[Congressional Record (Bound Edition), Volume 159 (2013), Part 1]
[Senate]
[Pages 866-869]
[From the U.S. Government Publishing Office, www.gpo.gov]




                               DOD REFORM

  Mr. McCAIN. Mr. President, this past year, our national debt passed a 
staggering $16 trillion, more than $51,000 for every man, woman, and 
child in America. Today, several very serious fiscal matters that would 
seriously impact the Department of Defense and the U.S. defense 
industrial base, including budget sequestration, the debt limit, and 
disposition of the defense budget for fiscal year 2013 remain 
unresolved. Underpinning all of these matters is the larger issue of 
why the culture of how the Department of Defense does business must 
change. While daunting, this question provides us with a valuable prism 
through which Senator Hagel's nomination, now pending consideration by 
the Armed Services Committee, should be considered.
  By ``culture,'' I mean that the mindset that has for years pervaded 
how the Department of Defense buys goods and services and manages 
assets and resources without regard to either their affordability or 
what our service men and women actually need to defend the Nation.
  After years of developing legislative initiatives intended to reform 
how the Department does business, I am convinced that the single most 
effective agent of cultural change at the Department is the right 
leadership: leadership

[[Page 867]]

that recognizes that the Department owes to the taxpayer a stewardship 
obligation to extract maximum value for every defense dollar spent, and 
a moral responsibility to the warfighter that these dollars are being 
spent wisely, to effectively procure desired combat capability.
  We need strong fiscal leadership to reject the use-or-lose mentality 
that incentivizes managers of the Department's programs and activities 
to spend every dollar, no matter what our priorities really are, and 
replace it with a process that actually rewards sound program 
management, incentivizes efforts to cut costs, and rewards those who 
use entrepreneurship and ingenuity to meet mission requirements, while 
returning taxpayer funds to the U.S. Treasury. In other words, cultural 
change needs leadership that not only rejects ``business-as-usual'' but 
also challenges it. Where Senator Hagel is on this is not clear.
  One area that reflects how desperately the Department of Defense 
needs to change its culture of inefficiency is how it procures goods 
and services, in particular, how it acquires major weapons systems. 
While reforms in this area have been attempted for more than 25 years, 
the same deplorable outcomes--major cost overruns, schedule slips, or 
failures to perform as promised--all persist. Why? It is because 
despite these efforts, the underlying culture within the Department of 
``business-as-usual,'' which predisposes its largest programs to these 
outcomes, has been allowed to live on.
  In how the Department procures its largest and most expensive weapons 
systems, this translates into a mindset that so fails to recognize the 
need for affordability that it has made the Department more willing 
than it should be to accept (at any cost) more risk than it can 
responsibly manage. There are far too many examples of where the 
Department begins a major program without knowing what it really wants 
or how these requirements should translate into technical 
specifications that are designed to generate the combat capability it 
really needs. Also, all too many times, there is no traceability 
between these specifications through a test regime that is sufficient 
to ensure that the system the Department is procuring is operational 
effective, suitable, and survivable before entering operational testing 
or early production. So what happens? These systems stay ``on rails''; 
blow through their original cost and schedule estimates; and, at the 
end of the day, bear little resemblance to what the war-fighter 
actually needs.
  But program management, fixated on ``keeping the money flowing'', 
push the program--many times, reimbursing the contractor for its costs 
throughout, and with the parochial support of Members of this body--
down the development pipeline, offering facile excuses for poor 
performance and, ultimately, less-than-desired capability. All of this 
happens within an overall management system that is overly cumbersome 
and costly and provides for no meaningful accountability.
  In the aggregate, this has been a ``perfect storm''. A defense 
procurement culture that is content with promises of exquisite 
solutions over actual affordability has squandered literally billions 
of taxpayer dollars. According to a recent study, since 2004, programs 
canceled by the Army alone consumed between $3.3 billion and $3.8 
billion per year. That is 35 to 45 percent of the Army's annual budget 
for development, testing, and engineering over this period. Obviously, 
this is simply unacceptable and unsustainable.
  Yet it happened again just recently. A couple of months ago, the Air 
Force, quite rightly, decided to kill a huge logistics supply chain 
management business system called the Expeditionary Combat Support 
System, ECSS. But it did so only after, one, sinking about $1 billion 
into the program since its start in 2005; two, recently finding that 
another $1.1 billion would be needed to field just 25 percent of ECSS's 
promised capability; and, three, extracting from the taxpayer's total 
$1 billion investment less than $150 million in usable hardware and 
software. I repeat: A total $1 billion investment, less than $150 
million was obtained in usable hardware and software. This is a 
travesty. In terms of how little benefit we realized compared to how 
much was spent, it is one of the most egregious examples of 
mismanagement in recent memory.
  Some reforms have helped, but much work needs to be done. The Weapons 
Systems Acquisition Reform Act of 2009 and its prescription to ``start 
programs off right,'' was a move in the right direction. I am pleased 
to report that in its last of the three reports focused on how 
effectively the Department has been implementing that act, the 
Government Accountability Office recently found that the Department has 
been taking positive steps to implement this reform act.
  It did so having sampled 11 weapons acquisition programs, including 
the KC-46A tanker, the SSBN(X) Ohio-class ballistic, missile submarine 
replacement, and the Ground Combat Vehicle, GCV. But getting rid of 
poor cost-, schedule-, and performance-outcomes and how the Department 
procures goods and services will require the sustained and enduring 
change that only a change in culture can provide. When it comes to 
defense procurement, a change in culture is possible only with 
leadership that recognizes that for government to act as a responsible 
steward over defense dollars, it must be as knowledgeable, skilled, and 
sophisticated a buyer as industry is a seller.
  Whether Senator Hagel would serve as the right leader at the 
Department of Defense to foster needed cultural changes in the 
Department's procurement practices is unclear. What we do know is that 
the right person must embrace the following principles: Set realistic 
requirements early and manage changes to those requirements 
aggressively. The Department must enforce better discipline and achieve 
greater accountability in how it meets its most critical military needs 
by dismantling stovepipes among the requirements, acquisition policy, 
and budgeting communities and ensure clear lines of authority within 
acquisition organizations. With the benefit of robust participation by 
the uniformed military, requirements should be frozen early, allowing 
for sufficient trade-space among the program's cost- schedule- and 
performance-variables to ensure that it is effectively managed 
throughout its lifecycle. Exquisite high-risk, next-generation 
solutions should be spiraled out over time. In other words, programs 
should be set to shorter acquisition timelines and should be managed to 
them.
  Improve the Department's ability to price risk--effectively and 
independently of industry--and budget to that cost. By ``risk,'' I mean 
the risk that a system is exposed to throughout its life cycle: 
technical-, software-, development-, integration-, manufacturing-, and 
sustainment-risk--all of them. Acquiring weapons systems thoughtfully 
vis-a-vis risk would minimize funding instability which can absolutely 
decimate a program's ability to deliver required capability on budget 
and on time and ultimately result in reliable systems that will be 
affordable to own and operate.
  Revitalize, and where necessary, build-up the Department's 
``organic'' workforce in areas most vital to ``buying smart'', like 
cost-estimating, technical- and systems-engineering, developmental 
testing, et cetera. The Department must be able to conduct proper 
should-cost analysis to inform its positions when it negotiates 
contracts and conduct engineering trade-off analysis to manage programs 
effectively over their lifecycles. With the benefit of this capability, 
the Department will be able to more effectively target affordability 
and control cost growth.
  Require the use of the type of contract that is most appropriate to 
the level of risk to be managed in the fee structure that is most 
appropriate to the type of performance to be incentivized. This 
requires the Department to know what it needs and, in connection with 
that requirement, exactly what kind of contractor performance it wants 
to incentivize. To that extent and as quickly as possible, the 
Department must get its programs into a low- to moderate-risk 
environment

[[Page 868]]

where it can use fixed-price contracts to effectively incentivize cost 
control.
  Better incentivize productivity and innovation. Rationalize profit 
policy and effectively use performance-based contracting and other 
tools in the contracting toolkit to incentivize and reward contractors 
for effectively managing costs, successfully managing their supply 
chains and indirect expenses, and actually delivering promised 
capability.
  Promote real competition, instead of ``checking the blocks''. Nothing 
drives costs down and enhances quality more effectively than 
competition. The Department has to make sure that competition, or the 
option of competition, is brought to bear on a program throughout its 
lifecycle, at both the systems and subsystems level. To the extent that 
the Department has been recently successful with some of its large, 
high-profile procurements, it is because it has been able to leverage 
competition aggressively.
  Improve how the Department acquires services. Military departments 
that have started diving into this area have already found massive 
opportunities for savings and efficiency--easily amounting to billions 
of dollars. This initiative should not only continue; it should expand 
throughout the defense enterprise.
  Reform how the Department procures information systems, especially, 
major automated information systems. While the technical aspects of 
these products are, of course, fundamentally different from major 
weapons systems, the basic tradecraft, especially those that reflect 
best business practices, shouldn't be that different. Procuring cyber-
security capability may, however, require greater agility and 
flexibility than what can be provided under the long and slow 
``deliberative'' acquisition process.
  Improve the ``rapid acquisitions'' process. In support of on-going 
operations, the war-fighter cannot rely on the ``deliberative'' 
acquisition process to satisfy its needs. The process by which these 
sorts of urgent operational requirements are satisfied reliably and 
cost-effectively needs to be reformed.
  Rein in the Department's ability to reprogram funds. I have been 
appalled that in fiscal year 2011 alone, the Department of Defense 
transferred nearly $27 billion among Defense accounts and that only $11 
billion, or 40 percent of these transfers, received any type of 
congressional oversight. That oversight was limited to just 8 Senators 
out of 100. The oversight of the transfer of billions of dollars is 
confined to the oversight of eight Members of the U.S. Senate. I 
happened to be one of them for the last 6 years, but I don't think it 
is appropriate to transfer that kind of money without all 100 percent 
being apprised of the need to do so. Despite that the Department cannot 
be audited--the Department of Defense has never been audited--we 
continue to provide it with the flexibility to engage in what amounts 
to budget gamesmanship where certain accounts, such as operation and 
maintenance and base-operations support, which are intended to satisfy 
``must-pay'' bills, are historically underfunded in the President's 
annual budget request, with the understanding that the Department will 
be able to transfer funds between accounts down-the-road. In my view, 
this type of budget gamesmanship is a big reason why the Department 
cannot annually produce auditable financial statements and frustrates 
objectively assessing the priority or urgency of the Department's 
requirements.
  This brings me to the other major area of how the Defense Department 
``does business'' that underscores the need for cultural reform, 
defense financial management, and the most significant thing that can 
be done in this area is finally getting the Department auditable.
  There can be no doubt that the ability of the Department to be 
audited independently would help ensure that the defense dollars are 
not wasted, lost, or otherwise misused. Absent auditability, the 
Government Accountability Office (GAO) has, since 1995, designated the 
Department's financial management as ``high-risk''.
  Today's fiscal challenges bring new urgency to the issue of 
auditability at the Department of Defense. To navigate successfully 
through this period of austerity and fiscal uncertainty without 
inadvertently impinging on military readiness, the Department will have 
to make management decisions that are fully informed and carefully 
calibrated. To ensure intended results, the Department has to make sure 
these decisions are being executed as planned.
  From well-managed companies in the private sector, which have to make 
decisions like this all the time, we know that reliable financial data, 
effective internal controls, efficient business processes, and sound 
business systems are needed to support an organization whose finances 
can be audited.
  Granted, the Department won't use auditable financial statements 
themselves to make important management decisions, but the high quality 
of the financial information that feeds into financial statements that 
are ready-for-audit would be incredibly valuable, indeed indispensable, 
for identifying opportunities for savings and efficiencies; 
successfully implementing initiatives and management controls to 
realize these savings and efficiencies; and making sure that 
increasingly scarce defense dollars are redirected to higher defense 
priorities. This would give the primary stakeholders in how the 
Department is managed--the war-fighter and the taxpayer--confidence 
that the defense management decisions can be relied upon to produce 
intended results. Given the state of financial management at the 
Department of Defense today, we do not now have that confidence.
  One big reason why we don't is that to date the Department's 
commitment to achieving financial auditability has been characterized 
by blown-deadline after blown-deadline. Various statutes, including the 
Chief Financial Officers Act of 1990, the Government Management Reform 
Act of 1994, the Federal Financial Management Improvement Act of 1996, 
and other provisions in various Defense authorization and 
appropriations acts, have required financial improvements at the 
Department of Defense for the Department to produce auditable financial 
statements. After continuous failure, we are at a point now where, for 
example, when then-Secretary of Defense Gates was trying to find 
efficiency and reduce waste at the Department a few years ago, he said 
what he was doing was ``something akin to an Easter egg hunt''. He 
explained, ``[M]y staff and I learned that it was nearly impossible to 
get accurate information and answers to questions such as `[h]ow much 
money do you spend?' and ``[h]ow many people do you have?'''
  For this reason, after succeeding Secretary Gates, Secretary Panetta 
immediately elevated financial improvement to a top priority of the 
Department by directing the Department to cut in half the time to make 
a key financial statement, called the Statement of Budgetary Resources 
(SBR), ready-for-audit. This goal must be achieved by fiscal year 2014. 
Seeking to leverage Secretary Panetta's initiative and with the 
assistance of Senator Ayotte, the Senate Armed Services Committee 
included a provision in its authorization bill this year that 
formalizes this goal.
  I am pleased to say that while much work needs to be done for the 
Department of Defense to achieve its audit-readiness goals, the 
Department has made some limited progress, particularly through its 
Financial Improvement and Audit Readiness (FIAR) plan, which the Senate 
Armed Services Committee legislated as a requirement a few years ago. 
The House Armed Services Committee's Panel on Defense Financial 
Management and Auditability Reform found early this year contained a 
``reasonable strategy and methodology.''
  In my view, it is no longer the case that top defense managers ``just 
don't get it'' or that they are dragging their feet because they don't 
see financial improvement as a priority. Indeed, perhaps the silver-
lining in today's fiscal challenges is that it seems to have united top 
management at the Pentagon into finally realizing how important it is 
for the Department to become financially auditable.

[[Page 869]]

  Indeed, over the last few years, some agencies within the Department, 
such as the Army Corps of Engineers, the Military Retirement Fund, 
Defense Contracting Audit Agency, and TRICARE's Contract Management 
Activity have received clean audit opinions. As GAO's Director of 
Financial Management and Assurance Asif Khan recently said, Secretary 
Panetta's directive has resulted in a ``change in tone at the top'' 
that has ``reset'' the Department's efforts to achieve an unqualified 
audit opinion. How exactly would Senator Hagel, if confirmed, further 
Secretary Panetta's efforts here?
  This is not an academic question. As the Department of Defense's 
Deputy Inspector General for Auditing Dan Blair recently noted, for the 
Department to achieve an auditable statement of budgetary resources 
(SBR) by 2014, it must run what amounts to ``a big checking account 
with thousands of people being able to write checks'' and that 
capturing an ``auditable universe'' within it will require reconciling 
between a general ledger and subsidiary ledgers.
  A big problem is ongoing delay in implementing very expensive 
business computer systems called ``enterprise resource planning'' or 
ERPs, which perform a number of business-related functions vital to 
transforming the Department's business operations. The ECSS system I 
mentioned a few minutes ago is one of these ERPs.
  As of December 2009, the Department of Defense has invested over $5.8 
billion in these ERPs and will invest billions more before they are 
fully implemented. Most of them are over budget and behind schedule or 
haven't provided promised capability. Yet these ERPs make up more than 
half of the Department's entire expenditure in the area of business 
transformation, costing the taxpayers more than $1 billion per year.
  This is vitally important. If the Department doesn't get ERPs right, 
like a system known as ECSS that cost $1 billion dollars, not only will 
the Department have squandered monies that it had already sunk into 
these programs but it will also severely undermined its ability to 
improve the efficiency and the effectiveness of scores of business- 
missions such as logistics and supply chain management, et cetera, that 
are key to supporting those service-men and -women who defend the 
Nation.
  What needs to be done? From the top down, lines of authority must be 
clarified. The relevant workforce must be well-versed in government 
accounting practices and standards and be experienced in related-
information technology. Given how vitally important these ERPs are to 
this mission, people who have actual experience successfully 
implementing global business systems must be properly mixed into the 
workforce, and contractors hired to integrate these business systems 
into the Department must be the best-qualified partners and held to the 
same high performance standards that should apply to any other major 
defense acquisition.
  Within this overall structure, there must be sufficient oversight and 
accountability vis-a-vis a well-defined and federated business 
enterprise architecture that ensures that, in terms of organizational 
transformation and systems modernization, all the different elements of 
the Department are moving in the same direction toward a single goal. 
These kinds of issues need to have the day-to-day attention of the 
Department's Chief Management Officer, that is, the Deputy Secretary of 
Defense and the chief management officers within the military 
departments.
  At this point, I am of the view that, with all of the congressional 
reforms and mandates in the area of financial improvement over the past 
few years, the Department of Defense has all the tools it needs to have 
in its tool-kit to achieve audit-readiness on time and on budget. The 
issue is leadership and execution. As the House Panel on Financial 
Management and Auditability Reform noted, a vital part of that is 
``ensuring that senior leaders are held accountable when audit 
readiness goals are not met, and conversely, rewarded when goals are 
achieved''. Also, defense financial improvement must no longer be 
regarded as an activity important only to the Department's financial 
community. Field commanders have to be fully engaged and interested in 
driving change outside the Pentagon. If Senator Hagel is confirmed, his 
setting this tone from the top will be vitally important.
  Is all this enormously challenging? It absolutely is, as befits an 
organization of the size and complexity of the Department of Defense. 
With an annual budget equal to the 17th largest economy in the world, 
as the Institute for Defense Analyses recently noted, the Department's 
``business'' of achieving its unique and disparate missions worldwide 
on an ongoing and contingency basis equates more to an economy than a 
commercial business.
  Be that as it may, with an annual federal budget deficit of $1.3 
trillion and defense reductions of at least $487 billion and possibly, 
with sequestration, another $500 billion over the next 10 years, the 
Department needs to have reliable financial management data to help it 
distinguish between defense budget cuts that are prudent and necessary, 
and those that may impinge on military readiness and, therefore, 
endanger our national security.
  Only a Department that can be audited can give us the assurance that 
the Department is moving in the right direction in terms of identifying 
the right opportunities to save defense dollars and eliminate waste, 
and redirecting increasingly scarce defense dollars to higher defense 
priorities.
  All I have discussed today illustrates how important sound leadership 
at the top of the Department of Defense is to ``buying smarter'' and 
getting the Department ready-for-audit. Without leadership 
fundamentally and unalterably mindful of the Department's 
responsibility to the American people to use defense dollars wisely, 
this cultural change will forever remain elusive. For this reason, this 
body's consideration of the President's nominee to serve as the next 
Secretary of Defense will be more important than it has been in recent 
memory.
  I would like to give credit to the present Secretary of Defense, Mr. 
Leon Panetta, who brought his knowledge and expertise on budgetary 
matters to his work at the Pentagon. I will say more about him later 
on, but I am very appreciative of the outstanding service present 
Secretary of Defense Panetta has provided to this Nation, with many 
long years of service both in elected as well as appointed office. We 
are proud to have Americans such as Secretary Panetta serving our 
Nation.
  I yield the floor.
  The PRESIDING OFFICER. The Senator from Iowa.

                          ____________________