well, first, I think we have to understand, in 
order to stay strong militarily, in order to be the leading 
nation around the world, you have to be strong economically. 
And if you don't put your financial house in order, then all 
those aspects--the military will suffer, our position in the 
world will suffer, our economy and job opportunities will 
suffer. So, we have to put our finances in order.
    I think the issue is, we have assumed a disproportionate 
responsibility for global security in the United States, in 
part because somebody has to lead, and thank God it's the 
United States; in part because others have not done their part 
and others have cut back on their allocation to the military, 
and they've been relying upon the United States to assume a 
disproportionate share. And I think that's something that 
obviously has to be looked at, because the type of security 
challenges that we face today are diffused, they are global, 
they do not respect geopolitical boundaries, and we need a 
collective effort in order to be able to effectively solve it. 
At the same point time, as the Chairman and others have said, 
the United States must lead, because there's nobody else to 
fulfill that role.
    Senator Lee. Now, in 2008, you appeared in a documentary 
called ``IOUSA.'' You talked about some of the threats we might 
face, some of the crises we might face as our national debt 
continues to rise. At the time, significantly, our national 
debt was $8 trillion. It's funny how we can look back on that 
now and say ``only $8 trillion,'' because, of course, that's a 
staggering sum of money. But, since then, our debt has 
significantly more than doubled. And so, other than facing 
possible insolvency, sooner rather than later, what 
consequences, specifically to our national security, do you 
project from this trend if we stay on our current path?
    Mr. Walker. Just to reiterate, if we don't put our finances 
in order, then everything is going to suffer, including 
national security. Let me give you something that I think most 
people don't know. Discretionary spending, which includes 
national defense, includes all of the express and enumerated 
responsibilities envisioned by our Nation's founders for the 
Federal Government. All of them. National security, homeland 
security, foreign policy, et cetera. That's what's getting 
squeezed. It's down to 32 percent of the budget. Thirty-two 
percent of the budget. Sixty-eight percent is mandatory 
spending. A hundred years ago, only 3 percent was mandatory 
spending. So, you know, we--we've lost control of the budget. 
We're spending more and more on consumption, more--less and 
less on investment, more and more on non-constitutionally 
specified responsibilities, less and less on the ones that are. 
And that's not sustainable. It's absolutely not sustainable.
    At the same point in time, as we've testified in this 
hearing, there is a tremendous amount of waste with regard to 
overhead and management practices within the Defense 
Department. And so, we need to have an adequate allocation of 
the budget to defense. At the same point in time, we need to 
improve the economy, efficiency, and effectiveness of the 
resources that are being allocated to the Defense Department at 
the present point in time.
    Senator Lee. That's a great point. I like your point about 
the comparison with 100 years ago. And another thing that goes 
along with that is, 100 years ago, we were spending only 2 or 3 
percent of our Nation's GDP on the Federal Government. And so, 
not only has the pie grown, it's grown----
    Mr. Walker. Two percent. A hundred years ago, the U.S. 
Government was 2 percent of GDP. Now we're--you know, now we're 
about 21 percent of GDP, so it's 10 and a half times bigger. A 
hundred years ago, we controlled 97 percent of spending, 
Congress did, every year, now it's 38, going down. It's out of 
control.
    Senator Lee. Well said. I see my time is expired. Thank 
you, Mr. Walker.
    Thank you, Mr. Chairman.
    Chairman McCain. We all yearn for those golden days of 
yesteryear.
    [Laughter.]
    Mr. Walker. It's not too late, Senator.
    Chairman McCain. Senator Manchin.
    Senator Manchin. Thank you, Mr. Chairman.
    Thank all of you for being here.
    And I think you agree, the same as that--when I first came, 
Admiral Mullens, we were asking--Joint of Chiefs of Staff are 
sitting where you all--and we asked--the question was asked by 
somebody on the panel, ``What's the greatest challenge the 
United States faces, the greatest challenge we face around the 
world?'' And, you know, we were waiting to hear some military, 
terrorist attack, and on and on and on. And Admiral Mullen put 
it quite clear and succinctly. He says, ``The defense of our 
Nation is the greatest challenge we face.'' And I think you all 
seem to agree to that, that we're in serious challenges here.
    I'll ask a simple question, basically. Is there enough 
money in the system? We put around $600 billion in defense. Is 
there--is that enough money to defend this country, to keep our 
people safe and defend the homeland? And what we seem to have a 
inability to do is to legislate good management. I don't know 
how you can do that. So, my point is this. If there's enough 
money--and they don't think there is enough money, the way 
they're managing now--will they change their management 
practices, since we can't seem to do it through legislation? Do 
you think it will change? Will it hit a crisis to where we're--
basically have to change? So, we can start, Mr. Walker, with 
you, if you don't mind.
    Mr. Walker. Thank you, Senator.
    First, the government is a monopoly. It doesn't face 
competition. And therefore, it doesn't have the same type of 
competitive pressures that forces it to be economical, 
efficient, effective, to innovate, to seek continuous 
improvement. I do believe that, absent other contingent 
operations, which we have some----
    Senator Manchin. Sure.
    Mr. Walker.--now, we may have others in the future, that 
there are adequate resources. But, I do think you have to think 
about the fact that the--that national security is fundamental, 
that only the Federal Government can do that, and whether or 
not, frankly, there ought to be some minimum allocation of a 
percentage of GDP to defense.
    Senator Manchin. Well, what we hear, if I don't--I'm sorry 
to interrupt--what we hear is, basically, sequestering is 
choked, and basically, everybody, Democrats and Republicans, 
want to do away with sequestration. Now, I understand, because 
we all want to keep the homeland safe. We'll do whatever we can 
to defend this great country.
    With that being said, is $600 billion enough? What is the 
figure? Has anyone looked and seen what it would take, if it 
was efficiently managed, to run this Department of Defense to 
keep us safe? That's what we--I would hope that somebody at--
you all, at your stature, could be able to do that, or look and 
see, and say, ``No, you're still 20 billion short,'' or, ``You 
have more than enough money, if it was managed properly.''
    General Punaro. Well, Senator, as the Chairman pointed out, 
we are at historically high spending levels. We are in 
constant--FY16 [fiscal year 2016] constant dollars, $100 
billion--at $600 billion, $100 billion higher than the previous 
lows. We're roughly spending at the same peak as the Reagan 
buildup. And yet, we--our warfighting forces are 40-50 percent 
smaller. And the problem is, there's so much of it chewed up in 
overhead.
    You've got three big problems in the Department of Defense 
that's gobbling up our warfighting forces. You have, basically, 
the unsustainable, long-term, fully burdened cost of personnel, 
which includes the retired force, and we certainly don't want 
to change anybody's benefits. Everybody would have to be 
grandfathered. But, we all know, when Congress deals with the 
grand compromise on entitlements, it's going to look forward, 
it's going to take 20 to 30 to 40 years to fix it. The same 
thing happens in defense. The acquisition system, we spend $400 
billion a year on goods and services, supplies, and equipment, 
and about the only polite thing you can say, ``We spend more, 
we take longer, we get less.'' Now, the committee's made a lot 
of reforms here.
    And then you have the massive overhead, which we have to 
get under control. If you look at the Army, for example--and 
they're not making all the right decisions in the Department--
from 2010 to 2017, the Active end strength's going to go down 
by 20 percent, from 567,000 to 450,000. Whether you agree with 
that, or not, the problem is, they're going to reduce the 
Active combat brigades by 30 percent. So, when they're reducing 
the end strength of the Army, instead of taking it out of the 
overhead, they're taking it out of the combat side. So, I 
believe----
    Senator Manchin. Who's making those decisions?
    General Punaro. Well, the leadership in the Department of 
Defense. It's not the Congress. And they come up with the 
budget, and they are allocating--they are keeping too much in 
the tail, and there's too little on the combat side.
    And I believe--Albert Einstein had a quote, and I don't 
know if I'm getting it just right. He said, ``You can't solve 
problems with people who created them.'' This committee has a 
history, going all the way back to the creation of the defense 
establishment after World War II, the amendments in '56, 
Goldwater-Nichols acquisition reform. It's going to have to 
have to come from this committee. The Department cannot reform 
itself internally. It is just too, too difficult for them. So, 
the reform----
    Senator Manchin. Do you believe there's enough money in the 
system if we managed it properly?
    General Punaro. At $600 billion, and in the FYDP [Future 
Years Defense Program] that the administration requested over 
the next 5 years, if they could get control of the overhead, if 
they could get the reforms and the acquisition, if they could 
start containing----
    Senator Manchin. I mean--quickly, but, basically, you're 
saying yes?
    General Punaro. I'm saying yes.
    Senator Manchin. How about you, Mr. Spencer, very quickly?
    Mr. Spencer. I'd say yes, Senator. And in just sort of a 
quick aside, if you take the study that we did on the Fortune 
250 companies that faced massive turnarounds, looking into the 
black hole, the first thing the management did when they came 
in was cut 20 percent. And we kept going back and looking at 
the records, and it was 20 percent across the board. We said, 
``Why?'' They said it was a great place to start. And, at the 
end of the day, it was probably too little. There has to be 
some event or external efforts, as General Punaro said, to get 
the organization going.
    Senator Manchin. Ms. Bisaccia, yes or no, $600 billion?
    Ms. Bisaccia. I'm not in a position to comment. I've----
    Senator Manchin. Okay.
    Ms. Bisaccia.--had no experience with Department of 
Defense. However, I would say, if you believe that leadership 
is the key element necessary to drive change, I can't think of 
a better reservoir of leadership than our Armed Forces. So, it 
seems to me that, given uniformity around the mission, our 
leaders can lead through the necessary changes.
    Senator Manchin. And very quickly, Mr. Walker.
    Mr. Walker. Yes, with the requisite reforms. However, those 
reforms will take time. I've publicly said it before, that I 
believe that if the overhead was 25 percent lower in the 
Pentagon, we'd be 50 percent more productive.
    Senator Manchin. So, by lifting the budget caps and the 
sequestering basically going away, that's not going to be the 
answer to----
    Mr. Walker. I think----
    Senator Manchin.--better management.
    Mr. Walker. I think you have to look at the top line, you 
have to look at how you're allocating the money. And I come 
back to something that General Punaro said. I do think you have 
to end up forcing change with regard to overhead and the 
administrative functions. I do think you need to figure out 
what you have, you have to benchmark it, you have to put caps 
on it, and you have to force people to drive that down. That's 
what's not happening. It's got to be forced to be driven down.
    Senator Manchin. Thank you. My time's up. I appreciate it.
    Senator Reed [presiding]: On behalf of the Chairman, let me 
recognize Senator Rounds.
    Senator Rounds. Thank you, sir.
    In doing just the review for this hearing today, the 
Congressional Research Service provided us with a list of some 
of the overall reforms that have been proposed in just the--
well, since 1983. It began with the Grace Commission, the 1985 
defense organization, The Need for Change, the Packard 
Commission in 1986, ending with the 2014 Quadrennial Report, 
the QDR. There were 24 different organizational reform 
proposals that have been made, ending, as General Punaro 
pointed out, with a grand total of 28 layers of bureaucracy now 
found within the Department.
    My question for you is this. And I'll begin with Mr. 
Spencer. You've suggested, specifically, areas that could be 
looked at for efficiencies. Is it possible to take them, 
department by department or location by location--depot 
maintenance, commissaries, Defense Logistics Agency, DOD 
Education Activity and so forth--is it possible to take one and 
separate it out and actually reform it, proving that it is not 
only doable, but it is desirable within the Department to 
actually make change based upon the mission that that 
particular part of the organization is responsible for?
    Mr. Spencer. Senator, I'd say yes to your question, in one 
area: Department of Defense education. Ironically, the largest 
school district in North America is not hamstrung like any of 
the school districts in public America. You could actually 
probably put dollars saved from commissary realignment, depot 
realignment, BRAC, whatever, and make it an institution that 
was extraordinary for recruiting purposes, for retention 
purposes. That would be one area where I'd say you could. The 
others that are on my list, I would say that that does not fall 
into the mission of the Department of Defense.
    Senator Rounds. When you say it ``does not fall into the 
mission of the Department of Defense,'' do you mean that they 
are incapable of making the changes internally? Is that what 
you're saying? Or are you saying that they should be separated 
out?
    Mr. Spencer. They should be separated out. It's not a core 
function.
    Senator Rounds. But, nonetheless, it is critical for the 
operation of the entire--for the mission of defending the 
country, correct?
    Mr. Spencer. Certainly is, but there are more organizations 
that can do it more effectively and more efficiently.
    Senator Rounds. But, should there not be some sort of an 
oversight or an area within the Pentagon responsible for seeing 
that they get accomplished? As an example, depot maintenance, 
the maintenance activities for there, isn't there some place 
within the Pentagon that should have the organizational 
responsibility to see that it gets done?
    Mr. Spencer. Yes.
    Senator Rounds. So----
    Mr. Spencer. The actual tank getting fixed, yes.
    Senator Rounds. So, if we take that as one area, which is 
the mission, to get the tank fixed, can we separate out that 
particular mission, the maintenance mission, pull it apart, and 
say, ``Let's dissect this, let's fix it, let's put it back in 
and prove that this particular operations within the Pentagon 
could be made more efficient,'' and use that as a sample that 
could be used in other areas, as well, similar to, as you've 
suggested, with the educational aspects?
    Mr. Spencer. I see where you're headed, Senator, but I come 
back to private sector. If it is not in your core competency 
wheelhouse and there are better providers out there that do it, 
you access the most efficient path you can, because your 
mission is not aligned with that. Yes, it's a subsupport of it, 
but somebody else can do it better and more effectively. Why 
waste resources on doing that, when you can apply it to your 
direct mission?--would be my response.
    Senator Rounds. When we look at making reforms, when--if 
we've looked back at it and we've got 24 different reform 
proposals that have occurred since 1983, have any of them 
actually worked? Is there anything in them which has actually 
worked? Can we list an example of where they've been 
successful?
    General Punaro. Well, I would say the Goldwater- Nichols 
reforms, which tremendously changed the operational chain of 
command in the military pioneered by this committee, worked. I 
would say there's very little on the management side that you 
could point to from all the various commissions. I do think 
you've got a kernel of really great idea, in that you could 
take two or three of these areas that you've talked about and 
create a pilot program. For example, we have 18 maintenance 
depots in the Department of Defense as part of their $170-
billion-a-year logistics enterprise. Why not take one of those 
organic depots and run a pilot program where outside enterprise 
could come in, keep it right where it is, and run it on the 
base? Let's take a DOD-dependent school. There are a lot of 
local school districts that could come in and run that school 
system on the base and see if it could be run more efficiently 
than the government is running it. With a commissary, for 
example, you could take the Marine Corps commissary at Camp 
Pendleton, as General Jim Jones was willing to do in 1998, when 
he was the Commandant, and bring in a Walmart or a Costco and 
let them run it, and see if it would be more efficient. And 
then you could--and then you would have some data, and then you 
could deal with some of the emotional arguments that you run 
into when people say, ``Well, they can't do it.'' So, test it 
out. So, as you look at these management reforms, which are 
going to be very tough and very hard, do some pilot programs 
and test out your proof of concept, and then decide if you want 
to take it to a broader set. So--but, I do think, in all these 
areas that are not core to the Department, these are the ripe 
areas for these kind of pilot programs.
    Senator Rounds. Thank you.
    Thank you, Mr. Chairman.
    Chairman McCain [presiding]: Could I just comment? We 
kicked that idea around about the commissary, and I can tell 
you, we have a PR [public relations] challenge. We--the 
hornet's nest that we ignited. So, we'll have to go back. Maybe 
pilot programs are the best way to address that issue. There 
are, as I understand it, 15,000 employees, and----
    General Punaro. Mr. Chairman, spot on. And I think the 
messaging ought to be, ``We're not trying to get rid of the 
benefit, we're not trying to get rid of the commissary in their 
locations. We're trying to reduce the taxpayer subsidy.'' So, 
give the troops and the families and the retirees the same 
benefit they have today, but if you run it and manage it more 
efficiently--you know, but the way the headlines come out, the 
bumper sticker is; ``We're trying to close the commissary.'' 
So, you're right, we've got to change the packaging.
    Mr. Walker. Mr. Chairman, I would respectfully suggest 
you've touched on one of the important four-letter words in 
politics, and that is ``jobs.'' And part of the question is; 
Can this be done more economically, more efficiently, and more 
effectively? And, if so, what does that mean with regard to the 
number of employees you're going to have? And that's----
    Chairman McCain. Right.
    Mr. Walker.--you know, that's the elephant in the room. You 
know, if you----
    Chairman McCain. Well, it--it's more than that in this 
issue.
    Mr. Walker. Yes, sir.
    Chairman McCain. It's the perception that we are taking 
away from our--particularly our retirees, not to mention Active 
Duty----
    Mr. Spencer. Mr. Chairman, can I add something here, 
though? Having chaired the--lucky enough to chair the DBB Task 
Force on Modernization of the Military Retirement System.
    Chairman McCain. You were lucky?
    [Laughter.]
    Mr. Spencer. Thank you, sir. One of the VSOs [Veterans 
Service Organizations] was nice enough to publish my home phone 
number, and I took 127 phone calls. I kept a log on this. And I 
actually wanted to speak to the people. And once you got the 
expletives out of the way and realized that I wasn't a 
communist agent trying to defer any sort of benefit, you could 
speak to----
    Chairman McCain. That took a while.
    Mr. Spencer. It took a while. It took a while. You could 
speak to everybody. And if you started rationalizing and 
saying, as an example, ``You have one dollar to spend on your 
benefits. Your healthcare costs 50 cents, your retirement costs 
33 cents, your commissary costs 26 cents, and you add it up and 
you have $1.70 of expenses and a dollar to spend,'' there was a 
great rational answer at the end of the day. There was an 
understanding. I think that if, in fact, this committee and 
Congress wants to sit and provide a preference-based selection 
with the information available, you can scale this monster.
    Chairman McCain. Well, I appreciate your confidence.
    Senator King.
    Senator King. Thank you.
    Your discussion of the 28 layers and the Deputy Under 
Secretary--40 years ago, I sat in one of these seats. I was a 
staff member here in the Senate and was once called upon to set 
up a hearing; called OMB, asked for a witness from the 
administration. The fellow said, ``We will send you the Deputy 
Under Secretary of Such-and-Such.'' My question was, ``Who is 
this person? I don't know about the titles?'' The fellow gave 
an answer, which, if I ever write a book about Washington, will 
be the title. He said, ``He's at the highest level where they 
still know anything.''
    [Laughter.]
    Senator King. Unfortunately, I'm keenly aware that I'm 
above that level today.
    [Laughter.]
    Senator King. I think one thing we haven't talked about 
today is the President. I don't mean this particular President, 
I mean Presidents in general. One of the problems, it seems to 
me, is that people that we elect President generally are 
politicians, and politicians generally don't think much about 
management. This has to start with the President, it seems to 
me, a President who cares about the management issues.
    One of Lincoln's greatest unappreciated qualities was as a 
manager. When he was--when he became President, there were 
16,000 members of the United States Army. By the end of the 
Civil War, they had scaled up to over 2 million people that 
fought on the Union side in the Civil War. Think of that as a 
management challenge. But, it occurred because Lincoln cared 
about it and put people in a position and required results, in 
terms of everything from making buttons to bullets to railroad 
ties.
    So, I would like just a quick reflection, Mr. Walker, on 
the role of the President in this process. I think we can lob 
ideas here, but the person who's in charge at the other end of 
Pennsylvania Avenue, it seems to me, has an enormous role to 
play, if they choose to play it.
    Mr. Walker. I agree, Senator. When you're hiring a 
President, you're really looking for three things, in my view. 
You're looking for the Chief Executive Officer [CEO] of the 
largest, most complex, most important entity on the face of the 
Earth, the U.S. Government, which has got a lot of challenges, 
some of which we're talking today; secondly, the Commander in 
Chief of the U.S. military; and thirdly, the leader of the free 
world. But, I also think you have to understand that, in order 
for them to discharge their CEO responsibilities, they've got 
to have good people.
    Senator King. Absolutely.
    Mr. Walker. They've got good people with the right skills 
in the right position for a requisite amount of time. And I 
think, when you look at presidential appointments, Senate 
confirmation, for example, there's three kinds of jobs. There 
are policy jobs, there are operational jobs, and there are 
oversight jobs. And you want different kinds of people in those 
jobs. And I would respectfully suggest, as I did for the CMO 
[Chief Management Officer] position and the sub-CMO positions, 
that you need statutory qualification requirements, that we 
need to be thinking about term appointments with performance 
contracts for those jobs that are operational jobs. They are 
not policy. They may be political appointees, but they are 
operational jobs.
    Senator King. But, I would suggest if the oversight from 
the White House is more about policy and politics than it is 
about running the enterprise--I mean, there's a reason it's 
called ``the administration.'' But, in many cases--and again, 
I'm not pointing the finger at the--this particular President, 
but it's just not in our political culture to care too much 
about how the structure at the Pentagon functions.
    Let me move on for a minute. Data and metrics. The fact 
that you were saying that there's an argument about how many 
people work in the Secretary of Defense's office is 
unbelievable--I mean, that we don't have--we can't possibly 
make good decisions if we don't have data. Would you concur?
    General Punaro. Absolutely, Senator. I go back to when I 
was serving on the committee. We couldn't get the data. When 
Secretary Cohen asked me to chair a task force in 1997, Doc 
Cook, the legendary mayor of the Pentagon, ``Doc, how large is 
OSD?'' ``Oh, Arnold, we've only got about 2,000 people.'' Well, 
Jim Locher and Rhet Dawson and others were on that task force. 
We went around and counted the names on the doors, we counted 
the computers, we counted the badges. There was another 1,300 
more than they admitted. And Secretary Gates, when he--in 2010, 
when he tried to downsize, they couldn't get the accurate 
baseline. If you look at the defense-wide headcounts that are 
in the Defense Manpower Requirements Report, today the Office 
of the Secretary of Defense, with military, civilian, and 
contractors: 5,273. You could argue that the Office of the 
Inspector General, which is 1,823, comes under OSD. You could 
argue that the Pentagon Force Protection----
    Senator King. Well----
    General Punaro. So, the problem is, GAO has said they don't 
have reliable data. Now, Peter Levine, the new DCMO [Deputy 
Chief Management Officer], former staff director of this 
committee, he's working this really, really hard right now. And 
in all the years I've been looking at this and doing this, he's 
the first senior Pentagon official that has admitted, ``You 
know, Arnold, I'm not sure we have accurate data. I'm going to 
try to get the accurate data.'' Before, they'd just stonewall 
you. So, maybe there's going to be--but, the committee is going 
to have to put pressure on it and mandate and get the 
information.
    Senator King. You just answered my last question, which 
was, How is Peter doing? And isn't he in the position that you 
were defining at the beginning? And it sounds like he's 
manfully trying to get a handle on that.
    General Punaro. He is, but that is a tough--that whole 
management operation is really tough, because the old 
Washington Headquarters Services, they have succeeded, you 
know, for 50 years, in stonewalling a lot of information. And 
so, he's having to dig it out with a pick and shovel.
    Senator King. Thank you, Mr. Chairman.
    Chairman McCain. Senator Ernst.
    Senator Ernst. Thank you, Mr. Chair.
    And thank you very much, to our witnesses, for being here 
today.
    Effective management of government programs is--especially 
in the DOD, is something that I have taken great interest in 
since I have come to the Senate. And I've found out that there 
really are no government-wide standards, especially when it 
comes to program management, whether it's in the DOD or some of 
our other departments. And I do believe they need to be more in 
tune with what is going on in the private sector. And there's a 
study--it was done by Accenture, a group out there--that says 
the U.S. Government could save as much as $995 billion by 2025 
by increasing public-sector efficiency by just 1 percent. And 
that, again, is across the government. And that includes 
improving program management practices.
    And so, this is a great topic for today. And I'm glad to 
have the discussion on it. I would like some feedback from the 
panel. Mr. Spencer, I'll start with you. But, it's my 
understanding that the Federal Government spends around $530 
billion in procurement. And when we talk about procurement, a 
lot of that discussion is really focused on the $177 billion 
that we spend on DOD weapon systems acquisition. And this type 
of procurement for tangible goods--so, out of that $530 
billion--for the tangible goods, only about 45 percent of that 
is on items in the acquisition program. The other--another 45 
percent is spent on service contracts and those types of 
things, not actual goods that you receive. And then another 10 
percent, or the remaining 10 percent, is spent on R&D [research 
and development] for future acquisition programs. So, the 
Defense Acquisition Workforce Improvement Act only applies to 
those goods that are tangible in nature. And so, it leaves 
those service contracts out.
    So, with that said, what is your assessment of the 
effectiveness of the Defense Acquisition Workforce Improvement 
Act and it's providing a standardized program management 
outcomes across all of DOD in the acquisition portfolio? Do you 
think it's something that could be improved?
    Mr. Spencer. Definitely. I think that it's a terrific step 
forward. When one looks at how the government, let alone the 
DOD, acquires, there are different pockets and different 
channels for which things are acquired. We do need to set 
standards. It sounds like a simple answer, but you have to take 
it across the board. There--it has to be a unified leadership 
demand that the standards are applied whether contracting 
services, whether hard goods purchased, whatever the case may 
be. It sounds very simple. It's--as I think I said in my 
testimony earlier, there's heavy lifting that has to be done. 
But, that would be one of the things to do, would be to force 
the standards across all purchasing areas within the building, 
at least.
    Senator Ernst. Thank you.
    Controller General Walker?
    Mr. Walker. The scope should be expanded. There's a lot of 
contracting that doesn't deal with goods. It also--it deals 
with services. We have to understand what are our goals, what 
are our objectives, what are our metrics, what are our 
measurement systems. And that applies both to, you know, 
defense weapons acquisitions, as well as a range of services.
    Part of the problem in the weapons acquisition, in my 
experience, has been--is that people have a dream about what 
they would like. That dream keeps on changing, so the 
requirements keep on changing. Every time the requirements 
change, that means it takes longer, it costs more money. And 
the other thing that we talked about earlier is personnel. We 
have people that stay in positions for 2-year periods of time 
automatically, rather than wait until a major milestone has 
been achieved. That is tremendously costly with regard to money 
as well as timing on these projects.
    Senator Ernst. Yes, General.
    General Punaro. I would step it back to broader issue that 
Senator King brought up, which is management. The Office of 
Management and Budget needs to emphasize more on the management 
side and less on the budget micromanagement. But, the biggest 
change we--that would affect what you're talking about--because 
55 percent of DOD's spend now is on services--would be a reform 
in the Congress in going to a 2-year budget. So, the first 
year--because the Congress and the Pentagon are drowning in 
budget details. Everything is just tied to these microbudget 
details. Not as much oversight and management occurs, either in 
the executive branch or in the Congress. So, the first year, 
you would deal with the budget request; the second year, you 
would do detail oversight on the management side. You'd have 
much more time to basically bring in witnesses that could 
basically have a back-and-forth. And so--and, in terms of the 
broader management, the Eisenhower Cabinet--I mean, he 
basically believed in true Cabinet line officers, as opposed to 
the kind of micromanagement that we've seen White Houses do 
today. So, the--so, you really aren't going to get to the 
bottom line until you go to this broader construct.
    Mr. Walker. May I jump in quickly?
    Senator Ernst. Yes.
    Mr. Walker. I strongly endorse the concept of a biennial 
budget. I'm 64 years old. I know that may be hard to believe, 
but I am.
    [Laughter.]
    Mr. Walker. And the fact of the matter is, Congress has 
passed timely appropriations and budget bills four times in my 
lifetime. We spend a tremendous amount of time--and most of the 
States have gone to biennial budgeting. I think it's something 
we need to consider, as well as the separation between the 
capital budget and an operating budget, and to focus not on 
deficits and debt, but debt as a percentage of the economy. 
That's what matters.
    Senator Ernst. All very good points.
    Thank you, Mr. Chair.
    Chairman McCain. We thought you were older.
    Senator Hirono.
    Senator Hirono. Thank you, Mr. Chairman.
    Mr. Walker, you just mentioned today, just now, that we 
should separate out the capital budget from the operating 
budget. Can you talk a little bit more about what that would do 
and what that would involve?
    Mr. Walker. Whether you talk about critical infrastructure, 
whether you talk about weapon systems acquisition, there's a 
difference between trying to be able to acquire things that 
have multigenerational benefit that end up--benefit society 
broadly over an extended period of time. Most States have 
capital budgets and operating budgets. Most corporations have 
capital budgets and operating budgets. And that's why I'm 
saying you have to be careful. Sometimes people want to play 
games to say, ``Well, this is really a capital item, this is 
really an investment, it's really not an expenditure, so I 
should have more flexibility.'' That's why I'm saying one of 
the things that you do is focus on debt-to-GDP [gross domestic 
product]. When you do that, when you focus on debt-to-GDP, 
which has gone from 31 percent in 1980 to--pardon me, 30--to 54 
percent in 2000 to 103 percent today, when you count what we 
owe Social Security and Medicare, we've got to get that down to 
about 60 by '20 to 2035. Let's use best practices from the 
private sector. Let's look to the States. And I think they 
would tell you, you need separate budgets for that.
    Senator Hirono. Yeah, I've often wondered why it is that we 
don't separate out these budgets, because, in the States, 
it's--the capital budgets are usually called the capital 
improvements budget [plans], CIP. That's a totally different 
way to look at long-term debt, et cetera. And so, why do you 
think we have not adopted that at the Federal level?
    Mr. Walker. Well, it's before----
    Senator Hirono. With any----
    Mr. Walker.--it's before my time, but, you know, our budget 
process is--it's a cash-based--and it's focused on 1 year at a 
time. And I think some people have been concerned that you 
might lose control of spending if you have a separate, you 
know, capital budget from an operating budget, ``Let's just put 
it all together.'' But, again, that's what I'm saying.
    Senator Hirono. Oh.
    Mr. Walker. If we focus on debt-to-GDP, it's--have specific 
targets, triggers, and enforcement mechanisms on debt-to-GDP, 
that's the way to manage that problem. Private sector and 
States separate it. States have 2-year budgets. We ought to 
learn from the States.
    Senator Hirono. Well, do the other panelists also agree 
that we should separate out these two budgets?
    General Punaro. I agree.
    Senator Hirono. Mr. Punaro?
    Mr. Spencer. Completely.
    Ms. Bisaccia. Seems like good management to do so, yes.
    Senator Hirono. We probably need to figure out how to get 
there, because to make this kind of a--what I would consider a 
really reasonable, fundamental change in how government 
operates and how we make decisions around here would be very 
challenging, but one that I particularly would be interested 
in.
    Going to a larger question, what do you think are the most 
important areas for the committee to begin with as we consider 
reforming the defense organization? For example, would you 
recommend--and any of the panelists can respond--first, 
addressing the culture and leadership issues, or would you look 
at organization and processes first?
    General Punaro. I'll----
    Senator Hirono. Mr. Punaro.
    General Punaro.--start. The----
    Senator Hirono. General.
    General Punaro.--culture is too hard. You can't start 
there, because you don't--we don't know what we have. I think 
you--you know, the basic--we have to, basically, get the basic 
information. How big is the DOD infrastructure? How much does 
it cost? What is the size that you want it to have? How are you 
going to get the really good top managers to come in that can 
drive cultural change? And, once you get on top of that, then I 
think you could focus on organization and culture. But, until 
we, basically, know what we have and what we're spending, you 
can't deal with any of those other--they are--those are the 
most important issues: leadership and cultural change. But, 
until you get the fundamentals, you can't really deal with the 
other.
    Mr. Spencer. I think that--in my testimony, I talked about 
internal and external forces at work. You all hold the external 
acts. There are things that you can do. Totally am sympathetic 
and understand that some of them are going to be, as I said, 
politically unsavory. But, you have the ability to force the 
issue. You also have internal activities that can happen, such 
as providing performance metrics for management. So, I think 
you can do them, actually, simultaneously.
    Chairman McCain. Senator Sullivan.
    Senator Sullivan. Thank you, Mr. Chair.
    Appreciate panelists on a very important topic.
    I want to drill down a little bit more on the tooth-to-tail 
ratio issue and just get a sense--you know, General Punaro, you 
talked a lot about it in your testimony, what the Army's trying 
to do, in terms of their reduction of its Active Duty Force, 
which, as you mentioned in your testimony, seems to be taking a 
very significant hit on the trigger-pullers versus the tail 
part of the Army. But--and then, if you look at charts 
internationally, where we stand as a military compared to other 
militaries in the world, we have a very large tail, relative to 
the tooth element, relative to other countries, almost every 
other country in the world.
    You hear some people, though, argue that the reason our 
military is so effective is because we're so good a logistics, 
and we're so good at other aspects of, kind of, the tail 
component of the military. How can--can you help us kind of 
tackle that issue? Our--is our military so effective because we 
have such a large tail? Or should we be looking historically, 
say, World War II, where I think the ratio was a lot less than 
it is today? And we obviously had a pretty darn effective 
military back then. How do you suggest we think about this? 
Because I think it's a critically important issue, and your 
testimony really drills down on it.
    General Punaro. I mean, I think you have to look at what 
makes our military the finest military in the world. It's 
really three things. And it is high quality people, it is 
constant and realistic training, and it is giving the troops 
the cutting-edge technology so they're never in a fair fight. 
Logistics is important. It's a discriminator that we have, vis-
a-vis other countries. And a lot of logistics is not tail. 
There's a lot of combat logistics that I would put on the 
forces side. So, when I talk about the 40 percent of the 
Department that's infrastructure, a lot of the logistics is 
combat logistics.
    So, the problem is--you know, I have a cartoon that I drew 
up years ago called, ``Where is Private Waldo?'' So, today you 
have 1.2 to 1.3 million Active Duty personnel, roughly 220,000 
forward deployed, including troops in the Middle East and in 
Afghanistan. So, you have to ask yourself the question, What is 
the other 1 million doing? And 330,000, and particularly a 
sizable number in the Army, are working in inherently 
commercial activities: laundry, retail, clerks, finance. These 
are jobs--and these are our most expensive personnel, the 
Active Duty military--that either a defense civilian or a 
contractor could do. And so, the problem in the Department, 
when you're talking about tooth-to-tail, is, we have too--we 
have so many people, defense civilians, in military that's in--
part of the tail that really is not fundamental to warfighting.
    Senator Sullivan. So, how would----
    General Punaro. Part--yeah.
    Senator Sullivan. So, General Milley has talked about 
trying to--as the Army is looking to draw down--to kind of make 
sure that the warfighters are the last elements of the 
reduction that the Army is undertaking. However, as your 
testimony points out, that's certainly not the case, that's not 
what they're doing.
    General Punaro. That's right.
    Senator Sullivan. How can this committee help the service 
chiefs and others focus in a way that does maintain the 
trigger-pullers and warfighters as the last troops that need to 
be cut, versus the guys who are doing laundry and other things, 
as you mentioned?
    General Punaro. I think you're going to have to do 
authorized end strengths in the overhead area, just like you do 
for Active personnel in Guard and Reserve. For example, the 
committee authorizes, let's say, 450,000 Active Duty Army. That 
means, on September 30th of each year, the Army's authorized 
end strength has to be within one-half of 1 percent above or 
below that authorized number.
    Senator Sullivan. And should that look at not only----
    General Punaro. And so----
    Senator Sullivan.--authorized numbers, but the number of 
BCTs [brigade combat teams], to make sure there's a heavy tooth 
element?
    General Punaro. Well, what I would do--the way I would do 
is, I'd come at it the other way. I would say that the Army can 
only have so many people in the institutional Army. You would 
legislate end strengths for overhead, headcounts, things of 
that nature, in layers, and then, when they see they can't have 
as many--they--when they see they can't have a battalion of 
soldiers guarding prisoners at Fort Leavenworth, they're going 
to then put those soldiers back into the combat side. So, the 
way you control it is by controlling the overhead and not 
letting them have the tail grow at the expense of the forces, 
and they--and then they're going to say, ``Okay, holy smokes, 
we've got 50,000 soldiers that we can't put in the 
institutional Army. Let's create, you know, 5 more combat 
brigades.'' I think that's the way to do it.
    You're never going to--you're never going to get there by 
encouraging them. Warren Rudman, when he was here in the 
Senate, from New Hampshire, on the Appropriations Committee, 
working with the Armed Services Committee, was a fanatic about 
tooth-to-tail and going after it and just encouraging the 
Department to do a better job of putting more in combat and 
less in tail--has not proven to be a successful model.
    Senator Sullivan. Mr. Walker?
    Mr. Walker. The Defense Department really has a subset of 
the same problem the Federal Government has with regard to the 
budget. You've got out-of-control overhead cost. That's what's 
eating things alive. That's why your end strength is going 
down. Your overhead's out of control. Just like if--the Federal 
Government, as a whole, our mandatory spending costs are 
cutting into discretionary spending, which you are all the 
express enumerated responsibility. So, you have to have limits. 
You have to have limits. You also have to have the right people 
in the right job for the requisite period of time who are 
responsible for driving this change. We don't have that now. 
And that's what I tried to focus on with regard to my 
testimony.
    Senator Sullivan. Thank you.
    Thank you, Mr. Chairman.
    Chairman McCain. Senator McCaskill.
    Senator McCaskill. You know, I--one of the things I find 
ironic about this hearing is that one of my pet peeves at all 
of these hearings--and it's particularly true with the 
subcommittee hearings--is, usually the first two rows behind 
the witnesses are all people from the Pentagon. In one hearing 
of a subcommittee, I said--I asked the audience how many of 
them worked at the Pentagon, and almost every seat in the 
hearing room, hands went up. I said, ``You know you can get 
this on TV.'' And it's a symptom of a Deputy Deputy Deputy Dog, 
General, that--I mean, when you have a three-star come to the 
Hart Building, it takes four SUVs to bring one three-star. 
There is this culture that you're not really important unless 
you've got a really big posse at the Pentagon. And I don't know 
how to get at that.
    I was really interested, General, in your recommendation 
that we statutorily limit the number of Deputy Deputy Deputy 
Dogs that are going to be in the Office of the SECDEF 
[Secretary of Defense], of the Secretary of Defense. And have 
you actually put a pen to paper as to what that should be? How 
would we specifically limit that? Because I believe that that 
might be one of the most important things we could do to 
strengthen our military.
    General Punaro. Well, there's--I agree with you, and I 
agree the entourage syndrome is alive and well in Washington. 
And it's a leadership issue. And I think Joe Dunford is going 
to be talking to a lot of these senior generals about perks and 
things of that nature.
    But, there's two ways to get at the problem you said. One 
would be working with the Department of Defense. I believe 
Secretary Carter is very reform-minded. He is on acquisition, 
on the Force of the Future. And I know he would like to get 
control of these management headquarters and get agreement on 
what--how big is the Office of the Secretary of Defense? How--
you know, and what size should it be? Then you could put the 
mandatory caps in.
    Another way of doing it--and I would say this has been my 
experience when I served on the committee, because it was 
always hard to find somebody that was willing to do something 
like that in a cooperative way--I believe Ash Carter is 
different, so I would try that first--is, let's say we believe 
OSD should be 3,000, and let's say they say it's 5,000, but we 
don't really know. So, put the cap at 3,000. They'll scream and 
holler and say, ``Holy smokes, that's too small.'' You'll then 
get the right number. But, you're going to have to legislate 
caps for OSD, the Joint Staff, the combatant commanders, and 
the management headquarters to be able to get control of the 
overhead.
    Senator McCaskill. As we cut the money under the budget 
constraints, none of those have gone away, right?
    General Punaro. The----
    Senator McCaskill. We've reduced end strength, but not the 
Deputy Deputy Deputy Dogs.
    General Punaro. There's too many ways--the money is too 
fungible. Cutting money doesn't do--will not cut the headcount. 
I mean, when Secretary Gates eliminated the Joint Forces 
Command, people believed that we eliminated the Joint Forces 
Command in July of 2010. The 2,000 military serving in the 
Joint Forces Command were added to the roster of the Joint 
Staff.
    Senator McCaskill. Right.
    General Punaro. All the defense civilians were just put in 
other locations. The only thing we got rid of were the 
contractors. Now, we don't have that headquarters, so there's--
the shell game--the Chairman--I saw something dealing with the 
Air Force, where they were taking credit. Now, I didn't look 
into the details on this, so--but, whatever it is, the problem 
is, the Defense Department, over the years, not unique to any 
one administration, they are the duty experts at, ``Hey, we 
just cut this defense agency,'' and then you look over here, 
and, ``Oh, my God, they just created a brand-new field activity 
that doesn't count against that total.''
    Senator McCaskill. Right.
    General Punaro. That's why I'm for these firm end caps. The 
Department won't like this. Maybe members of the committee 
won't like this. We don't like to try to have to micromanage in 
this area. But, to get control of it, I think----
    Senator McCaskill. It may be----
    General Punaro.--you're going to have to do it.
    Senator McCaskill.--necessary, yeah.
    I'm not going to have time to get to all the contractor 
stuff, but obviously this is something I'm spending a great of 
time on, and I worry a little bit--I know my dad peeled 
potatoes in World War II, and I know we shouldn't have anybody, 
an expensive warfighter, peeling potatoes, but we know that 
LOGCAP [U.S. Army's Logistics Civil Augmentation Program], at 
least the first two or three versions, were a disaster, in 
terms of costs, in terms of handling costs. And so, I don't 
want us to lose sight of the fact that, while we move these 
functions to a civilian force, a contractor force, that we lose 
sight of the fact of the kind of money we've wasted on bad 
contracting practices. I just want to get that on the record, 
because we've spent an awful lot of time trying to dig deep on 
that issue.
    General Punaro. You have to have--that's why David Walker 
and all of us here believe you've got to bring in these world-
class business managers and manage these contracts. You all 
created the Wartime Contracting Commission. They made a lot of 
good recommendations. But, again, you've got to bring--these 
are businesses. LOGCAP----
    Senator McCaskill. Right.
    General Punaro.--is a business enterprise. You need people 
that know how to run business. There are very, very few people 
in government that know how to manage a business.
    Senator McCaskill. Finally, just briefly--and if you want 
to answer this for the record, because I know I'm almost out of 
time, but----
    Chairman McCain. No, please go ahead.
    Senator McCaskill. I want to talk about the audit. David, 
should we--it's almost like the systemwide audit is the bright, 
shiny object. And the amount of resources and time we're trying 
to get--this systemwide financial audit, I might add--we are 
not, probably, putting the time into performance-based audits. 
And as a fellow auditor, both of us understand that the real 
gold is in performance audits, in terms of figuring out how 
much wasted payroll there is at the Pentagon. Are we getting 
distracted by the effort to synchronize systems across various 
branches for the financial audit? And should we, in fact, 
refocus on how many performance audits are actually going on at 
DOD, and how much are we consuming them and using the 
information in them?
    Mr. Walker. As you know--you having been the State auditor 
for Missouri, myself having been Comptroller General--the fact 
is, internal controls are the most important thing. In 
addition, having effective cost accounting systems with full 
cost accounting is important. In addition, understanding what 
you have, where it is, what condition it's in, and then 
performance metrics, those are the most important things.
    Peter Levine--I've spent some time with Peter recently--
Peter recognizes that he needs to spend more time on controls, 
on cost accounting, and on performance management. I agree with 
that. I think we have to reassess where they are with regard to 
the financial statement audit. As I mentioned before, my 
personal view is, you need a plan, a matrix plan that talks 
about organizations and line items, focused on getting an 
opinion on the consolidated DOD financial statements, rather 
than the sub-entities.
    I would also respectfully suggest that, once we have clean 
opinions on all major U.S. departments and agencies, then I 
think we have to think about whether or not we need to have 
opinions on the financial statements of individual departments 
and agencies, and we focus on the consolidated, which GAO 
[Government Accountability Office] would lead, and they would 
end up working with the inspector generals and contract out 
with private sector, independent public accountants, as 
appropriate, so we could discharge our responsibility to the 
taxpayers with regard to what's happening with their resources, 
but we can spend a lot more time and money on exactly what 
you're talking about.
    Senator McCaskill. Right.
    Mr. Walker. Let's talk about performance audits--what's 
working, what's not working--so we can focus economy, 
efficiency, effectiveness, and continuous improvement.
    Senator McCaskill. Thank you.
    Thank you, Mr. Chairman.
    Chairman McCain. I thank the witnesses. And the----
    Senator King. Mr. Chairman? Mr. Chairman?
    Chairman McCain. Senator King.
    Senator King. Very quickly, I just wanted to mention that 
Senator Enzi and a number of us have a bill on biennial 
budgeting. And, in fact, we had a hearing at the Budget 
Committee, just last week. So, that's under very active 
consideration. And on the performance audit question, my 
favorite way to approach that is, ask two question: Does it 
work, and how do you know? And that's something that we don't 
do frequently enough.
    Thank you, Mr. Chairman.
    Chairman McCain. General Punaro mentioned the Air Force 
exchange I had with the Secretary of the Air Force, who 
volunteered, twice, that they had reduced the size of the 
headquarters by 10 percent, I believe it was, ahead of the 
years they were supposed to. And finally, I asked her, ``Well, 
how many jobs were eliminated?'' Zero. So----
    And again, I still, frankly, am challenged by this 
requirement to get particularly Silicon Valley as well as other 
wise people into the Department of Defense. And I agree with 
you, there's a certain number out there that were--are just 
patriotic Americans. But, that's in spite of the system that 
they would be joining, not because of. And so, I'm hoping we 
can work out some better way of incentivizing people of the 
kind of talents we need in this Information Age, and the cyber 
challenge that we're facing to serve the government.
    So, I thank you for this very important hearing.
    General Punaro?
    General Punaro. Mr. Chairman, I wanted to add one thing. In 
one of my other recommendations for reform in the Congress is 
to collapse the authorizing and appropriation committee and 
have the Senate Armed Services Committee authorize and 
appropriate in the same bill. That's a serious recommendation. 
It goes with biennial budgeting.
    And, number two, on the Goldwater-Nichols, I think we need 
to go back to giving the Chairman and the Vice Chairman a 4-
year tour instead of two 2-years, like we set it up. I'm very 
worried--and I've studied this and looked at it over time. I've 
talked to Senator Nunn, Senator Warner, Jim Locher, and others. 
I worry that the Chairman--I'm not pointing fingers at any one 
particular one--we're losing--they're losing their 
independence. And it--fundamental to this committee has always 
been that, when a military person is asked their professional 
views, independent of the administration in power, they give 
them. But, because we set it up so they have to be reconfirmed, 
I really worry about that. And I hope you will take a serious 
look at that.
    Chairman McCain. I think that's an excellent point. We 
recently had the Secretary of Defense come before this 
committee and refuse to confirm something that had--an event, 
of going inside the 12-mile limit, which was widely reported--
television, radio, and print media--refusing to confirm that. 
Later, in the New York Times, it said that they didn't want him 
to confirm it because it would irritate the Chinese over 
climate change. We have come a long, long way since my earliest 
days here on this committee. As much as I admire the Secretary, 
I find that kind of thing absolutely unacceptable.
    I thank you witnesses today. I thank you for being here. 
And this, again, contributes enormously to what we will really 
make a serious effort, hopefully, and I believe optimistically, 
that we will be working with the Secretary and others as we try 
to implement these reforms. But, we will implement these 
reforms, with or without the Secretary of Defense.
    This hearing is adjourned.
    [Whereupon, at 11:27 a.m., the hearing was adjourned.]

    [Questions for the record with answers supplied follow:]

               Questions Submitted by Senator Joni Ernst
           lack of occupational series for program management
    1. Senator Ernst. What role does the lack of a core occupational 
series for program management and a lack of a holistic program 
management framework rooted in industry standards and practices play in 
all acquisition outcomes?
    According to the Defense Acquisition Workforce Human Capital 
Initiative PowerPoint on Program Management from March 31, 2015--only a 
quarter of Program Managers are identified with OPM's 0340 job series. 
Moreover, the job description for the 0340 job series states, ``There 
are no individual occupational requirements for this series.'' 
Similarly the same presentation shows that there are engineers, IT, 
contracting professionals and others all fulfilling the role of Program 
Manager. How you are certain these individuals have the necessary 
credential to successful manage an acquisition program from start to 
finish?
    Major General Punaro did not respond in time for printing. When 
received, answer will be retained in committee files.
    Mr. Spencer did not respond in time for printing. When received, 
answer will be retained in committee files.
    Mr. Walker did not respond in time for printing. When received, 
answer will be retained in committee files.
               retention and growth of program managers:
    2. Senator Ernst. Information from the Defense Acquisition 
Workforce Human Capital Initiative PowerPoint on Program Management 
from March 31, 2015, also shows that of the ``experienced'' PM's . . . 
45 percent are eligible for retirement within 10 years and 17 percent 
are already eligible for retirement. What is DoD doing to ensure there 
is an experienced workforce and talent pipeline that is ready to keep 
up with the growing complexity and demand of defense acquisition and 
where is that talent pool going to come from?
    Major General Punaro did not respond in time for printing. When 
received, answer will be retained in committee files.
    Mr. Spencer did not respond in time for printing. When received, 
answer will be retained in committee files.
    Mr. Walker did not respond in time for printing. When received, 
answer will be retained in committee files.

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