Defense IRM: Strategy Needed for Logistics Information Technology
Improvement Efforts (Letter Report, 11/14/96, GAO/AIMD-97-6).

Pursuant to a congressional request, GAO reviewed the Department of
Defense's efforts over the last 4 years to improve its informations
systems in the depot maintenance, materiel management, and
transportation business areas, focusing on whether selected standard
information systems will allow DOD to meet its business objective to
dramatically improve the efficiency and effectiveness of its logistics
operations.

GAO found that: (1) DOD's continued deployment of information systems
using a migration strategy for the depot maintenance, materiel
management, and transportation business areas will not likely produce
the significant improvements originally envisioned; (2) DOD has
acknowledged that its migration systems strategy will not provide
necessary dramatic improvements and cost reductions and is now
emphasizing alternative ways of improving logistics business operations,
such as turning to the private sector to carry out major logistics
functions; (3) DOD is continuing to deploy information systems selected
under the migration strategy that are linked to the very same business
functions it wishes to make more efficient and economical through
outsourcing or privatization; (4) DOD is exploring alternative ways to
improve its logistics operations, but GAO is concerned that the current
path needlessly risks wasting a substantial amount of the more than $7.7
billion DOD plans to invest in improving automated logistics systems;
(5) DOD still has not taken the fundamental steps necessary to ensure
that the automated systems it continues to deploy will yield a positive
return on investment, and it has not yet sufficiently tied these new
efforts to its overall business objectives through the use of a
strategic investment strategy; and (6) without addressing these
concerns, DOD's new improvement efforts, like the failed standard
migration strategy, will proceed with little chance of achieving the
objectives originally envisioned for substantial operational
improvements and reduction in costs.

--------------------------- Indexing Terms -----------------------------

 REPORTNUM:  AIMD-97-6
     TITLE:  Defense IRM: Strategy Needed for Logistics Information 
             Technology Improvement Efforts
      DATE:  11/14/96
   SUBJECT:  Defense procurement
             Defense cost control
             Defense economic analysis
             Logistics
             Privatization
             Information resources management
             Strategic information systems planning
             Reengineering (management)
IDENTIFIER:  DOD Air Loading Module
             DOD Corporate Information Management Initiative
             Air Force Cargo Movements Operations System
             DOD Logistics Corporate Information Management Migration 
             Master Plan
             Air Force Stock Control and Distribution System
             DOD Materiel Management Standard System
             DOD Depot Maintenance Resource Planning System
             DOD Depot Maintenance Standard System
             CIM
             
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Cover
================================================================ COVER


Report to Congressional Requesters

November 1996

DEFENSE IRM - STRATEGY NEEDED FOR
LOGISTICS INFORMATION TECHNOLOGY
IMPROVEMENT EFFORTS

GAO/AIMD-97-6

Defense Logistics IRM

(511366)


Abbreviations
=============================================================== ABBREV

  ALM - Air Loading Module
  ASD(C3I) - Assistant Secretary of Defense for Command, Control,
  Communication, and Intelligence
  CIM - Corporate Information Management
  CMOS - Cargo Movement Operations System
  DOD - Department of Defense
  DUSD(L) - Deputy Under Secretary of Defense for Logistics
  GPRA - Government Performance and Results Act
  IBM - International Business Machines
  IRM - information resources management
  PRA - Paperwork Reduction Act
  USD(A&T) - Undersecretary of Defense for Acquisition and Technology

Letter
=============================================================== LETTER


B-272459

November 14, 1996

The Honorable Herbert H.  Bateman
Chairman, Subcommittee on Military Readiness
Committee on National Security
House of Representatives

The Honorable John Glenn
Ranking Minority Member
Committee on Governmental Affairs
United States Senate

As requested, as part of our continuing review of the Department of
Defense's (DOD) Corporate Information Management (CIM) initiative,
this report summarizes our findings on DOD's efforts over the last 4
years to improve its informations systems in the depot maintenance,
materiel management, and transportation business areas.  Our specific
objective was to determine whether selected standard information
systems will allow DOD to meet its business objective to dramatically
improve the efficiency and effectiveness of its logistics operations. 

These standard logistics systems, in which DOD expects to invest more
than $7.7 billion over the next few years, are part of the
Department's CIM initiative.  CIM, begun in October 1989, was
initially an attempt to apply best business practices to dramatically
improve DOD's business operations.  In 1992, DOD estimated that such
improvements to its logistics operations could save as much as $28
billion by fiscal year 1997.  After some initial process improvement
efforts were begun, however, DOD determined in October 1993 that
these improvements would take too long to implement and would not
produce needed short-term budgetary savings. 

Consequently, DOD changed its CIM implementation focus to what it
termed a "migration systems" strategy.  This strategy was geared
toward obtaining more short-term budgetary savings by selecting DOD's
best logistics information systems and standardizing them across all
the military services and defense agencies.  These migration systems
were expected to provide budgetary savings by eliminating the cost of
developing and maintaining multiple information systems that support
the same business functions.  By gradually implementing and improving
these standard systems, DOD believed it would eventually achieve the
dramatic improvements originally expected from CIM. 

In 1995, DOD recognized that the migration system deployments for
materiel management and depot maintenance were consuming large
amounts of money and taking longer than expected, and would not be
able to achieve significant benefits.  These deployments were scaled
back and the strategy of standardizing automated systems across all
the services and Defense agencies was abandoned in favor of efforts
to achieve interoperability between services' information systems and
privatize logistics functions.  However, DOD is continuing to deploy
some of the system applications at selected sites determined by the
services and defense agencies. 


   RESULTS IN BRIEF
------------------------------------------------------------ Letter :1

DOD's continued deployment of information systems using a migration
strategy for the depot maintenance, materiel management, and
transportation business areas will not likely produce the significant
improvements originally envisioned.  For the most part, these
efforts--which were intended to lay the groundwork for future
dramatic change by first standardizing information systems and the
related processes throughout the Department--are merely increasing
the risk that the new systems that are deployed will not be
significantly better or less costly to operate than the hundreds of
logistics information systems already in place. 

DOD itself has acknowledged that its migration systems strategy will
not provide necessary dramatic improvements and cost reductions and
is now emphasizing alternative ways of improving logistics business
operations, such as turning to the private sector to carry out major
logistics functions.  At the same time, however, it is continuing to
deploy information systems selected under the migration strategy that
are linked to the very same business functions it wishes to make more
efficient and economical through outsourcing and/or privatization. 

While we are encouraged that DOD is exploring alternative ways to
improve its logistics operations, we are concerned that the current
path needlessly risks wasting a substantial amount of the more than
$7.7 billion DOD plans to invest in improving automated logistics
systems.  First, DOD still has not taken the fundamental steps
necessary to ensure that the automated systems it continues to deploy
will yield a positive return on investment.  Second, even as Defense
embarks on its new improvement efforts, it has not yet sufficiently
tied these new efforts to its overall business objectives through the
use of a strategic investment strategy to ensure that the billions of
dollars will be wisely spent.  Such planning would be in keeping with
best private and government sector practices as well as with new
legislation which underscores the importance of strategic information
planning for the efficient and effective use of information
technology.  Without addressing these concerns, Defense's new
improvement efforts--like the failed standard migration
strategy--will proceed with little chance of achieving the objectives
originally envisioned for substantial operational improvements and
reduction in costs. 


   SCOPE AND METHODOLOGY
------------------------------------------------------------ Letter :2

To determine whether DOD's logistics migration efforts will meet its
objectives for dramatic improvements in operational efficiency and
effectiveness, we reviewed DOD's policies and guidance for enterprise
integration, corporate information management, and logistics
migration system selection to ensure that information technologies
are acquired, managed, and used in the most efficient and effective
manner.  Our assessment included analyzing DOD and prior GAO studies
of the migration system strategy implementation and comparing DOD's
logistics information resources management practices to those
followed by public and private organizations.  We conducted our
review from August 1995 through August 1996 in accordance with
generally accepted government auditing standards.  Details of our
scope and methodology are contained in appendix I.  The Deputy Under
Secretary of Defense for Logistics provided written comments on a
draft of this report.  These comments are discussed at the end of
this report and reprinted in appendix II. 


   BACKGROUND
------------------------------------------------------------ Letter :3

DOD has said that it must either improve effectiveness and efficiency
dramatically or face real losses in capability to meet its mission
objectives.  As characterized by the Under Secretary of Defense for
Acquisition and Technology (USD(A&T)), "Every logistics dollar
expended on outdated systems, inefficient or excess capability and
unneeded inventory is a dollar not available to build, modernize or
maintain warfighting capability."


      LOGISTICS IS BIG BUSINESS
---------------------------------------------------------- Letter :3.1

Defense logistics is the acquisition, management, distribution, and
maintenance of the DOD materiel inventory used to provide replacement
parts and other items for sustaining the readiness of ships,
aircraft, tanks, and other weapon systems, as well as supporting
military personnel.  Logistics business operations include four major
business activities\1 --depot maintenance, distribution, materiel
management, and transportation.  DOD has reported that it spends over
$44 billion annually maintaining, managing, distributing, and
transporting a materiel inventory of $70 billion to support about
$600 billion in mission assets. 


--------------------
\1 Depot maintenance is the manufacture, overhaul, and repair of
large items, such as tanks, ships, and airplanes, as well as small
ones, such as communications and electronic components.  Distribution
is the receipt, storage, issue, and movement of materiel from
suppliers to warehouses or from warehouses to users.  Materiel
management is the determination of what and how many items DOD needs,
how to acquire and where to store them, and tracking these items
until their issue to users.  Transportation is the movement of people
and cargo by truck, rail, air, and sea performed by military
services, joint organizations, or commercial carriers. 


      CIM ESTABLISHED TO IMPROVE
      BUSINESS OPERATIONS
---------------------------------------------------------- Letter :3.2

In October 1989, DOD established the CIM initiative to dramatically
improve the way DOD conducts business, primarily by adopting best
business practices used in the public and private sectors and
building the automated information systems to support those improved
practices.  Originally, CIM focused on administrative areas such as
civilian payroll, civilian personnel, and financial operations.  DOD
quickly broadened the initiative to encompass all DOD business areas,
including the major logistics business activities. 

In January 1991, the Deputy Secretary of Defense endorsed a CIM
implementation plan under which DOD would "reengineer," that is
thoroughly study and redesign, its business processes before it
standardized its information systems.  The Deputy Secretary believed
this implementation strategy would emphasize the importance of
improving the way DOD did business rather than merely standardizing
old, inefficient business processes.  In 1992, DOD projected that by
focusing on business improvement, it could save as much as $36
billion by fiscal year 1997.  DOD expected that improvements to its
logistics operations would provide most--$28 billion--of these CIM
savings. 

By early 1992, DOD had identified a number of process improvement
projects.  However, later in the year, the Acting DOD Comptroller,
concerned that the current CIM implementation approach would not
produce the cost savings needed to help offset significant budget
reductions, recommended that focus be shifted from reengineering
projects to the selection and implementation of standard information
systems that could be used departmentwide. 


      MIGRATION STRATEGY FOR
      IMPLEMENTING LOGISTICS CIM
---------------------------------------------------------- Letter :3.3

In November 1992, the Assistant Secretary of Defense for Production
and Logistics--now called the Deputy Under Secretary of Defense for
Logistics (DUSD(L))--issued the Logistics CIM Migration Master Plan. 
This plan established the selection of migration systems as the CIM
implementation strategy within the logistics business activities. 
This "migration systems strategy" called for identifying the best
operational logistics information systems and deploying them across
all the services and defense agencies.  This, DUSD(L) believed, would
not only make logistics operations more efficient (areas would mirror
the best in DOD) but these standard systems would also eliminate the
cost of developing and supporting redundant systems designed to
perform the same basic business functions. 

The strategy was designed to gradually migrate the military services
and defense agencies from their multiple and often redundant
information systems by (1) selecting and deploying migration
systems--either single information systems or groups of information
systems--in each logistics activity departmentwide, (2) improving
current business processes and adding new functions to fill voids,
and (3) combining the improved and new business processes with the
new information systems to form a corporate logistics process.  For
example, Defense had identified over 200 large and numerous smaller
depot maintenance and materiel management logistics systems with the
goal of first reducing the number of these separate systems to as few
as 32 and then using these systems to migrate toward a single
logistics standard information system. 


   THE MIGRATION SYSTEM STRATEGY
   HAS NOT WORKED AS EXPECTED
------------------------------------------------------------ Letter :4

DOD's efforts to standardize and migrate information systems across
the logistics areas of depot maintenance, materiel management, and
transportation have not achieved expected results.  Recently, DOD
acknowledged that the deployment of standard information systems will
not provide the dramatic improvements and cost reductions envisioned
under the CIM initiative and is now emphasizing alternative ways for
meeting these objectives.  At the same time, however, it is
continuing to deploy the information systems selected under the
failed migration strategy. 


      GAO REVIEWS OF DOD'S
      MIGRATION SYSTEM EFFORTS
---------------------------------------------------------- Letter :4.1

Our reviews of DOD migration system efforts for depot maintenance,
materiel management, and transportation operations confirm that, to
date, the strategy has failed to produce the dramatic gains in
efficiency and effectiveness that DOD anticipated.  More
specifically: 

  -- Our review of depot maintenance\2 systems found that even if the
     migration effort was successfully implemented as envisioned, the
     planned depot maintenance standard system will not dramatically
     improve depot maintenance operations in DOD.  First, under the
     CIM initiative, DOD planned to invest more than $1 billion to
     develop a depot maintenance standard system.  However this would
     achieve less than 2.3 percent in reduced operational costs over
     a 10-year period.  Such incremental improvement is significantly
     less than the order-of-magnitude improvements DOD has said could
     be achieved through the reengineering of business processes. 
     Second, by postponing reengineering efforts until after
     developing the standard system, DOD may make it more difficult
     to reengineer in the future by increasing the risks of
     entrenching inefficient and ineffective work processes. 

  -- Our review of DOD's materiel management\3 systems effort showed
     that the Department itself abandoned the migration strategy for
     this logistics area after it realized that the original goal for
     achieving a standard suite of integrated systems would require
     significantly more time and money than originally anticipated. 
     For example, it would take as long as 2 years and as much as
     $100 million more than originally estimated to develop and
     deploy the Stock Control System--an application that would
     assist in requisition, receipt, and inventory processing.  After
     spending over $700 million to migrate materiel management
     standard systems, there were no dramatic improvements in
     materiel management business processes; there were numerous
     development, scheduling, and contracting problems; and only one
     application of the Stock Control System had been deployed.  That
     application was delivered basically untested, did not meet user
     functional requirements, and required much rework, debugging,
     and testing on the user's part. 

  -- Our review of Defense's transportation\4 migration efforts found
     that the current migration strategy in the transportation area
     will not ensure improvements are made that Defense recognizes
     are critical to the transportation function.  A number of
     studies since 1950 have found that Defense traffic management
     processes are fragmented and inefficient, reflecting the
     conflicts and duplication inherent in a traffic management
     organizational structure consisting of multiple transportation
     agencies, each with separate service and modal responsibilities. 
     In a 1994 DOD report, Reengineering the Defense Transportation
     System:  The "Ought To Be" Defense Transportation System of the
     Year 2010, Defense officials maintained that nothing less than
     fundamental change would be required to achieve the quantum
     gains in savings and productivity needed to improve
     transportation business processes.  We recently reported\5 that
     it will be difficult for Defense to realize the benefits of its
     current reengineering efforts because these efforts do not
     concurrently focus on how the transportation organization
     structure should be redesigned.  Moreover, we have also recently
     reported\6

that even though reengineering efforts for transportation are
underway, in making its migration system selections, Defense did not
assess the impact that these operational changes would have on its
system selections. 


--------------------
\2 Defense Management:  Selection of Depot Maintenance Standard
System Not Based on Sufficient Analyses (GAO/AIMD-95-110, July 13,
1995). 

\3 Defense IRM:  Critical Risks Facing New Materiel Management
Strategy (GAO/AIMD-96-109, September 6, 1996). 

\4 Defense Transportation:  Migration Systems Selected Without
Adequate Analysis (GAO/AIMD-96-81, August 29, 1996). 

\5 Defense Transportation:  Streamlining of the U.S.  Transportation
Command Is Needed (GAO/NSIAD-96-60, February 22, 1996). 

\6 GAO/AIMD-96-81, August 29, 1996. 


      DOD ACKNOWLEDGES MIGRATION
      STRATEGY HAS NOT WORKED
---------------------------------------------------------- Letter :4.2

DOD's own studies have acknowledged that the implementation of the
migration strategy has not worked.  In May 1994, for example, DUSD(L)
chartered a team with representatives from the services and Defense
Logistics Agency to identify ways to improve the business practices
of DOD inventory control points.  The team, with industry assistance,
found\7 that the migration approach to standardizing and upgrading
materiel management information systems was not workable and
recommended that efforts to develop the Materiel Management Standard
System be discontinued.  Similarly, the Commission on Roles and
Missions of the Armed Forces,\8 in its logistics case studies,
concluded that DOD's efforts to standardize its management
information systems under its CIM initiative would merely result in
more compact, standardized versions of DOD's traditional business
operations. 

In late 1994, the Assistant Secretary of Defense for Command,
Control, Communications, and Intelligence (ASD(C3I)) acknowledged
that DOD's logistics migration systems strategy was seriously flawed. 
The Assistant Secretary said that, as opposed to the private sector
which uses a very different approach, "DOD has virtually no chance of
making high impact/quantum changes using the current approach." In
October 1995, the Under Secretary of Defense for Acquisition and
Technology called for a revision to the standard migration systems
strategy. 


--------------------
\7 Final Report of the Inventory Control Point Benchmarking Team,
April 1995. 

\8 The National Defense Authorization Act of 1994, Public Law
103-160, Section 952(a) established the Commission to provide an
independent review of the current roles, missions, and functions of
the Armed Services; evaluate and report on alternatives; and make
recommendations for changes in their current definition and
distribution. 


      DOD IS EMPHASIZING
      ALTERNATIVE WAYS TO IMPROVE
      LOGISTICS OPERATIONS
---------------------------------------------------------- Letter :4.3

Currently, for all business areas, DOD is trying alternative ways to
achieve its CIM objectives of dramatic business improvement and cost
reductions while, at the same time, continuing to deploy migration
systems.  To improve logistics operations, DOD is now emphasizing
systems interoperability--the ability to exchange information between
and among business activities--as a critical means for achieving
dramatic improvements.  To reduce operational costs, DOD is seeking
to privatize and outsource certain functions--relying on the private
sector to provide services that need not be performed by the
Department.  These three efforts make up a de facto DOD strategy for
improving logistics systems.  Each of the current efforts is
discussed in more detail below. 


         INTEROPERABLE SYSTEMS
-------------------------------------------------------- Letter :4.3.1

In calling for a revision to the migration strategy, the Under
Secretary of Defense for Acquisition and Technology, in October 1995,
stressed the importance of building interoperable systems and
processes by relying on common operating environments\9 and standard
data exchange--elements which many migration systems do not have. 
DOD has directed business area managers to view their areas as part
of the bigger DOD enterprise and develop information systems that are
interoperable.  Accordingly, business activities must be able to
readily exchange information in order to provide senior managers with
the comprehensive overview they need to make dramatic process
improvements. 


--------------------
\9 A common operating environment is a profile of products selected
for an organization or project in conformance with the standards
defined in the organization's or project's technical architecture. 


         PRIVATIZATION AND
         OUTSOURCING
-------------------------------------------------------- Letter :4.3.2

In May 1995, the Commission on Roles and Missions of the Armed
Services reported\10 that more than 250,000 of DOD's employees engage
in commercial-type activities.  To significantly reduce the costs of
Defense operations, the Commission recommended that DOD rely
primarily on the private sector for services that need not be
performed by the government and reengineer those retained by the
Department.  Specifically addressing depot maintenance and materiel
management activities, the Commission concluded that private
contractors could provide essentially all of the services now
conducted in government maintenance and inventory facilities more
efficiently and effectively. 

Consistent with the Commission's recommendations, the Deputy
Secretary of Defense announced, in late 1995, that DOD would review
opportunities to privatize a whole array of functions that, while
important, do not directly contribute to the warfighter in the field. 
It has been reported that DOD spends about $125 billion each year
performing commercial-type support functions, including those of
depot maintenance, materiel management, and transportation.  It has
also been reported that, by privatizing only half of these support
functions, DOD could save as much as of 20 percent, or $12 billion
annually.  We have, however, reported that under current conditions
of excess depot capacity and limited private sector competition,
these savings may not be realized.\11

To achieve these savings, DOD established nine working groups,
including one for depot maintenance and one for materiel management. 
According to materiel and distribution management working group
officials, all business activities are actively being considered for
privatization, including those the logistics migration systems are to
support.  They emphasized, however, that their reviews would not be
complete until mid-1996 and resulting privatization actions would
likely take a year or longer to accomplish at initial sites.  They
also stated that it could take longer than 5 years to fully implement
any overall privatization strategy. 


--------------------
\10 Directions for Defense, Report of the Commission on Roles and
Missions of the Armed Forces, May 24, 1995. 

\11 Defense Depot Maintenance:  Commission on Roles and Mission's
Privatization Assumptions Are Questionable (GAO/NSIAD-96-161, July
13, 1996). 


         MIGRATION SYSTEM
         DEPLOYMENT
-------------------------------------------------------- Letter :4.3.3

Although DOD has acknowledged that its migration systems strategy has
failed, it continues to deploy migration systems.  Over the next
several years, DOD plans to spend more than $7.7 billion to deploy
these systems in addition to the $1.2 billion it reported having
already spent.  Table 1 identifies the costs to date and those
expected to accrue that DOD reported in its fiscal year 1996-1997
biennial budget exhibits.  We did not independently verify DOD's
budget estimates. 



                                Table 1
                
                Logistics Migration Information Systems
                  and DOD Budget Estimates for Fiscal
                          Years 1996 and 1997

                        (Dollars\a in millions)

                           Migration           Costs
                             systems   Costs      to    Life
                          applicatio      to  comple   cycle  Completi
Logistics activity                ns    date      te   costs  on date
------------------------  ----------  ------  ------  ------  --------
Depot maintenance                8\b  $190.3  $2,616  $2,807  Late
                                                  .9      .2   1998
Materiel management              9\c   437.8  3,967.  4,405.  None
                                                   6       4   estimat
                                                               ed
Defense transportation            23   587.0  1,122.  1,709.  1999
                                                   7       7
======================================================================
Totals                            40  $1,215  $7,707  $8,922
                                          .1      .2      .3
----------------------------------------------------------------------
\a All costs in then year dollars (inflated dollars). 

\b The number of depot maintenance migration systems has declined
from nine to eight because one system became a major component of
another system. 

\c Materiel management migration systems declined from 24 to 10
applications through combining two or more systems into one.  In
March 1995, one of the 10 was terminated. 

We asked DOD logistics officials why they continued deployment of the
logistics migration systems.  They told us that the costs associated
with stopping deployment of these systems and then restarting them
would be significant.  However, they had not performed an analysis to
support this view.  Also, officials cautioned that stopping migration
system deployments could result in a lengthy delay in providing these
systems to the services and Defense agencies.  However, they
acknowledged that immediate assessments are needed to ensure that the
Defense investments in these systems were justified. 


   CONCERNS ABOUT DOD'S CURRENT
   LOGISTICS IMPROVEMENT EFFORTS
------------------------------------------------------------ Letter :5

We encourage DOD to explore alternative ways for improving logistics
operations.  However, we have two major concerns with its current
efforts to develop systems interoperability, privatize
commercial-type logistics activities, and deploy migration systems. 
First, Defense still has not completed the analyses required to
determine that its logistics system deployment effort will yield a
positive return on investment.  Without this decision-making tool,
Defense has no assurance that any efforts it makes to improve
logistics systems will support its operational improvement and cost
reduction objectives.  Second, Defense has not yet sufficiently tied
its improvement efforts to its overall business objectives through
the use of strategic planning--a necessary step to ensure that the
billions of dollars being invested in logistics improvement efforts
will result in significant improvements in operations.  Had it
strategically planned for its system migration efforts, it may well
have avoided costly strategy failures.  We are currently reviewing
DOD's progress in its implementation of its overall logistics
strategic plan. 


      FUNDAMENTAL COST-BENEFIT
      ANALYSES NECESSARY TO ENSURE
      SUCCESS OF SYSTEM EFFORTS
---------------------------------------------------------- Letter :5.1

In continuing to deploy migration systems without addressing the
fundamental problems associated with its selection and deployment of
migration systems to date, DOD risks wasting a substantial amount of
the additional $7.7 billion it plans to spend over the next few
years.  In developing systems for depot maintenance, materiel
management, and transportation, Defense did not adequately ensure
that the hundreds of millions of dollars it spent on development
efforts would be cost-effective and beneficial. 

Defense requires\12 that decisions to develop and deploy information
systems be based on convincing, well-supported estimates of project
costs, benefits, and risks.  These directives establish a disciplined
process for selecting the best projects based on comparisons of
competing alternatives.  Defense's principal means for making these
comparisons is a functional economic analysis.  For each alternative,
a functional economic analysis identifies resource, schedule, and
other critical project characteristics and presents estimates of the
costs, benefits, and risks.  Once an alternative is chosen, the
analysis becomes the basis for project approval.  Any significant
change in expected project costs, benefits, or risks requires
reevaluation of the selected alternative. 

In our reviews of DOD's efforts to implement the migration system
strategy across its depot maintenance, materiel management, and
transportation business activities, we found that DOD routinely
selected and is deploying migration systems without (1) sufficiently
analyzing their costs and benefits and (2) considering possible
better commercial alternatives, such as reengineering, privatization,
and outsourcing of business functions.  Only recently has DOD began
to consider such options. 

The following are the results of our previous reviews on DOD's cost,
benefit, and risk analyses. 

  -- Our review of depot maintenance\13 migration found that Defense
     selected the Depot Maintenance Standard System without analyzing
     the systems' full development and deployment costs.  Instead, it
     relied on a functional economic analysis of a previously
     proposed project--the Depot Maintenance Resource Planning
     system.  This analysis understated Depot Maintenance Standard
     System project costs by at least $140 million by including costs
     for only some components, and it understated costs for the
     components it did include. 

  -- Had Defense followed its own regulations and calculated
     investment returns on its transportation migration
     selections,\14 it would have found--based on data available when
     the migration systems were selected--that two of the selected
     systems would lose money.  The Air Loading Module (ALM) would
     lose $0.67 out of every dollar invested and the Cargo Movement
     Operations System (CMOS) would lose $0.04 out of every dollar
     invested.  DOD's analyses also did not include all costs
     associated with its evaluation of in-house systems.  At least
     $18 million in costs were excluded--$16 million for an analysis
     of candidate migration systems and $2 million for maintaining
     migration system hardware.\15 We also found that had DOD
     included these costs in its systems selection analyses, it would
     have found that the overall return on investment would have
     decreased. 

  -- Our review of materiel migration system\16 efforts showed that a
     complete economic analysis was never made for the migration
     strategy until July of 1995--nearly 3 years after the strategy
     began.  Further, when Defense dramatically changed the course of
     materiel management systems development--abandoning the concept
     of developing a standard system and instead moving to
     incremental and individual deployments--it again did not set out
     to first assess risks, costs, and benefits before proceeding
     with such a change in strategy. 

Our reviews also found that major changes to operations or
potentially better business practices were not assessed during the
system selection process.  Without a comparison of alternatives, DOD
has no assurance that it has selected the most efficient and
effective solution.  For example, Defense selected a migration system
to support its transportation of personal property and plans to spend
$63 million over the next 5 years to implement it.  Recently,
however, DOD began actively seeking to privatize major components of
this function.  As a result, further spending on the migration system
may be questionable since the system may no longer be needed. 
Similarly, DOD is deploying migration systems to support its materiel
management operations without sufficient assessment of recent DOD
initiatives focusing on privatizing materiel management operations or
consolidating inventory control points.  As a result, Defense may end
up spending millions of dollars on systems for functions that it no
longer performs or on inventory control points that are later
consolidated. 

Our previous reports made a number of recommendations to help ensure
that DOD selected the systems that offered the most effective
solutions at least cost.  These recommendations included preparing
documentation that described system efforts and validated that they
were the best alternatives for improving their respective business
areas.  Although DOD partially agreed with some of our
recommendations, it essentially has continued to deploy systems
without adequate economic analysis and full comparisons of available
alternatives needed to ensure that it is making the best investment
of its resources. 

Nevertheless, DOD is required to manage its information technology as
investments.  The Clinger-Cohen Act of 1996\17

was passed to stop government spending on systems projects that were
found to be far exceeding their expected costs and yielding
questionable benefits to mission improvements.  Specifically, under
the Clinger-Cohen Act, DOD is required to design and implement a
process for selecting IT investments using such criteria as
risk-adjusted return-on-investment and specific criteria for
comparing and prioritizing alternative information system projects. 
If implemented properly, this process should provide a means for
senior management to obtain timely information regarding progress in
terms of costs, capability of the system to meet performance
requirements, timeliness, and quality. 


--------------------
\12 Defense Directive 5000.1, Defense Acquisition, March 15, 1996,
and Defense Regulation 5000.2, Mandatory Procedures for Major Defense
Acquisition Programs and Major Automated Information System
Acquisition Programs, March 15, 1996, and draft Defense Manual
8020.1-M, Functional Process Improvement (Functional Management
Process for Implementing the Information Management Program of the
Department of Defense). 

\13 GAO/AIMD-95-110, July 13, 1995. 

\14 GAO/AIMD-96-81, August 29, 1996. 

\15 All costs representing the understated investment have been
discounted according to Department of Defense Instruction (DODI)
7041.3. 

\16 GAO/AIMD-96-109, September 6, 1996. 

\17 This act was formerly known as the Information Technology
Management Reform Act of 1996.  Division E of Public Law 104-106,
February 10, 1996. 


      STRATEGIC PLANNING NECESSARY
      TO ACHIEVE IMPROVEMENTS
---------------------------------------------------------- Letter :5.2

Many of the problems we found in our past reviews of logistics
systems efforts may well have been prevented had Defense employed
strategic information planning before embarking on its CIM
improvement efforts.  Studies of private sector organizations show
that strategic information planning is fundamental for achieving any
significant level of performance improvement.  Through the
Clinger-Cohen Act, the Government Performance and Results Act\18
(GPRA), and the Paperwork Reduction Act\19 (PRA), the Congress has
underscored the importance of strategic planning for the efficient
and effective use of information technology.  The Clinger-Cohen Act
also requires that the investment process for information technology
be integrated with processes for making budget, financial, and
program management decisions.  For Defense, such planning would
establish a direct link between its business objectives and
information technology use.  In turn, this would have helped Defense
focus on meeting the objective of dramatic improvement in operations
rather than incremental change. 

Private industry and our studies of public and private organizations
have identified that cohesive plans resulting from strategic
information management--managing information and information
technology to maximize improvements in business performance--are
crucial for developing information systems that support substantial
business improvement.  For example, in early 1993, the International
Business Machines (IBM) Consulting Group\20 reported on its extensive
case study of 17 exemplary companies chosen from an initial list of
200 companies in a wide range of industries. 

The IBM study found that the best companies had well-structured and
well-explained information management plans that closely integrated
with their business planning processes.  Also, these plans aligned
the use of information technology with business objectives to improve
performance and deal effectively with changes in the business
environment.  The study also found that these companies did not
invest in an information system until they clearly understood how and
to what extent the proposed information system would enhance their
business environment. 

Our studies\21 of how leading private and public organizations have
applied information technology to improve their performance have also
found that organizations achieving substantially higher levels of
performance had a disciplined, outcome-oriented, and integrated
strategic information management process.  For example, one
organization that lacked a business vision--a definition of how the
organization would work in the future--and an integrated strategic
information management process, spent the majority of its resources
maintaining existing, aging information systems.  By integrating its
planning, budgeting, and evaluation processes, the organization was
able to shift about a third of its information systems personnel to
reengineering projects.  These new improvements in turn increased
productivity and the quality of customer service. 

With GPRA, the Congress has recently underscored the importance of
strategic planning by clarifying and expanding the requirement for a
strategic information resources management plan first called for
under the Paperwork Reduction Act of 1980.  GPRA requires that
agencies submit to the Office of Management and Budget, by September
1997, a strategic plan for their activities, including a
comprehensive mission statement as well as goals and objectives for
the agency's functions and operations.  The Clinger-Cohen Act
supports the GPRA requirement of establishing goals for improving the
efficiency and effectiveness of agency operations by improving the
delivery of services to the public through more effective use of
information technology. 

In late 1995, DOD proposed a new policy requiring the development of
a DOD-wide strategic information resources management plan, with
supplements for each DOD component, that would integrate the use of
its information technology resources with its budgeting processes. 
While we support DOD's efforts to establish a strategic information
resources management planning process, the new policy, as proposed,
does not require the DOD-wide plan and component supplements to be
anchored in the Department's business strategies.  Without a direct
link between its business objectives and information technology use,
we believe that DOD risks developing a strategic information
resources management (IRM) planning process that will become merely a
reactive exercise to immediate priorities that are not adequately
weighed against those of the future. 

We discussed our concern about DOD's current efforts to make dramatic
logistics improvements without a cohesive strategic information plan
with the DUSD(L) and the Assistant Deputy Under Secretary of Defense
for Logistics Business Systems and Technology.  They stated that they
had begun developing a strategic IRM plan that integrates business
and systems strategies.  This plan, they said, is needed to move from
the migration systems strategy to a new business-oriented strategy
and they agreed that migration systems that do not fit under this new
strategy should be halted. 


--------------------
\18 Public Law 103-62, August 3, 1993. 

\19 Public Law 104-13, May 22, 1995. 

\20 An American Express/IBM Consortium Benchmarks Information
Technology, Planning Review, January/February 1993. 

\21 Strategic Information Planning:  Framework for Designing and
Developing System Architectures (GAO/IMTEC-92-51, June 1992) and
Executive Guide:  Improving Mission Performance Through Strategic
Information Management and Technology (GAO/AIMD-94-115, May 1994). 


   CONCLUSION
------------------------------------------------------------ Letter :6

DOD has acknowledged that its logistics migration strategy for
improving its automated logistics information systems is flawed and
has embarked on other efforts to develop interoperable systems and
privatize commercial-type functions where it can save money. 
However, as it embarks on these other efforts, Defense is still not
addressing the critical weaknesses associated with its previous
strategy.  By not doing so, it will continue to encounter unmanaged
risks, low-value information technology projects, and too little
emphasis on redesigning outmoded work processes.  In essence, the new
strategy will be just as risky as the previous strategy until Defense
adopts the key ingredients needed to ensure successful information
technology investments:  (1) conducting thorough economic and risks
analyses so that senior managers can begin examining trade-offs among
competing proposals and prioritizing projects based on risk and
return and (2) developing a strategic IRM plan defining how
information technology activities will help accomplish agency
missions.  By adopting the framework for strategic planning mandated
by the Government Performance and Results Act and managing its
information technology projects as investments as called for in the
Clinger-Cohen Act, DOD can begin delivering, at an acceptable cost,
high-value information technology solutions for logistics operations. 


   RECOMMENDATIONS
------------------------------------------------------------ Letter :7

To ensure that DOD optimizes its use of information technology to
achieve its logistics CIM goals of dramatic business process
improvement and operational cost reduction, we recommend that the
Secretary of Defense: 

  -- Direct that immediate cost-benefit analyses of each logistics
     migration system be undertaken and halt deployment of those that
     (1) cannot be shown to have significant return-on-investment,
     (2) will not facilitate ongoing efforts to privatize logistics
     business functions, or (3) do not support efforts to achieve
     interoperability between and among business activities. 

  -- Expedite development of a strategic information resources
     management plan that anchors DOD's use of logistics information
     resources to its highest priority business objectives.  The plan
     should conform with requirements established by the Government
     Performance and Results Act of 1993, the Paperwork Reduction Act
     of 1995, and the Clinger-Cohen Act of 1996. 


   AGENCY COMMENTS
------------------------------------------------------------ Letter :8

The Department of Defense provided written comments on a draft of
this report.  These comments are summarized below and reprinted in
appendix II.  The Deputy Under Secretary of Defense for Logistics
generally agreed with our findings and conclusions.  Defense also
agreed with our recommendation that the Department develop a
strategic information resources management plan for logistics and is
currently developing such a plan. 

Defense disagreed with our recommendation to conduct cost-benefit
analyses of current logistics development activities to ensure that
those systems now being deployed will provide significant returns on
investment.  It contended that the strategic information resources
plan being developed for the logistics area will create an
environment that effectively controls the development and
modernization of information systems.  As part of this plan, Defense
stated that overall DOD business objectives, mission requirements,
and economic efficiency will be considered in making decisions to
halt, proceed, or change the direction of the development/deployment
process. 

We support DOD's stated efforts to establish a more effective
investment process for logistics information systems.  However, we
believe that as it develops its strategic plan, Defense should
conduct cost-benefit analyses for its ongoing development efforts. 
As noted in our report, Defense still plans to spend more than $7.7
billion in the next few years developing and deploying migration
systems.  If it does not take steps to determine whether this
significant investment is worthwhile, it will continue to risk
wasting it as has been the case in the past. 

In the past, had cost-benefit analyses been correctly done for
transportation, Defense would have found that some of its migration
investments would have produced negative returns.  Had a cost-benefit
analysis been correctly done for depot maintenance, Defense would
have found benefits to be far less than the dramatic improvements
originally envisioned.  Had Defense conducted cost-benefit analyses
before it embarked on its materiel management efforts, it would have
likely concluded that it should abandon the concept of developing
standard systems before spending hundreds of millions of dollars on
the effort.  For the future, if Defense does not follow our
recommendation to conduct cost-benefit analyses of its current
projects, it will miss out on opportunities to identify more projects
showing little promise for return and to redirect its investment to
development efforts that more effectively support military missions. 


---------------------------------------------------------- Letter :8.1

We are sending copies of this report to the Chairmen and Ranking
Minority Members of the Senate and House Committees on
Appropriations, Senate Committee on Armed Services, the House
Committee on Government Reform and Oversight, and the House Committee
on National Security; the Chairman of the Senate Committee on
Governmental Affairs; the Ranking Minority Member of the Subcommittee
on Military Readiness of the House Committee on National Security;
the Secretaries of Defense, Army, Navy, and Air Force; the Commandant
Marine Corps; the Director of the Defense Logistics Agency; the
Deputy Under Secretary of Defense for Logistics; and the Director of
the Office of Management and Budget.  Copies will be made available
to others on request. 

If you have any questions about this report, please call me at (202)
512-6240, or Carl M.  Urie, Assistant Director, at (202) 512-6231. 
Major contributors to this report are listed in appendix III. 

Jack L.  Brock, Jr.
Director, Defense Information
 and Financial Management Systems


OBJECTIVES, SCOPE, AND METHODOLOGY
=========================================================== Appendix I

To determine whether DOD's efforts to standardize its logistics
migration systems will allow Defense to meet its business objectives
of dramatically improving the efficiency and effectiveness of its
logistics operations, we identified problems DOD has had implementing
information systems selected under its migration strategy by
analyzing prior GAO reports on DOD's CIM efforts related to logistics
business activities.  Also, other ongoing GAO reviews provided the
results of cost and benefit analyses, risk assessments, and
interviews with program and technical officials responsible for
implementing migration systems in the materiel management and
transportation business areas. 

We evaluated the strategies, policies, and memoranda establishing
DOD's Enterprise Model, CIM initiative, and logistics migration
information systems strategy to determine whether DOD's migration
systems strategy is consistent with DOD's corporate business vision
for balancing investments across the Department and optimizing its
operational effectiveness.  Also, we reviewed the findings of studies
conducted by the Commission of Roles and Missions of the Armed
Services and DOD for achieving dramatic increases in operational
efficiency.  To identify private and public organizations that have
successfully managed information technology use to obtain superior
business performance, we researched technical and business databases,
reviewed literature by technology vendors, and reviewed prior GAO
work and compared the private sector approach to DOD's strategy in
using information technology. 

Focusing on DOD's new efforts to develop interoperable information
systems emphasized in the enterprise model and to privatize and
outsource commercial-type activities as recommended by the Commission
on Roles and Missions, we compared DOD's actions and plans for
implementing depot maintenance, materiel management, and
transportation migration systems with its business vision.  Also, we
compared the business activities DOD is considering privatizing with
those the migration systems are to support.  We compared the "best
practices" of private and public organizations with DOD's logistics
migration strategy to identify actions that could increase the
probability of achieving logistics business objectives and maximizing
the return on technology investments. 

We interviewed senior Defense officials responsible for managing the
CIM initiative, implementing the logistics migration strategy, and
developing privatization plans.  We also met with program and
functional officials, including DOD managers responsible for
deploying the depot maintenance and materiel management migration
systems.  Our work was performed from August 1995 through August 1996
in accordance with generally accepted government auditing standards. 
We performed our work primarily at the offices of the Deputy Under
Secretary of Defense for Logistics in Washington, D.C.; the Joint
Logistics Systems Center, Wright-Patterson Air Force Base, Ohio; and
the Automated Systems Demonstration, Warner Robins Air Logistics
Center, Georgia. 




(See figure in printed edition.)Appendix II
COMMENTS FROM THE DEPARTMENT OF
DEFENSE
=========================================================== Appendix I



(See figure in printed edition.)


MAJOR CONTRIBUTORS TO THIS REPORT
========================================================= Appendix III

ACCOUNTING AND INFORMATION
MANAGEMENT DIVISION, WASHINGTON,
D.C. 

Carl M.  Urie, Assistant Director
Alicia L.  Sommers, Senior Information Systems Analyst
Cristina T.  Chaplain, Communications Analyst

CHICAGO/DAYTON FIELD OFFICE

James E.  Hatcher, Core Group Manager
Sanford F.  Reigle, Evaluator-In-Charge
Thomas C.  Hewlett, Staff Evaluator

*** End of document. ***