Major Management Challenges and Program Risks: Department of Defense
(Letter Report, 01/01/2001, GAO/GAO-01-244).

This report, part of GAO's high risk series, discusses the major
management challenges and program risks facing the Department of Defense
(DOD). DOD has begun several Department-wide reform initiatives and
other actions to improve its key business processes in such areas as
financial and information management, weapons systems acquisitions, and
logistics reengineering. However, problems continue to plague DOD in
several areas, including financial management, information technology,
acquisitions, contracts, support infrastructure, and logistics.

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

 REPORTNUM:  GAO-01-244
     TITLE:  Major Management Challenges and Program Risks: Department
	     of Defense
      DATE:  01/01/2001
   SUBJECT:  Public administration
	     Logistics
	     Defense procurement
	     Information resources management
	     Accountability
	     Strategic planning
	     Contract administration
	     Internal controls
	     Risk management
	     Personnel management
IDENTIFIER:  EA-6B Aircraft
	     F-16 Aircraft
	     U-2 Aircraft
	     DOD Financial Management Improvement Plan
	     SDI Theater High Altitude Area Defense System
	     DOD Future Years Defense Program
	     High Risk Series 2001
	     GAO High Risk Program
	     DOD Quadrennial Defense Review
	     Defense Health Program
	     F/A-18E/F Aircraft

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GAO-01-244

Performance and Accountability Series

January 2001 Major Management Challenges and Program Risks

Department of Defense

GAO- 01- 244

Letter 3 Overview 6 Major

16 Performance and Accountability Challenges

Related GAO 72

Products Performance

78 and Accountability Series

Lett er

January 2001 The President of the Senate The Speaker of the House of
Representatives

This report addresses the major performance and accountability challenges
facing the Department of Defense (DOD) as it seeks to support and defend the
Constitution of the United States; provide for the common defense of the
nation, its citizens, and its allies;

and protect and advance U. S. interests around the world. It includes a
summary of actions that DOD has taken and that are under way to address
these challenges. It also outlines further actions that GAO believes are
needed. This analysis should help the new

Congress and administration carry out their responsibilities and improve
government for the benefit of the American people. This report is part of a
special series, first issued in January 1999, entitled the Performance and
Accountability Series: Major Management Challenges

and Program Risks. In that series, GAO advised the Congress that it planned
to reassess the methodologies and criteria used to determine which federal
government operations and functions should be highlighted and which should
be designated as “high risk.” GAO completed the assessment,
considered comments provided on a publicly available exposure draft, and
published its guidance document, Determining Performance and Accountability
Challenges and High Risks (GAO- 01- 159SP), in

November 2000. This 2001 Performance and Accountability Series contains
separate reports on 21 agencies- covering each cabinet department, most
major independent

agencies, and the U. S. Postal Service. The series also includes a
governmentwide perspective on performance and management challenges across
the federal government. As a companion volume to this series, GAO is issuing
an update on those government operations

and programs that its work identified as “high risk” because of
either their greater vulnerabilities to waste, fraud, abuse, and
mismanagement or major challenges associated with their economy, efficiency,
or effectiveness.

David M. Walker Comptroller General of the United States

Overview The mission of the Department of Defense (DOD) is to support and
defend the Constitution of the United States; provide for the common defense
of the nation, its citizens, and its allies; and protect and advance U. S.
interests around the world. Defense operations involve over $1 trillion in
assets, budget authority of about $310 billion annually, and about 3 million
military and

civilian employees. Directing these operations represents one of the largest
management challenges within the federal government. The United States
begins the new millennium as the world's sole superpower with military
forces second to none. The effectiveness of U. S. forces is well evidenced
by experiences in the Persian Gulf, Bosnia, and Kosovo. However, the same
level of excellence is not evident in many of the business processes that
are critical to achieving the Department's mission in a reasonably
economical, efficient, and effective manner. For many years, we and others
have reported that a number of the

Department's key business processes are inefficient and ineffective. More
recently, we have also noted that support activities have not always been
fully responsive in meeting the needs of military units. Adding to these
concerns are human capital challenges in recruiting and

retaining military personnel as well as ensuring that the civilian workforce
is properly constituted in key areas, such as acquisition management. DOD's
human capital problems can be seen as part of a broader pattern of human
capital shortcomings that have eroded mission capabilities across the
federal government. See our

High- Risk Series: An Update (GAO- 01- 263, January 2001) for a discussion
of human capital as a newly designated governmentwide high- risk area. If
these and related support problems are not addressed, inefficiencies will
continue to make the cost of carrying out assigned missions unnecessarily
high and, more important, increase the risk associated with those

missions. Each dollar that is spent inefficiently is a

dollar that is unavailable to meet other internal Department priorities such
as weapon system modernization and readiness. To its credit, the Department
has initiated a number of Department- wide reform initiatives and other
actions to improve its key business processes in such areas as financial and
information management, weapon systems acquisitions, and logistics
reengineering. While these initiatives have produced some positive results,
much more remains to be done before the reform process is

successfully completed. We have identified eight key interrelated areas that
represent the Department's greatest challenges to developing world- class
operations and activities to support its forces. We consider all or part of
six areas relating to financial management, information

technology, acquisitions, contracts, support infrastructure, and logistics
to be high risk.

Developing strategic plans that lead to desired mission outcomes

? Hiring, supporting, and retaining military and civilian personnel with the
skills to meet mission needs

? Establishing financial management operations that provide reliable
information and foster accountability

? Effectively managing information technology investments

? Reforming acquisition processes while meeting military needs

? Improving processes and controls to reduce contract risk

? Creating an efficient and responsive support infrastructure

? Providing logistics support that is economical and responsive

Strategic Planning Sound strategic planning is needed to guide Shortfalls
improvements to the Department's operations. Without it, decisionmakers and
stakeholders may not have the information they need to ensure that the
Department has strategies that are well thought- out for resolving

ongoing problems, achieving its goals and objectives, and becoming more
results oriented.

While the Department has improved its strategic planning process, its
strategic plan is not tied to desired mission outcomes. As noted in several
of the other key challenges, sound plans linked to the Department's overall
strategic goals are critical to achieving needed reforms. Inefficiencies in
the planning process have led to difficulties in assessing performance in
areas such as combat readiness; support infrastructure reduction; force
structure needs; and the matching of resources to program spending plans. We
recommended that the Department include more qualitative and quantitative
goals and measures in its annual performance plan and report to gauge
progress toward achieving mission outcomes.

Human Capital Given the large number of military and civilian

Challenges personnel within the Department, human capital

management represents a huge challenge that impacts virtually every
activity. The Department is dealing with military personnel issues such as
shortages of junior officers for the career force, problems in retaining
certain skills (such as intelligence analysts, computer programmers, and
pilots), and the military services'

failure to meet recruiting goals. The Department also faces significant
challenges in managing its civilian workforce. For example, the sizable
reduction in civilian personnel since the end of the Cold War has led to an
imbalance in age, skills, and experience that is

jeopardizing certain acquisition and logistics capabilities within the
Department. The Department has initiatives to address military and civilian
human capital issues. However, to guide individual initiatives and link them
together, we recommended that the Department assess

the relative success and cost effectiveness of the services' recruiting
strategies and put tools in place for measuring success in reducing
attrition. Also, in recent testimony, we noted that the Department should
better

align its civilian human capital management with its strategic planning and
core business practices.

Financial A key enabler to addressing the Department's diverse Operations

management challenges is accurate financial Reforms information to support
decision- making, control costs and manage assets. While improved in recent
years, financial management remains a high- risk area for the

Department. To date, no major part of the Department's operations has passed
the test of an independent financial audit because of pervasive weaknesses
in the Department's financial management systems, operations, and controls.
Also, despite genuine progress, ineffective asset accountability and lack of
internal controls continue to adversely affect visibility over weapon
systems and inventories. Further, unreliable

cost and budget information negatively affect the Department's ability to
effectively measure performance, reduce costs, and maintain adequate fund

control. As we recently testified, we are concerned that many of the planned
financial management improvement initiatives are mainly focused on one-
time, year- end

numbers for financial statement purposes. As such, they will not result in
the production of timely and reliable financial and performance information
for ongoing use by management. In the short term, DOD needs to focus on
improving its basic processes and controls needed to better manage its every
day operations. In the long term, a sustained commitment from the highest
levels of DOD leadership- a commitment that must extend to the next
administration- will be needed to overhaul DOD's

financial systems and to ensure that personnel throughout the Department
share the common goal of establishing financial management systems and

processes that routinely generate timely and reliable financial information.

Information Effective management of information technology is also
Technology

key to implementing many of the Department's planned Challenges management
reforms. However, significant management weaknesses in this area place the
ultimate success of many reform initiatives at risk. Weaknesses in

information technology management could seriously jeopardize operations and
compromise the confidentiality, integrity, or availability of sensitive
information. Effective systems modernization requires the Department to
implement fundamental management controls, such as integrated enterprise
architectures, disciplined investment management practices, and mature
system development and acquisition processes that ensure mission performance
and accountability. However, this is not occurring on a systematic basis
within the Department. For example, poor processes and management controls,
in conjunction with ad hoc development of implementation plans and
architectures, place information technology investments in electronic

commerce and support systems at risk. Also, security for computer systems
continues to pose concerns, since malicious attacks on these systems are an
increasing threat to the nation's security. The Department recognizes that
improvements are needed in information technology management, such as

comprehensive and integrated enterprise architectures to guide and direct
its modernization efforts and structured and disciplined processes for
selecting and controlling business technology options. Equally important, we
have also recommended that the

Department ensure that corrective actions are taken to address identified
security vulnerabilities and more accurately and realistically define the
responsibilities, mechanisms, and expected outcomes of its efforts to manage
and integrate information assurance throughout the Department.

Acquisition Reform Acquiring weapons for the military forces is central to
accomplishing the Department's mission. However, the weapon systems
acquisition process continues to be a high- risk area. Notwithstanding
ongoing reform initiatives, the process is still too slow and costly.

Pervasive problems persist regarding the process to acquire weapons; cost,
schedule, and performance estimates; program affordability; and the use of
high- risk acquisition strategies such as acquiring weapons based on
optimistic assumptions about the maturity and

availability of enabling technologies. Our work also shows that leading
commercial firms are getting the kinds of outcomes from their development of
new products that the Department seeks.

Specifically, these firms are developing increasingly sophisticated products
in significantly less time and at lower cost than their predecessors.
Valuable lessons can be learned from the commercial sector and applied to
the development of weapon systems. Leading commercial firms expect that
their program managers will deliver high quality products on time and within
budget. We recommended that the Department apply these types of practices in
its acquisition management processes.

Contract Closely related to the weapon systems acquisition Management

process is the contracting for goods and services. This is Reform also a
high- risk area. Over the last few years, several broad- based changes,
including the establishment of key metrics, have been made to acquisition
and contracting processes and management to improve Department and

contractor relationships and rules. But we and the Department of Defense
Inspector General continue to identify risks in contracting, including (1)
improving oversight and accountability in the acquisition of services, (2)
preventing erroneous and improper payments being made to its contractors,

(3) implementing commercial practices for contract pricing, and (4) managing
health care contracts. Without effective control over its contract
management activities, the Department will continue to risk erroneously
paying contractors millions of dollars and perpetuating other financial
management and accounting control problems. Weak systems and

controls also leave the Department vulnerable to fraud and improper payment.
We have testified that the application of commercial best practices, such as
the use of more cost- effective buying strategies for commercial spare
parts, can improve acquisition and

contracting processes and help reduce contract risk. Support

Regarding specific operations challenges, the Infrastructure

Department has to address inefficiencies in its support Inefficiencies
infrastructure. Again, while progress has been made in this area, more needs
to be done if the Department expects to reduce infrastructure costs and
improve

business operations through its reform initiatives. After the Cold War, the
defense force structure and military spending were reduced, and the
Department realized it must make its operations and support infrastructure
smaller, more efficient, and more responsive to warfighter needs and to
create savings for other needs

like weapons modernization. Although the Department has reduced its forces
by about 25 percent and closed many bases, the percentage of its budget
spent on support infrastructure has remained relatively constant. Because of
continued inefficiencies in its support infrastructure, this continues as a
high- risk area for the Department. The effectiveness of many civilian
agencies has also been undermined by outmoded organizational structures that
drain resources needed to make improvements to mission delivery
capabilities. We recommended that the Department develop and implement a
comprehensive, integrated, long- range plan

to sustain and fully implement its reform initiatives and also right- size
and recapitalize its facilities infrastructure. Addressing facilities
infrastructure will also require the Department to reach agreement with the
Congress regarding the need for additional base realignment and closure
rounds. The infrastructure problems in civilian agencies also suggest the
possible relevance of a civilian facility closure and realignment

process. Logistics Support

Providing economical and responsive logistics support Inefficiencies is also
central to achieving the Department's mission. While the system gets the job
done, it is often described as a brute force process that is uneconomical
and inefficient. Although the Department has progressed in improving
logistics support, especially through the application of best inventory
management practices, serious weaknesses persist throughout its logistics

activities, and it is unclear to what extent its ongoing reengineering
management improvement initiatives will overcome them. A key area of the
logistics process that remains high risk is inventory management. The
Department continues to spend more than necessary to procure and manage
inventory. If this condition persists,

the Department risks having key items, such as aircraft parts, not available
when needed, which could impair aircraft and other equipment readiness.
Again, sound integrated plans for achieving logistics reforms are central to
making improvements.

To enhance DOD's reengineering efforts, we have recommended that DOD develop
an overarching plan that integrates the individual service and defense
agency logistics reengineering plans to include an investment strategy for
funding reengineering initiatives and details for how DOD plans to achieve
its final logistics system end state. We also recommended that DOD reassess
its

schedule for testing, evaluating, and implementing the

initiatives; establish a methodology showing the savings or improvements
that come from reengineering concepts; and reassess its approach for
addressing various combat command concerns, such as the presence of
increasing numbers of contractor personnel

on the battlefield. Also, to improve inventory management, we recommended
that DOD make more use of supply- chain best management practices similar to
those used in the private sector to help cut costs and improve customer
service. In conclusion, while the Department is making some progress toward
improving its business support operations, sustaining such efforts in the
Department in the past has proven to be elusive. The Department has a

unique opportunity to address the management challenges discussed in this
report because a Quadrennial Defense Review will occur in 2001. During the
congressionally directed review, the Department examines America's current
and future defense needs and produces a strategic plan and blueprint for a
strategy- based, balanced, and affordable defense program. Since the next
review is expected to be completed by September 2001, the Department has a
timely and appropriate vehicle for also addressing the performance and
accountability problems and

recommended specific actions we highlight in this report.

Major Performance and Accountability Challenges

To accomplish its national security mission, the Department of Defense (DOD)
maintains trained forces ready to respond to threats to U. S. security
arising anywhere on the globe. DOD achieves its mission with a budget of
about $310 billion, which is about 15 percent of the federal budget. DOD
maintains a force of about 1. 4 million active duty personnel, 1. 28 million
military guard and reserve personnel, and over 700, 000 civilian

personnel. DOD's military and civilian personnel are critical to achieving
all of its performance goals. In addition to the Army, the Navy, the Air
Force, the Marine Corps, the Office of the Secretary of Defense, and the
Joint Chiefs of Staff, DOD manages 14 defense agencies such as the Defense
Logistics Agency. DOD has a worldwide presence, with its 10 active Army
divisions, 3 Marine expeditionary forces, 12 active Air Force fighter wings,
163 active bombers, 12 active aircraft carriers, 10 active naval air wings,
12 amphibious ready groups, 55 attack submarines, 108 active surface
combatant ships, and reserve units, and with 247,000 of its troops and
civilians overseas.

Because of the magnitude of its force structure, DOD faces many management
challenges. This report summarizes ours and, where appropriate, the DOD
Inspector General's findings and recommendations to address DOD's challenges
in eight key areas. These challenges include systemic problems with
management processes related to strategic planning, human capital,

and financial and information management and specific problems related to
acquisition reform, contracting processes, support infrastructure, and
logistics reengineering. Also, our report addresses human capital as a
specific management challenge and incorporates, where appropriate, human
capital issues as they relate to specific management challenges, including
financial management and contracting.

Developing Strategic planning that clearly lays out DOD's mission Strategic
Plans That

and goals and the resources needed, strategies to be Lead to Desired
followed, and assigned responsibilities for

Mission Outcomes accomplishing the goals is crucial to fully focusing the
Department's activities on achieving desired outcomes.

However, inefficiencies in DOD's strategic planning process have led to
difficulties in assessing the Department's performance in achieving mission
outcomes, in meeting force structure needs, and planning the budget.

Challenges in The Government Performance and Results Act of 1993 Achieving
Mission

provides a framework for DOD and other federal Outcomes agencies to achieve
greater accountability in their programs and operations. Under the Results
Act, DOD is to develop an annual performance plan to establish performance
goals and measures covering a given fiscal year and directly link its
longer- term strategic goals to day- to- day activities. Annual performance
reports are to disclose the degree to which those performance goals

were met. At the request of the Congress, DOD also performs the Quadrennial
Defense Review (QDR), from which it draws its mission and vision statements
and strategic goals. The next review will be undertaken during fiscal year
2001.

In June 2000, we reported on DOD's progress in Results Act reporting. While
noting numerous efforts to improve its overall reporting, 1 we underscored
the extent to which DOD has achieved some of its outcomes is not

completely clear. There are five major expected 1 We observed that DOD
identified and discussed the roles of federal agencies in crosscutting
activities, added more information on its efforts to ensure the credibility
of its performance information, and included initial goals and performance
measures for financial management.

outcomes that relate directly to DOD's performance plan. These are: ? U. S.
forces are maintained at the levels planned in terms of divisions, aircraft
carriers, etc., and provide the anticipated overseas presence. ? Combat
readiness is maintained at desired levels. ? Planned levels for recruiting
and retaining skilled

military personnel are achieved. ? Goals toward transforming military forces
for the

future are met. ? Planned progress toward streamlining DOD's

infrastructure, pursuing business practice reforms, and improving the
acquisition process and management functions is accomplished.

The extent to which DOD has achieved some of these outcomes is not
completely clear, in part, because its outcomes are complex and interrelated
and may require a number of years to accomplish, and because DOD has not
fully assessed its performance. Further, reported measures often have not
addressed a cost- based efficiency aspect of performance, making it
difficult to fully assess its efficiency and effectiveness. For example,
DOD's combat readiness outcome is aimed at being ready to fight and win two
major theater wars or to conduct multiple operations other than war.
However, its performance report and plan do not clearly show what forces and
performance are required to accomplish this and whether the outcome is being

achieved. Also, the plan included measures for the level of combat forces,
but not for support forces, although the report acknowledges support force
shortfalls and discusses Army plans for correcting them. Further, DOD's
performance report does not include efficiency measures based on cost for
areas such as managing inventory and weapon system maintenance.

Planning to Better U. S. strategy requires military forces to be capable of
Meet Force Structure

executing a range of military operations, including major Demands

theater warfare, overseas presence, and a variety of smaller- scale
contingencies, and responding to asymmetric threats. According to DOD, the
ability to transition from smaller- scale contingency operations to
warfighting remains a fundamental requirement for virtually every U. S.
military unit. DOD has concluded that the same forces needed for war would
be used for smaller- scale contingencies until they were needed to meet
wartime requirements. Our work shows that DOD continues to be challenged in
meeting certain needs for contingency operations and major theater warfare.
For

example, some unique capabilities are in high demand and repeatedly
deployed. As DOD prepares to conduct the next QDR, it faces the significant
challenge of determining and providing the right mix of forces to support
the full spectrum of military operations with a force structure largely
designed for major theater warfare.

Since the 1991 Persian Gulf War, U. S. forces have been involved in more
than 50 contingency operations abroad. While the services have been able to
provide the forces and assets necessary for these operations, our work shows
that some unique capabilities have been in high demand. Such capabilities
include Army divisions

and civil affairs units, EA- 6B aircraft used to suppress enemy air defenses
and electronically jam enemy antiaircraft radar, specialized F- 16 aircraft
used to suppress enemy air defenses, and U- 2 aircraft pilots. To fulfill
contingency missions, military personnel deploy

on a rotational basis from assigned home stations, and some have exceeded
the services' deployment goals for the maximum number of days an individual
should

deploy in a 1- year period. DOD also faces challenges in transitioning
forces from lesser operations to major theater wars. For example,
redeploying forces committed to various regions would be difficult and

could seriously strain the services' mobility and support forces. While DOD
has taken some steps to better manage the availability of existing assets
and made some adjustments in its forces, it has not identified what force
might be best suited to meet the demands of the full spectrum of military
operations. To relieve the stress of repeated deployments on active forces,
DOD has taken or is planning actions such as increasing the size of certain
units, tasking reserve forces to deploy overseas, converting certain reserve
units from non- warfighting missions to warfighting support, spreading the
burden of deployments over a larger part of the total force, and

creating additional squadrons from existing aircraft. DOD also has secondary
missions to support other federal agencies that have placed demands upon its
force structure. For example, DOD provides support to federal efforts
involving counterterrorism,

counternarcotics, and counterproliferation in support of the Departments of
Justice and State. While these activities are not part of DOD's primary
warfighting mission, a number of DOD units are engaged in them in a support
role. Integrated, strategic planning is essential

to ensure these activities are carried out effectively. However, DOD and
other federal agencies have not adequately planned or coordinated these
efforts.

DOD Employs Overly Since the mid- 1980s, we have reported that DOD
Optimistic Planning employs overly optimistic planning assumptions in its
Assumptions in Its

budget formulation. As a result, DOD has too many Budget Formulation
programs for the available dollars, which often leads to program
instability, costly program stretch- outs, and

program terminations. Moreover, optimistic planning makes defense priorities
unclear because tough decisions and trade- offs between needs and wants are
avoided. Until DOD presents realistic assumptions and plans in its future
budgets, the Congress will lack the

accurate and realistic information it needs to properly exercise its
decision- making and oversight. In 2000, we reported that because the fiscal
year 2001 program's projected cost was about $16 billion more than the cost
projected for the same elements in the fiscal year 2000 program, DOD could
not implement its operation and maintenance and procurement programs as
planned. For example, although DOD planned to increase Defense Health
Program funding by $615 million during 2001- 05, DOD officials said the
program needed an additional $6 billion through fiscal

year 2005. Officials in the Office of the Secretary of Defense said that
they work to make Defense Health Program funding projections realistic only
for the current budget year and that they underfund the program in the
outyears to free up funds for other defense programs. If DOD has to spend
more money on the Defense Health Program than it budgeted for, it will need
to shift funds from other accounts, thereby introducing risk that other
programs will not be implemented as planned or that it will need to request
additional budget authority. Key Actions Needed To help overcome
inefficiencies in DOD's strategic planning processes and to promote more
realistic budgeting, DOD must follow results- oriented management principles
in performing the next Quadrennial Defense Review in 2001. To provide a
clear picture of DOD's performance, we recommended that DOD include more
qualitative and quantitative goals and

measures in its performance plan and report to gauge progress toward
achieving mission outcomes. The QDR needs to have an explicit strategy for
achieving its force structure goals. DOD should consider identifying force
structure alternatives that might result in a better balance between forces
required for smallerscale contingency operations and major theater wars

and ensuring personnel levels are sufficient to support that force
structure. DOD should also consider matching the strategies and programs
that will be used to achieve the goals included in the QDR to projected
available funding for defense. This process should help the Department
modify and balance force structure and support infrastructure to meet
today's requirements.

Key Contact Charles I. Patton, Jr., Director Defense Capabilities and
Management (202) 512- 4412 pattonc@ gao. gov Carol Schuster, Director

Defense Capabilities and Management (202) 512- 3958 schusterc@ gao. gov
Hiring, Supporting,

Effective human capital management is key to ensuring and Retaining the
Department will have the right number of military Military and and civilian
personnel with the right skills to accomplish

Civilian Personnel its mission. However, human capital management

With the Skills to represents a huge challenge that impacts virtually every
Meet Mission Needs

activity within the Department. DOD has decreased the level of military
personnel by about 25 percent since 1992, creating skill imbalances in
various areas. They have also encountered considerable difficulties in
recent years in achieving its desired military end strength due to problems
in recruiting and retaining personnel. At the same time, significant
challenges exist for the management of its civilian workforce. Also, since
the end of the Cold War, DOD has significantly downsized its civilian
workforce. The downsizing is expected to continue through 2005 and
ultimately to result in a cumulative reduction of about 43 percent from 1989
levels. The increase in the average

age of the remaining civilian workforce and a decline in the proportion of
younger staff in the pipeline to fill future leadership roles signal
potential problems down the road in such key areas as financial and contract
management. While initiatives are under way to address

both military and civilian human capital issues, much remains to be done.
Services Need to

The Department of Defense faces a significant challenge Assess Efforts to in
recruiting and retaining the hundreds of thousands of Meet Recruiting new
recruits it enlists each year. The last 2 years, in Goals and Cut
particular, have been difficult for the military services, Attrition

as they have struggled to meet their recruiting goals. This difficulty,
which some believe represents a recruiting crisis, makes the services'
problems with first- term attrition rates even more critical. The early
separation of new recruits is costly in that the services' recruiting and
training investment in each enlistee

averages almost $38,000. To address mounting problems in recruiting
sufficient numbers of qualified enlisted personnel, three services- the
Army, the Navy, and the Air Force- have

increased their numbers of recruiters and their advertising budgets and have
offered larger enlistment bonuses and more money for college. These tools
have been shown by past research to help the services attract new recruits.
However, as shown in figure 1, the resources devoted to recruiting have
increased dramatically over the last 7 years, while the number of new
recruits has stayed about the same.

Figure 1: DOD Expenditures for Advertising and Enlistment Bonuses Relative
to the Number of Recruits (fiscal years 1993- 99)

300 Fiscal year 2000 constant dollars in millions Recruits in thousands

250 250

200 200

150 150

100 100

50 50

0 0

1993 1994 1995 1996 1997 1998 1999

Advertising Enlistment Bonuses Number of Recruits

Source: DOD.

Because so little time has passed since the services began to respond to
their recent recruiting problems, they cannot yet assess the long- term
success of their efforts. Also, the services do not yet know which of their
new recruiting initiatives work best. For example, the

Navy does not know the extent to which each of the changes it has made to
its recruiting program- increasing its number of recruiters, its advertising
budget, or its enlistment bonuses- contributed toward meeting its goal in
fiscal year 1999 and whether that

strategy will work in the future. Until sufficient time has passed and each
of the services consistently meets its

goal, DOD cannot be assured that individual service strategies will
collectively enable DOD to meet its overall recruiting requirements.

To further address military personnel needs, the services have begun many
efforts to reduce the attrition of first- term enlistees. For example, the
services have taken steps to improve the screening of applicants before they
enter the service. Efforts aimed at keeping recruits after they enter
include providing extra attention to recruits struggling during basic
training and disciplining and working with enlistees who have completed
training and are experiencing minor

behavioral problems. These actions appear promising, as they target recruits
who might previously have been summarily discharged. Nonetheless, as shown
in figure 2, the latest full 48- month attrition data available

indicate that first- term attrition has reached all- time highs for DOD
enlistees.

Figure 2: Trends in First- Term Enlisted Attrition

40 Percentage separating early

36.9 36.8 34.2 35.9 33.9 33.6 33.2 29.7 31.4 30.5 31.4 30

20 10

0 1985 1986 1987 1988 1989 1990 1991 1992 1993 1994 1995 Fiscal Year

Source: DOD.

The attrition rate for enlistees entering the services in the mid- to late
1980s hovered between 30 and 34 percent, and this rate gradually rose in the
1990s from a low of 33 percent to a peak of nearly 37 percent for enlistees
entering the services in fiscal years 1994 and

1995. Greater success in reducing attrition may not yet be apparent because
the services have just begun many of their efforts, or the continued high
rate of attrition

may indicate that without these efforts, the services' losses would be even
higher. The services, however, are not developing tools needed to measure
the long- term

success of their efforts, thus limiting their ability to judge the
effectiveness of those efforts in reducing attrition. Significant Civilian

The Department of Defense employs over 700,000 Workforce

civilians- some 37 percent of all nonpostal civilian Management Issues
federal workers. Because it is the largest employer of Exist

federal employees in the competitive civil service, how DOD approaches human
capital management sends important signals about trends and expectations for
federal employment across government. Moreover, the role that DOD's civilian
workforce plays in support of our U. S. national security makes DOD's
approach to managing its people a matter of fundamental public interest. As
shown in figure 3, DOD has undergone a sizable reduction in its civilian
workforce since the end of the Cold War, and additional reductions are
expected at least through fiscal year 2005. Between fiscal year 1989 and
1999, DOD reduced its civilian workforce by about 400, 000 positions, from
approximately 1, 117, 000 to 714, 000- a 36- percent reduction. The
President's fiscal year 2001 budget request projected additional reductions
in DOD's civilian workforce, to a level of 637,500 by fiscal year 2005- a
cumulative reduction of nearly 43 percent from the fiscal year 1989 level.

Figure 3: DOD Civilian Workforce Trends (fiscal years 1989- 99)

1200 DOD civilians in thousands 1000

800 600 400 200

0 1989 1990 1991 1992 1993 1994 1995 1996 1997 1998 1999

Civilian Workers

Source: DOD.

DOD's approach to civilian downsizing in the early years relied primarily on
voluntary attrition and retirements and varying freezes on hiring authority.
DOD also used existing authority for early retirements to encourage

voluntary separations at activities facing major reductions in force. The
fiscal year 1993 National Defense Authorization Act authorized a number of
transition assistance programs for civilian employees, including financial
separation incentives, or “buyouts,” to induce the voluntary
separation of civilian employees and reduce authorized positions. DOD has
credited the use of separation incentives, early retirement authority, and
various job placement opportunities to enable it to avoid nearly 200, 000
involuntary demotions and separations.

While the tools available to DOD to manage its civilian force downsizing
helped mitigate the adverse effects of force reductions, DOD's approach to
the reductions was

not oriented toward shaping the makeup of the workforce. During our work on
the early phases of the DOD downsizing, some DOD officials voiced concerns
about what was perceived to be a lack of attention to identifying and
maintaining a balanced basic level of skills needed to maintain in- house
capabilities as part of the defense industrial base. These concerns remain
today and are heightened by DOD's increased emphasis on competitively
sourcing many of its functions.

DOD leaders recognize that agencies have balanced their programs and budgets
without fully considering the severe problems looming in the area of
civilian personnel management or the need for increased attention to the
problem. To address some of these

challenges, DOD has recently outlined a number of actions, such as (1) fully
executing hiring authorizations (with targeted overhiring), (2) expanding
training and education through the Defense Acquisition University, and (3)
improving marketing and recruitment. The Department has also noted the need
for renewed emphasis on apprenticeship programs to reinvigorate workforce
capabilities in its industrial activities and for

a comprehensive strategic plan for its acquisition workforce. DOD also could
benefit from provisions of the Congress' recent enactment of the Fiscal Year
2001 Floyd D. Spence National Defense Authorization Act, which permits DOD
to use separation incentives to help

shape its workforce without requiring that affected positions be eliminated.
It also authorizes federal agencies to pay off college loans of students who
agree to work for the government.

Key Actions Needed As we have recommended, DOD needs to (1) assess the
relative success and cost- effectiveness of the services' recruiting
strategies in meeting DOD's overall needs by

applying one service's best practices to the other services whenever
possible and by minimizing cross- service competition and (2) put in place
tools for measuring the long- term success of the services' attempts to
reduce attrition by confirming that the

services' short- term remedial efforts are not simply delaying attrition to
later points in enlistees' first terms. DOD is working to achieve these
actions.

As we noted in recent testimony, taking an integrated, strategic view of the
Department's approach to civilian human capital and using a measurement
tool, such as our human capital self- assessment checklist for agency

leaders, will be important to DOD to improve the alignment of its human
capital management with its strategic planning and core business practices.
Additionally, to ensure the total integration of human capital resources
throughout the Department, DOD needs a human resources plan that links
clearly to the Department's organizational goals and one which is

integrated with the Department's overall mission emphasis on strategic
planning to ensure concerted and sustained emphasis on addressing human
capital issues.

Shortcomings discussed in the following sections on financial management,
information technology, acquisitions, and contracts are attributable in part
to human capital issues. As such, a human capital plan as discussed in this
section would require priority attention. For example, our work on best
practices of recognized world- class financial organizations shows

that for DOD to reach and maximize financial performance throughout the
Department, it will need a strategic approach to human capital. Similarly,
for its acquisition reforms to succeed in producing better outcomes, DOD
will need a strategic approach to training its acquisition workforce on new
practices, to include the provision of customized training targeted to
specific needs.

Key Contact Derek B. Stewart, Director Defense Capabilities and Management
(202) 512- 5559

stewartd@ gao. gov Establishing Accurate financial information is crucial to
making Financial sound decisions and controlling assets so that the
Management Department's mission and goals are efficiently and

Operations That effectively accomplished. With DOD's vast operations,

Provide Reliable including an estimated $1 trillion in assets and reported
Information and liabilities and a reported net cost of operations of Foster

$378 billion in fiscal year 1999, effective asset Accountability
accountability and reliable financial information are critical. The
Department continues to confront pervasive and complex financial management
problems

that can seriously diminish the efficiency of the military services' support
operations. Since 1995 DOD financial management has been on our list of
high- risk areas vulnerable to waste, fraud, abuse, and mismanagement. The
Department has made progress in a number of areas, both larger steps forward
and smaller incremental improvements. As detailed in the following
paragraphs, however, DOD has a long way to go to effectively address these
problems. Financial Reporting No major part of DOD's operations has been
able to pass

Continues to Be the test of an independent financial audit. The most
Inaccurate

recent audits of DOD's financial statements- for fiscal year 1999- highlight
ongoing financial management challenges that affect the development of
accurate and complete financial information. If available, this information
could provide useful perspectives to decisionmakers on such key areas as
budget requests, performance measurement, and costs. For example, because of
weaknesses in DOD's budget execution

accounting, the Department does not know with certainty the amount of
funding it has available.

These weaknesses include (1) an inability to reconcile an estimated $7
billion difference between its available fund balances and the Treasury's;
(2) frequent adjustments of recorded payments between appropriation
accounts- with nearly $1 of every $3 in fiscal year 1999 contract payments
representing an adjustment; and (3) incorrect or unsupported obligations. In
addition, DOD records show an estimated

$1. 6 billion of transactions held in suspense accounts at the end of fiscal
year 1999. Until these suspended transactions are posted to the proper
appropriation account, the Department will have little assurance that
reported appropriation balances are correct. As we have testified, such
information is essential for DOD and the Congress to determine if funds are
available to reduce

current funding requirements or to be reprogrammed to meet other critical
program needs. Also, we have testified that, while the Department reported
the total net costs for its operations as $378 billion, it could not justify
this amount. Areas in which DOD has been hampered by the lack of reliable
information on the full cost of its programs include (1) accounting for the
costs associated with functions

studied for potential outsourcing under OMB Circular A- 76, including a
long- standing concern over how accurately DOD's in- house cost estimates
reflect actual costs; (2) controlling and managing weapon system
acquisition, operation, and disposal costs under its overall Defense Reform
Initiative; and (3) long- standing problems in accumulating and reporting
the cost data needed to help assess the economy and efficiency of its
businesslike activities used to provide goods and services in support of the
military services.

Environmental DOD does not have an effective process in place to

Liability Is Uncertain comprehensively and accurately report liabilities
associated with its environmental and cleanup costs.

DOD has taken important steps to better recognize and report on these
liabilities, increasing its reported estimated liabilities from $34 billion
in its fiscal year 1998 financial statements to $80 billion in fiscal year
1999. As we have testified, more complete and accurate information on these
liabilities would be an important factor in determining the timing of
funding

requests. However, the full magnitude and timing of these costs are not yet
known because (1) DOD does not yet have a comprehensive inventory of all
potential environmental and disposal liabilities, potentially excluding
billions of dollars of costs associated with nonnuclear weapons,
conventional munitions, and

ongoing operations; (2) estimates were not based on the consistent
application of assumptions and methodologies, resulting

in some cases in significantly different results across the services; and
(3) support for the basis of reported cost estimates continues to be
inadequate.

Accountability Over DOD cannot properly account for and report on its

Equipment and weapon systems and support equipment. Lacking such

Inventory Is Weak reliable information, DOD has little assurance that all

items purchased are received and properly recorded. Because the military
services cannot identify all of their weapon systems and support equipment
through a centralized system, each service had to supplement its

automated data with manual procedures to collect the information needed on
these assets to meet military objectives and readiness goals. For example,
items that were not included in the Army's centralized systems in fiscal
year 1999 included 56 airplanes, 32 tanks, and 36 Javelin missile command-
launch units. Additionally,

DOD has also been unable to account for and control its huge investment in
inventories. These weaknesses (1) increase the risk that responsible
inventory item managers may request funds to obtain additional, unnecessary
items that may be on hand but not reported

and (2) result in a loss of accountability that could affect supply
responsiveness and purchase decisions. Financial

Establishing an integrated financial management Management Systems system-
including both automated and manual Are Inadequate processes- will be key to
reforming DOD's financial management operations. DOD has acknowledged that
its current financial management systems (1) are flawed with decades- old
problems that will be impossible to reverse overnight, (2) for the most part
do not comply with federal financial management systems

requirements, and (3) were not designed to collect data in accordance with
generally accepted accounting principles. The Department has set out an
integrated financial management system goal. However, it faces a significant
challenge in integrating its financial management systems because of its
size and complexity and the condition of its current financial management
operations. That is, DOD supports personnel on an estimated 500 bases in 137
countries and territories

throughout the world, makes an estimated $24 billion in monthly
disbursements, and maintains as many as 500 or more active appropriations in
any given year. In addition, each service operates unique, nonstandard
financial processes and systems. As a result, millions of transactions must
be keyed and rekeyed into multiple systems. To illustrate the difficulty
that DOD faces, figure 4 shows for one business area- contract and vendor
payments- the number of financial systems

involved and their interrelationships.

Figure 4: DOD's Current Systems Environment for the Contract and Vendor
Payment Process

DPPS MOCAS

SPS SAACONS CAPS

ITIMP 1 Bill Pay

APADE IAPS

BCAS IPC

GAFS ADS

STARS SRD1

DJAS DSDS

STANFINS Prevalidation

SABRS Debt CEFT Management

Source: DOD.

Transactions must be recorded using a complex line of accounting that
accumulates appropriation, budget, and management information that varies by
military service and fund type. An error in any one character in such a line
of code can delay payment processing or affect the

reliability of data used to support management and budget decisions.

Further, through the Year 2000 experience, DOD has learned that its goal of
systems improvement initiatives should be improving end- to- end business
processes.

Lessons learned from the Year 2000 effort also stressed the importance of
strong leadership from top leaders in making any goal- such as financial
management and systems improvements- an entitywide priority. DOD's

current Financial Management Improvement Plan sets out an integrated
financial management system as the long- term solution for establishing
effective financial management and includes hundreds of initiatives to
address its financial management problems. However, as we recently
testified, the plan's vision and goals fell short of achieving basic
financial management

accountability and control and did not position DOD to adopt financial
management best practices.

Key Actions Needed Successfully completing efforts to prepare financial
statements that can withstand the test of an audit will be a key milestone
for DOD. Such audit efforts can help in better understanding the extent,
nature, and underlying causes of the Department's long- standing financial
management problems; identifying information needs; and strengthening
fundamental discipline in its controls and systems. However, as we recently
testified, we are concerned that many of the planned financial management
improvement initiatives are mainly focused on one- time, year- end numbers
for financial statement purposes. As such, they will not result in the
production of timely and reliable financial and performance information. In
the short term, DOD needs

to focus on improving its routine processes and controls to manage its every
day operations. However, in the long term, sustaining the strong commitment
we have seen over the past few years from the highest levels of DOD
leadership- a commitment that must extend to the next administration- will
be needed to overhaul DOD's

financial systems and to ensure that personnel throughout the Department
share the common goal of establishing financial management systems and

processes that routinely generate reliable financial information.

Key Contact Gregory D. Kutz, Director Financial Management and Assurance
(202) 512- 9095 kutzg@ gao. gov Effectively

Information technology management is a crucial enabler Managing to DOD's
efforts to accomplish its mission and achieve Information its goals. DOD
invests about $20 billion annually in Technology

information technology (IT) to support a wide range of Investments military
business functions and operations (e. g., logistics, finance and accounting,
and health services), and 10s of billions of dollars more on technology
embedded in sophisticated weaponry. This heavy reliance will only grow as
the Department moves to modernize and respond to technological advances that
are changing traditional approaches to managing business functions and
engaging in conflicts. 2 The

effective management of system modernization efforts continues to challenge
DOD and remains a high- risk area. At the same time, computer security and
information accuracy are also key concerns.

2 In our 1999 performance and accountability report series, we referred to
this area as DOD information management and technology issues.

Effective The Department of Defense Appropriations Act for Management of
Fiscal Year 2000 3 reemphasized the need for the kind of System

IT implementation and oversight processes cited in the Modernization
Clinger- Cohen Act of 1996. Among other things, the Efforts Is a

Appropriations Act calls for an IT investment oversight Continuing Challenge

process that covers the life of each investment and includes explicit
criteria for analyzing projects' expected and actual cost, benefits, and
risks. Both our and the DOD Inspector General's reports have identified a
broad array of problems that reinforce the need for these processes and
management controls. Accordingly, we designated this area as high risk in
1995. 4

The Department's vision of using electronic commerce technologies to
transform and streamline its business processes and relationships is a vivid
illustration of the problems and risks that DOD faces in this area.
Specifically, as we reported, the Department's electronic commerce vision is
at risk because key elements- a DOD- wide implementation plan, including an
electronic commerce enterprise architecture( s)- have not been developed to
direct and control business process change and IT investments in this area.
Without these

management controls, the Department does not have a common blueprint or
roadmap that is essential for effectively introducing modern electronic
commerce operations and investing in supporting systems.

DOD has not developed such a plan primarily because the DOD Chief
Information Officer and the Joint Electronic Commerce Program Office have
been unable to reach agreement with the military services and Defense
agencies on the scope and content of such a

plan. In lieu of a common and integrated approach, DOD 3 P. L. 106- 79, Oct.
25, 1999. 4 In 1999, we referred to this high- risk area as DOD systems
development and modernization efforts.

is allowing the joint program office, the military services, and three of
the larger Defense agencies to develop separate plans. According to Chief
Information Officer officials, the separate plans may then be merged into a
DOD- wide plan at some point in the future.

However, no specific commitment or date for doing this has been established.
As a result, DOD components are addressing architecture development within
their respective stovepiped organizations. Such an approach will not
adequately support the Department's electronic commerce strategic
objectives, such as achieving systems interoperability across the Department
and

streamlining its processes before implementing electronic commerce
technologies. In its 2000 annual report to the President and the Congress,
DOD acknowledges that it needs to improve its IT management and oversight.
The report notes that “DOD systems must transition from isolated
stovepipe environments to a seamless and coherent infostructure.”
Additionally, the report cites steps under way to address its challenges in
this regard, such as the creation of a Portfolio Management and Oversight
Working- Level Integrated Product Team to ensure that IT investments are
managed and evaluated based on specific measurable contributions to the
Department's mission goals and priorities. Similarly, DOD has published a
framework to guide the components' efforts in developing enterprise
architectures and better ensure that they are defined consistently. Also,
the

Department's fiscal year 2001 performance plan, as required by the
Government Performance and Results Act of 1993, includes performance goals
for IT management. Such goals were not in place in fiscal year 1999.

Computer Security Securing DOD's vast array of networked computers is a and
Information major challenge and an area fraught with risk, not just
Assurance Remain a for DOD but for the federal government as a whole. Major
Concern Accordingly, we designated computer security as a governmentwide
high- risk area in 1997 and it remains high risk today. In DOD, information
security officials readily acknowledged that despite progress, DOD systems
and networks continue to be more vulnerable than the Department would like.
Of particular concern is

what one official described as the “huge population” of
unclassified networks in need of additional safeguards. Evaluations of the
security of the Department's systems have continued to identify weaknesses
that could seriously jeopardize operations and compromise the

confidentiality, integrity, or availability of sensitive information. In
August 1999, we reported that serious weaknesses in DOD information security
provided hackers and hundreds of thousands of unauthorized users the
opportunity to modify, steal, inappropriately disclose, and destroy
sensitive DOD data. These weaknesses impair DOD's ability to (1) control
physical and electronic access to its systems and data; (2) ensure that
software running on its systems is properly authorized, tested, and
functioning as intended; (3) limit employees' ability to perform
incompatible functions;

and (4) resume operations in the event of a disaster. Our August 1999 report
also pointed out that while DOD had initiated some corrective actions in
response to recommendations we made in May 1996, progress in correcting
weaknesses identified in 1996 and in previous reviews had been inconsistent
across DOD. Although many factors contribute to these weaknesses, DOD

Inspector General and our audits found that poor management of security
programs was an underlying cause of weaknesses in the protection of computer
security. In August 1999, we reiterated this finding and

our recommendation that DOD take steps to strengthen Department- wide
security program management. DOD components are taking actions to correct
security weaknesses. Further, DOD has been taking steps to improve the
Department- wide security management. Notably, the Department has
established the (1) DODwide Information Assurance Program under the
jurisdiction of the DOD CIO and (2) Joint Task Force for Computer Network
Defense to monitor DOD computer networks and defend against hacker attacks
and other unauthorized access.

Key Actions Needed As we have previously testified, DOD's recognition that
improvements are needed in IT management is a positive step. Equally
important will be the application of lessons learned from DOD Year 2000
success, such as obtaining the unwavering commitment of the Deputy Secretary
of Defense to have comprehensive and integrated enterprise architectures to
guide and direct DOD's modernization efforts and following structured and
disciplined institutional processes for continuous

selection and control of the competing business and technology investment
options. In this regard, in the area of electronic commerce, we recommended
that DOD place a high priority on completing an electronic commerce
implementation plan; finish an electronic commerce architecture;

establish clearer lines of program management responsibility, authority, and
accountability; and ensure that all new electronic commerce initiatives
support the Department's strategic goals and have meaningful performance
measures. To strengthen departmental security program measures, we
recommended that DOD implement more effective measures for ensuring that
corrective actions are taken

to address identified security vulnerabilities and more accurately and
realistically define the responsibilities, mechanisms, and expected outcomes
of DOD's efforts to manage and integrate information assurance throughout
the Department.

Key Contact Randolph Hite, Director Information Technology (202) 512- 3439
hiter@ gao. gov Robert Dacey, Director

Information Technology (202) 512- 7439 daceyr@ gao. gov Reforming

Acquiring weapons for the military forces is central to Acquisition
accomplishing the Department's mission. DOD spends

Processes While close to $100 billion annually to research, develop, and

Meeting Military acquire weapon systems. Although the Department has Needs

many acquisition reform initiatives in process, pervasive problems persist
regarding (1) questionable requirements and solutions that are not the most
cost- effective available; (2) unrealistic cost, schedule, and performance
estimates; (3) questionable program affordability relative to competing
wants and needs; and

(4) the use of high- risk acquisition strategies. While these problems have
proven resistant to reform, the best practices employed by leading
commercial firms to develop new products offer different and promising
solutions. We have reported that weapon systems

acquisition is a high- risk area since 1990, and it remains on our high-
risk list.

Requirements and DOD acquisition policies require analyses of missions,
Solutions That Are

mission needs, costs, and weapon system alternatives to Questionable and Not

ensure that cost- effective solutions are matched to valid Cost- Effective
needs before substantial resources are committed to a particular program.
However, we have found that while the services conduct considerable analyses
in justifying major acquisitions, these analyses can be narrowly focused,
without full consideration of alternative

solutions, including the joint acquisition of systems with the other
services. In addition, because DOD does not routinely develop information on
joint mission needs

and aggregate capabilities, it has little assurance that decisions to buy,
modify, or retire systems are sound. Three examples of our findings follow:
? The Air Force and the Navy continued their plans to spend $5 billion
acquiring 19, 000 Joint Standoff Weapons even though the ability to use the
weapon

against moving and relocatable targets was significantly less than
originally projected. ? Although average annual funding for space systems

exceeds $6 billion, the U. S. Space Command's longrange plan and the Air
Force Space Command's supporting strategic master plan do not fully conform
to the Department's new space policy. The

plans propose space systems only and do not provide for an assessment of the
cost- effectiveness of terrestrial land, sea, and air systems as
alternatives

to space systems, which is called for in DOD policy. ? Although the F/ A-
18E/ F met its key performance parameters, such as range and carrier
suitability, the operational testers' comparisons of the F/ A- 18E/ F to the
F/ A- 18C showed that the former did not demonstrate superior operational
performance. Instead, after comparing 18 operational mission areas such as
interdiction and fighter escort, the testers concluded that the F/ A- 18E/
F's operational mission effectiveness was essentially the same as the F/ A-
18C's. Such performance is disconcerting, given

that the F/ A- 18E/ F costs nearly twice as much as the F/ A- 18C/ D.

Unrealistic Cost, We continue to find that the desire of program sponsors
Schedule, and

to keep cost estimates as low as possible and to present Performance
attractive milestone schedules encourages the use of Estimates unreasonable
assumptions about the pace and magnitude of the technical effort, material
costs, production rates, savings from competition, and other

factors. For example: ? Some F- 22 development activities have been
deferred, reduced, or eliminated in order to maintain

the aircraft program's development costs within the congressional cost
limitation. ? The Army's Theater High Altitude Area Defense Program's
compressed flight- test schedule did not allow for adequate ground testing,
and as a result, officials could not detect problems prior to flight tests.
The schedule also left insufficient time for preflight testing, post- flight
analysis, and corrective actions. ? The original schedule for developing the
Joint Air- toSurface

Standoff Missile was ambitiously set at about half of what previous missile
programs required. The schedule was later delayed by 22 months, and total
program costs increased by $500 million. Questionable Each year for the past
several years, we have reported Program

that DOD's spending plans could not be executed with Affordability available
funds. We continue to find and report on numerous problems with DOD's
budgeting and spending practices for weapon system acquisitions, suggesting
that wants and needs are not being balanced with affordability limitations.
For example, the availability of several billions of dollars in funding
increases that the

Air Force has projected for space system expansion is uncertain. The
President and the Congress have not

agreed on overall funding increases to DOD for the first 6 years of the 18-
year projection (fiscal years 2000- 05). Additionally, for the last 12 years
of the projection (fiscal years 2006- 17), the Air Force relies on planned
funding

increases for program modernization without identifying funding sources,
thus creating additional uncertainty and putting the expansion of space
systems in jeopardy for affordability reasons. Further, we reported that
current planned procurement spending may be reduced to fund potential
operations and maintenance shortfalls. Specifically, DOD's 2001 Future Years
Defense Plan may have understated cost and overstated savings projections
for operations and maintenance, which increases the risk that planned
spending for procurement may be used to pay for operations and maintenance
funding shortfalls.

As another example, there is a gap between the Army's stated requirements
and DOD's planned missile procurements for the Patriot Advanced Capability-
3 missile. Detailed analyses of the costs, benefits, or available
alternatives for defending U. S. forces and assets are lacking. Such
analyses are needed to allow decisionmakers in the Department and the
Congress to make better decisions on the number of missiles to buy. We have
also reported on similar issues regarding the

vulnerability of surface ships, a concern expressed by Navy leaders, but
that may not be reflected in the budget for ship self- defense programs. As
shown in figure 5, for fiscal years 1997- 2005, spending is relatively flat
(fluctuating between $719 million and $1 billion), and associated research
and development funding is projected to decline from about $517 million to
about $218 million.

Figure 5: Total Ship Self- Defense Funding

1,200,000 Dollars in thousands

1,000,000 800,000 600,000 400,000 200,000

0 1997 1998 1999 2000 2001 2002 2003 2004 2005 Fiscal year

Note: Funding does not include the costs of ship construction. Source:
Fiscal year 1999 and 2000 President's budgets. Other examples include (1)
mismatches between DOD's and the Navy's estimates for how much is needed to
implement the Navy Theater- Wide Program, with DOD's funding at $282
million, considerably lower than the Navy's estimated needs at $567 million
per year and (2) the Navy's need for a more comprehensive and consistent
strategy for improving its ship self- defense capabilities. Previous plans
have not included all

affected ship classes, established priorities among ship classes, or
consistently used a baseline from which to measure progress and set
timelines for achieving desired improvements.

High- Risk Acquisition In our previous high- risk reports, we stated that
highrisk

Strategies acquisition strategies- such as the acquisition of weapons based
on optimistic assumptions about the maturity and availability of enabling
technologies- were being based on the need to meet the threat and to reduce

acquisition costs. We also reported on the high- risk practice of beginning
production of a weapon system before development, testing, and evaluation
are complete. Using highly concurrent strategies and rushing prematurely
into production can lead to uninformed decisions about a weapon's
demonstrated operational effectiveness and the purchase of systems that do
not perform as intended, which ultimately result in lower- than- expected
availability for operations and expensive modifications.

Nevertheless, DOD still begins production on many major and nonmajor weapons
without first ensuring that the systems will meet critical performance
requirements. Examples include: ? The Army plans to begin production of its
Comanche helicopter before initial operational testing starts. ? The Army
established an aggressive production shedule for an inexperienced contractor
to produce

its Family of Medium Tactical Vehicles, resulting in the contractor
producing trucks that could not meet qualification and operational testing
requirements. ? The Navy was moving toward a full- rate production

decision on the MV- 22 Osprey aircraft without having an appropriate level
of confidence that the program would meet design parameters as well as cost
and schedule objectives. ? DOD, citing the emerging missile threat from
rogue nations, compressed the National Missile Defense program schedule by
at least 4 years- making the program vulnerable to delays.

In addition to these examples, we have raised similar issues regarding the
acquisition strategy for the Joint Strike Fighter Program and production of
the Navy F/ A- 18E/ F aircraft.

The Prospects for After having performed hundreds of reviews of major

Change weapon systems over the last 20 years, we have seen many of the same
problems recur- cost increases,

schedule delays, and performance shortfalls. These problems have proven
resistant to reform in part because underlying incentives have not changed.
On the other hand, our work also shows that leading commercial firms are
getting the kinds of outcomes from their development of new products that
DOD seeks. Specifically, these firms are developing increasingly
sophisticated products in significantly less time and at lower cost than
their predecessors. Valuable lessons can be learned from the commercial
sector and applied to the development of weapon systems.

Leading commercial firms expect that their program managers will deliver
high quality products on time and within budget. Doing otherwise could
result in the

customer's walking away, meaning failure for the product. Thus, these firms
have created an environment and adopted practices that put their program
managers

in a good position to succeed in meeting these expectations. Key elements of
this environment are deliberately short cycle times, assurance that
technology is mature before starting a new product development, and use of a
knowledge- based approach to managing product development. Commercial firms

develop new products in well under 5 years, a number that continues to fall.
Short cycle times help people stay focused on delivering the product and
make them accountable for outcomes. Specific practices are embodied in a
knowledge- based approach to product development that can be distilled into
three cumulative knowledge points, depicted in figure 6.

Figure 6: Knowledge- based Process for Applying Best Practices to the
Development of New Products Technology Product Development Production
Development Technologies

Design Production can meet

match performs as

cost, schedule, and requirements

expected quality targets

Source: GAO.

Product development in commercial ventures is a clearly defined undertaking
that firms will not start unless they have the technology in hand to meet
customers' needs. Leading firms do not ask their product managers to develop
technology. The process of developing a product culminates in delivery and

therefore gives great weight to design and production. The firms demand- and
receive- specific knowledge about a new product before production begins. A
program does not go forward unless a strong business

case on which the program was originally justified continues to hold true.
Such a knowledge- based process is essential to commercial firms' getting
better cost, schedule, and performance outcomes. It enables

decisionmakers to be reasonably certain about critical facets of the product
under development when they need it. DOD wants the kinds of outcomes
commercial companies have achieved and has taken steps to reform its
acquisition process to attain them. Examples include the recent revision of
the 5000 series of acquisition guidance, which puts more emphasis on mature
technology before a program is started and a more flexible requirements
process that permits requirements to be met in stages. A few programs have
exhibited some of these features in the early stages of development,
including the Tactical and Global Hawk unmanned aerial

vehicles. It would be premature to interpret this progress as evidence that
systemic change has occurred in DOD's acquisition process. Rather, such
progress

appears to be more the result of individuals' attempts to pioneer change
through extraordinary effort. The environment for DOD weapon system
programs, particularly regarding the requirements setting, funding, and
career management processes, encourages launching programs that embody more
technical unknowns than commercial ventures and less knowledge about the
performance and production risks they entail. The reason DOD programs are
launched earlier is at least partly because establishing a formal program
has been necessary to attract the funds needed to develop a new weapon
system. As requirements are

being set, a new weapon system is more likely to be funded if it possesses
performance features that significantly distinguish it from other systems.
Consequently, DOD program managers have incentives to promote performance
features and design characteristics that rely on immature technologies. To
gain approval, program estimates are squeezed to fit into profiles of
available funding. Additional requirements, such as high reliability, serve
to make the fit even tighter. As competition for funding continues
throughout the program, success becomes identified with the ability to
secure the next installment. Other factors, such as the short tenures of
program managers- relative to long development cycle times- and the
unlikelihood that an unsatisfied customer will walk away, serve to make
managers less accountable for delivering the product as promised.

Key Actions Needed As we have recommended, DOD leadership could improve the
acquisition of weapon systems by (1) routinely considering, in establishing
weapon requirements, joint mission needs and aggregate

capabilities; (2) using more realistic assumptions in developing system
cost, schedule, and performance requirements; (3) approving only those
programs that can be fully executed within reasonable expectations of future
funding; and (4) limiting the use of high- risk acquisition strategies.

Also, as we have recommended, taking these steps would require a better
environment for starting and managing weapon system development programs.
DOD

leadership could help create such an environment by applying best commercial
practices unless there is a clear and compelling national security reason
not to. Such practices would enable DOD to (1) ensure that key technologies
are mature before they are included in weapon system development programs;
(2) set limits, such as 5 years for program development cycle times; and (3)
adopt a knowledge- based approach to managing and making decisions on weapon
system programs.

Key Contact Jack L. Brock, Jr., Managing Director Acquisition and Sourcing
Management (202) 512- 4841

brockj@ gao. gov Improving DOD spent in excess of $130 billion in fiscal
year 1999 Processes and for goods and services. Since 1992, we have reported

Controls to Reduce DOD contract management as a high- risk area. It Contract
Risk

remains on our list of high- risk areas because DOD continues to experience
significant challenges relating to contract management, including (1)
improving oversight and accountability in the acquisition of services, (2)
preventing erroneous and improper payments being made to its contractors,

(3) implementing commercial practices for contract pricing, and (4) managing
health care contracts.

Although contract management remains a high- risk area, DOD has made
meaningful changes to improve the way it relates to contractors and the
rules governing these relationships over the last few years. It also has

attempted to measure select changes to its contracting processes by
establishing key metrics, including (1) the percentage of purchases made by
purchase card, (2) the percentage of paperless contracting and payment
transactions, and (3) the percentage reduction in acquisition workforce
personnel. However, while DOD reported it generally met these established
metrics for last year, the metrics do not measure many of the significant
challenges to improve processes and controls for reducing contract risk.

Improving Oversight DOD also faces challenges in addressing concerns about
and Accountability in

the lack of oversight and accountability in acquiring Acquiring Services

services. This is an area that must receive additional attention as DOD
shifts to greater procurement of sophisticated services. DOD is presently
changing what it buys and how it buys. For example, contracts for research
and development, engineering, and various management support services make
up a growing share of DOD's purchases. In fact, DOD now spends about $70
billion annually acquiring services from the private sector, and that number
is expected to grow as DOD pursues efforts to contract with the private
sector for many functions currently performed by DOD personnel.

We recently raised concerns that DOD has avoided competition when acquiring
services, and the DOD Inspector General found that DOD had not adequately
performed many basic management tasks, including market research, price
analyses, and contractor surveillance. 5 Consequently, DOD seriously
undermined its ability to ensure that it gets the best services at the best
prices. Such concerns, in part, led the Congress to ask us to examine the
practices of leading commercial companies and identify “best
practices” that could yield

benefits to DOD in acquiring services. Both the Congress and DOD have taken
steps to improve DOD's acquisition of services. For example, recently
enacted legislation 6 requires that each military department establish at
least one center of excellence for service contracting. These centers are
intended to assist the acquisition community by identifying and

serving as a clearinghouse on best practices in contracting for services in
the public and private sectors. For its part, DOD has targeted the increased
use of performance- based service acquisitions as a high priority. In April
2000, DOD announced that it had

established a goal that by 2005, 50 percent of all service acquisitions,
measured in both dollars and actions, be based on performance. Each of the
military services and the Defense Logistics Agency are to develop an
implementation plan, while DOD committed itself to provide training,
templates, and other tools to its acquisition workforce to help define,
acquire, and

5 Contracts for Professional, Administrative, and Management Support
Services (Office of the Inspector General, Department of Defense, D- 2000-
100, Mar. 10, 2000) and Contract Management: Not Following Procedures
Undermines Best Pricing Under GSA's Schedule (GAO- 01- 125, Nov. 28, 2000).
6 Floyd D. Spence National Defense Authorization Act for Fiscal Year 2001
(P. L. 106- 398, Oct. 30, 2000).

manage service requirements. While these initiatives should help DOD improve
its acquisition of services, it may be several years before they are fully
implemented and the impact on DOD's acquisition of services can be
evaluated. Fixing DOD's HighRisk

The need for DOD to achieve effective control over its Payment

payment process remains imperative. For fiscal years Systems Is 1994- 99,
DOD reported that contractors returned nearly Imperative

$5. 3 billion. Of this amount, DOD's Defense Finance and Accounting Service
erroneously paid $1. 2 billion- as a result of errors such as paying the
same invoice twice or misreading invoice amounts. Other payment errors can

be attributed to problems with contract administration, such as the failure
to adjust progress payments for changes in contract requirements or
performance. Further, in its fiscal year 1999 financial statements, DOD

reported $3. 6 billion in uncollected debt that relates to a variety of
contract payment problems. Of this amount, we determined that at least $225
million relates to duplicate payments, overpayments, and payments for goods
not received, all of which we consider improper payments. DOD payment errors
can be attributed to complex regulations, long- term contracts,
nonintegrated systems, and the manual entry of contract data into payment
systems. In October 2000, we reported that DOD had not

yet made a comprehensive estimate of improper payments made to its
contractors, and there are likely more overpayments that have yet to be
identified and returned. With an annual budget of over $130 billion in
purchases involving contractors, DOD would benefit from estimating the
magnitude of improper payments. As discussed in the financial management
area, system deficiencies significantly contribute to improper payments.

In addition to improper payments, weak systems and internal controls can
leave DOD vulnerable to fraud. In February 2000 testimony before the House
Budget Committee, the DOD Deputy Inspector General stated that the finance
and acquisition communities appear to be moving in opposite directions on
contractor pay. He noted that while the finance community is attempting to
improve controls over payments by taking measures

such as rejecting vouchers with remittance addresses that are not in the
Central Contractor Registry and may be suspect, some DOD acquisition
officials believe that payments to contractors are not being made promptly
enough, and they advocate making payments without

any attempt to match invoices to receiving documents. According to the DOD
Inspector General, contractor payment processes remain vulnerable to fraud.
As of September 30, 1999, the Defense Criminal Investigative

Service had 85 open financial fraud cases. Moreover, as DOD's reliance on
electronic payment methods increases, unresolved computer security
weaknesses will impact its vulnerability to fraudulent contract payments.

Adjusting to In recent years, DOD has significantly changed the way
Commercial Contract it acquires goods and services by removing what were
Pricing Practices considered barriers to efficient and effective use of the
commercial marketplace. A major focus of these changes is the adoption of
commercial buying practices. For example, for an increasing number of
contracts for

sole- source spare parts, DOD is transitioning from a cost- based pricing
environment, in which contractor costs are the basis to negotiate prices, to
a market- based or commercial pricing environment in which factors other
than cost, such as pricing data, are the principal means used to determine
the reasonableness of prices. While the level of commercial contracting
remains relatively small compared to total DOD procurement, it is likely to
increase substantially in the coming years.

Both we and the DOD Inspector General have found and recommended that DOD
needs to strengthen its efforts to obtain fair and reasonable prices. For
example, the Inspector General found that DOD needs to use more cost-
effective buying strategies for commercial spare

parts. The Inspector General noted that DOD was paying higher prices for
some commercial spare parts than necessary. Our work also identified cases
in which limited price analyses of commercially offered prices resulted in
significantly higher prices than previously paid. DOD is taking steps to
improve its workforce training in commercial buying and pricing. How well
DOD's acquisition workforce will adjust to an environment with increased use
of commercial pricing practices remains to be seen.

Managing DOD's DOD's difficulty in managing contracts is further Contracts
for Health

illustrated in the implementation of its TRICARE health Care care program.
TRICARE was established during a period of military downsizing and budget
concerns to contain costs and maintain access to and the quality of health
care for DOD's 8. 2 million beneficiaries. To implement this program DOD
awarded seven competitive 5- year contracts totaling about $15 billion.

Once these contracts were awarded, DOD made numerous and continuous changes
to them through contract change orders. We reported that DOD had not
developed a reliable estimate of the total federal liability for the
contract changes and that DOD neither systematically reviewed the need for
each order nor considered its likely costs and other effects. As of July

2000, over 500 change orders to the TRICARE contracts had not been settled
and may represent a significant future liability to the Defense Health
Program. To address this growing backlog DOD initiated a plan, called
Mobilization, to settle all of its open change orders by December 2000. We
are evaluating DOD's

progress in settling change orders and identifying improvements to the
process. Furthermore, in an effort to better control costs and improve
health care contracting, DOD has initiated a broad review of TRICARE's
operational structure. For the study, DOD will examine TRICARE's
organization and business plans and will develop a revised procurement
strategy. Whether DOD can successfully develop and launch the new
procurement strategy and

whether this new strategy will reduce the current volume of contract changes
or control health care costs remain to be seen.

Key Actions Needed As we have previously stated in testimony, the problems
that we have identified are difficult ones and are deeprooted in very large
programs and organizations. There is much to be learned from the best
practices of leading, high- performing private sector organizations that can
be used to improve the acquisition and contracting process

and controls to reduce contract risk. We testified that, when use of
commercial best practices is determined to be appropriate, government
agencies should adopt these practices unless compelling reasons exist for
not doing so. To ensure that progress continues, sustained management
attention and congressional oversight will be necessary.

Key Contact David E. Cooper, Director Acquisition and Sourcing Management
(202) 512- 4841 cooperd@ gao. gov Stephen P. Backhus, Director

Health Care (202) 512- 7111 backhuss@ gao. gov

Creating an DOD also has to address the inefficiencies in its support

Efficient and infrastructure. Although the United States has

Responsive Support significantly reduced its defense force structure and

Infrastructure military spending since the end of the Cold War, it has

not achieved commensurate reductions in operations and support
infrastructure 7 costs. As the Department has sought to bring about a
revolution in military affairs, it has realized that it must transform its
support infrastructure to become leaner and more efficient to serve the
warfighter faster, better, and cheaper. It also has realized that high
priority needs such as weapons modernization can be fulfilled only with a
large influx of infrastructure savings. While DOD has made some progress, it
needs to do more to significantly reduce its

infrastructure costs, and many obstacles remain. The effectiveness of many
civilian agencies has also been undermined by outmoded organizational
structures that drain resources needed to make improvements to mission
delivery capabilities. Because of the difficulties associated with achieving
these reductions and the potential for the continued waste of billions of
dollars annually on inefficient and unneeded activities and facilities, we
included defense infrastructure on our list of high- risk areas among
federal agencies in 1997. It remains on that list.

7 DOD defines infrastructure as those activities that provide support
services to mission programs, such as combat forces, and primarily operate
from fixed locations. The activities include such program elements as
installation support; acquisition infrastructure; central logistics; and
central training, central medical, and personnel. In fiscal year 2001,
approximately $33 billion of infrastructure costs are expected to be related
to maintenance and upkeep of facilities across these program elements.

Infrastructure Costs In our recent reviews of DOD's Future Years Defense
Continue to Consume Program (FYDP), 8 we did not find significant reductions

a Larger Than in DOD's budgets devoted to its support infrastructure.
Necessary Portion of

For example, we reported in April 1996 that no DOD's Budget significant net
infrastructure reductions were expected between fiscal year 1996 and 2001.
We noted that the

proportion of planned infrastructure funding in DOD's budgets would remain
relatively constant at about 60 percent through 2001. This is not to suggest
that

operating efficiencies and reductions have not occurred due to such efforts
as base realignment and closure, consolidations, regionalization,
privatization, and outsourcing efforts. However, our October 2000 analysis
of the FYDP for fiscal years 2001- 2005 showed that the

portion of the FYDP devoted to direct infrastructure relative to mission has
not changed, despite the expectations that it would. Figure 7 shows
infrastructure funding as compared to the total Defense budget.

8 The FYDP is the official document that summarizes the force levels and
funding associated with specific programs that the Secretary of Defense
would like the Congress to approve. The FYDP reflects decisions made in the
DOD Planning, Programming, and Budgeting System, which is intended to
produce the best possible mixture of forces, equipment, and support to
accomplish DOD's mission. The

FYDP presents estimated appropriation needs for the budget year for which
funds are being requested from the Congress and at least the 4 years
following it.

Figure 7: Direct Infrastructure Funding Versus the Total DOD Budget (fiscal
years 1986- 2000)

500 Billions

400 300 200 100

0 1986 1987 1988 1989 1990 1991 1992 1993 1994 1995 1996 1997 1998 1999 2000
Fiscal year

Infrastructure Total

Source: OSD.

Additionally, while the Department's performance plan required by the
Results Act includes as an outcome measure the percentage of DOD's budget
spent on infrastructure, we recently reported that this measure is of
limited value because the reliability of reported

budget execution data is questionable and because the data do not reflect
what the Department should be spending on infrastructure. The Department
acknowledges that it has not been spending enough money to offset a growing
backlog of facilities maintenance and repair projects. For example, the
Department's September- October 2000 Monthly Readiness Report to the
Congress cited concerns about funding shortfalls in base operating support,
real property maintenance, and military construction

accounts. The Air Force noted that these accounts are inadequately funded,
with infrastructure presently

funded for replacement at the 250- year point. This suggests that the
Department needs to reduce its facilities infrastructure and requires
balanced funding of the infrastructure it retains.

DOD Faces The Defense Reform Initiative, announced by the Significant

Secretary of Defense in November 1997, was intended to Challenges in improve
the effectiveness and efficiency of DOD's Planning for Reform

business processes and support infrastructure. It and Infrastructure
represents a number of management initiatives, such as Reductions

adopting best business practices; expanding the use of electronic commerce,
logistics reengineering, 9 and public- private competitions (using the
Office of Management and Budget's A- 76 process); 10 and eliminating
unneeded facilities infrastructure. The latter has included such actions as
demolition of unneeded buildings, privatization of housing and utilities on
military facilities, and a proposal for additional base realignment and
closure rounds. While the initiatives collectively offer the potential for

significant long- term savings, the Department is not likely to quickly
realize large- scale net savings from many of these initiatives because most
individual initiatives are long- term efforts that require significant up-
front investments to implement. Additionally, the major benefit from some of
the initiatives involves cost avoidance such as avoiding upkeep of unneeded
buildings and relying on private sector resources, rather than the
government's, for needed capital investment for new housing and revitalized
utilities. 9 The issue of logistics restructuring is discussed later as a
separate management challenge.

10 Under A- 76, agencies conduct public/ private competitions to determine
whether the public or private sector will perform selected commercial
activities and functions.

In July 2000, we reported that only a few of the reform initiatives had been
completed and that while most of the remaining initiatives were progressing,
they faced barriers that could keep them from meeting specific time frames
and goals. For example: ? DOD's program to evaluate activities involving
over 200,000 positions for potential outsourcing is expected to result in
estimated savings of $9. 2 billion

by 2005 and $2. 8 billion in annual recurring savings thereafter. However,
the savings are likely to be smaller than expected in the short term because
of delays in completing the studies and because the

Department had not fully calculated either the investment costs associated
with these competitions or the personnel separation costs likely to be
associated with them. The services have expressed concern about the
reductions in their future operating budgets that have already been planned
in anticipation of A- 76 savings.

? DOD has encountered delays in its efforts to improve military family
housing through private sector financing, ownership, operation, and
maintenance. Almost 4 years after the program was initiated, the Department
has awarded few contracts to build or renovate military family housing
units. While the program offers an important opportunity to improve military
housing at a faster rate than relying on traditional military construction
methods, we have found that DOD's life- cycle cost analyses associated with
its privatization efforts have been incomplete and inaccurate, and have
overstated savings.

? DOD continues to emphasize that additional base realignment and closure
rounds are necessary to reduce unneeded infrastructure and to free up funds
for readiness, weapon modernization, and quality- oflife plans. The
Secretary's position has been that the post- Cold War transformation of
America's defense posture will not be complete until excess military bases
and facilities are eliminated. The Reform

Initiative called for two additional rounds of base realignments and
closures to supplement the four rounds conducted between 1988 and 1995.
Additional base closures and A- 76 studies are the two key

initiatives for which the Department has projected savings from its Reform
Initiative. ? The Department projects that additional base closure

rounds could produce new savings of $3. 4 billion a year once realignment
and closure actions were completed and the costs of implementing these
actions were offset by savings. However, because of issues related to
economic impacts, cost and savings from prior rounds, and executive branch
handling of two closure and realignment decisions in the 1995 round, the
Congress has been reluctant to authorize additional rounds.

Key Actions Needed As we have recommended, DOD needs to develop an
integrated plan to better integrate, guide, and sustain the implementation
of its diverse defense reform initiatives and an approach for assessing and
making key investment decisions. Key reform initiatives, such as
acquisition, financial management, and logistics reform, could be
strengthened if addressed in an integrated fashion.

For its facilities infrastructure, DOD also needs to develop a comprehensive
long- range facilities plan that addresses long- term facility needs, plans
to upgrade or replace aging facilities, and plans for reversing the reported
increasing work backlog involving facilities maintenance and repair.
Development of such a plan could be significantly affected by DOD's ability
to reach agreement with the Congress on the need for additional base
realignment and closure rounds. The infrastructure problems in civilian
agencies also suggest the possible relevance of a civilian facility closure
and realignment process.

Despite limitations in the precision of DOD's estimates of savings from base
closures, our prior work has shown that significant net annual recurring
savings can be expected once initial investment costs have been offset.
Legislation that was enacted in 1990 and which expired in 1995 has been seen
by many officials as a starting point should the Congress decide it wants to
authorize future base realignments and closure rounds.

Key Contact Barry W. Holman, Director Defense Capabilities and Management
(202) 512- 5581 holmanb@ gao. gov Providing Logistics

Providing economical and responsive logistics support Support That Is is
central to DOD's achievement of its mission. However, Economical and while
the logistics support system gets the job done, it is

Responsive often described as a brute force process that is uneconomical and
inefficient. In the past we have reported problems in DOD's depot
maintenance programs, inventory systems, and distribution and

transportation processes. Support costs have continued to increase despite
reductions in DOD's equipment inventory, support personnel, and military
activities. At the same time, questions have been raised about whether DOD's
logistics system is responsive to

emerging operational requirements. In 2000 we reported that despite DOD's
progress in its efforts to reengineer, streamline, and improve the
efficiency and effectiveness of its logistics systems,

processes, and operations, the Department continues to have serious
weaknesses throughout its logistics activities, and it is unclear to what
extent the ongoing reengineering effort will address these weaknesses. One
of the most critical logistics functions on which we have reported problems
is inventory management, which we

identified as high risk in 1990 because levels of inventory were too high
and management systems and procedures were ineffective and wasteful. This
continues to be a high- risk area. Improvements are

DOD is attempting to reengineer and modernize its Needed in Logistics

logistics program to increase efficiency, improve Reengineering Plans

performance, and reduce system operations costs of about $84 billion.
Numerous studies have laid the groundwork for the current logistics
reengineering efforts. Generally these studies have focused on adopting
improved business processes and increasing reliance on the private sector to
improve logistical support operations. Based on these studies, DOD has taken
steps toward restructuring its logistics processes. Despite the progress the
Department has made with its restructuring effort, our recent review
identified several concerns or uncertainties about incompleteness, overly
optimistic implementation schedules, the potential for

savings associated with specific initiatives, the effect of the initiatives
on combat forces, and other factors. For example, many aspects of the
restructuring plan are incomplete, raising questions about whether or when
the overall goals of improved service and lower costs

will be achieved. The services and defense agencies have about 400 ongoing
individual initiatives to improve logistics support, and DOD has not
developed an overarching plan that integrates individual service efforts
into a single, Department- wide implementation strategy.

A March 23, 2000, directive required the military services to establish
logistics reengineering plans. The plans are supposed to relate the 400
different service- sponsored logistics reengineering initiatives to DOD's
Logistics Strategic Plan, but that plan is very general and does not address
all logistics activities or functions. While there is no requirement to
develop an overall DOD plan that

integrates the service plans, DOD officials said that the integration will
be accomplished through the Department's planned new logistics architecture,
which is supposed to provide a blueprint that will guide and control the
development and maintenance of the many related logistics systems. It is too
early in the development of the logistics architecture to know the
integration required if the Department is to achieve the desired economy,
efficiency, and performance goals for

the restructured process. Also, uncertainties exist about the overly
optimistic implementation schedule that has been established for DOD's
reengineering program. For example, the Department plans to use information
gleaned from the 30 pilot programs to develop future models for
reengineering and policy changes and to fully implement reengineered support
strategies by the end of 2005. However, as shown in table 1, some pilot
program test plans have not been fully developed, test objectives for others
have not been clearly defined or may later change, and test results of some
pilots may be delayed. Table 1: Pilot Programs Whose Plans Are Not Likely to
Meet Logistics Reengineering Time Lines

Number of pilots, by service Problem a Army Air Force Navy Total

Test plans not yet developed 2 1 4 7

Test plans subject to change 6 7 4 17

Test results likely not available at end of fiscal 7 6 8 21

year 2002 to support DOD- wide reengineering a Problems are not mutually
exclusive; consequently, some pilot programs are included in more than one
category. Source: GAO analysis.

Inventory One of the most serious weaknesses in DOD's logistics

Management operations and where there are questions about whether Continues
to Be High ongoing initiatives will address past shortcomings is the Risk
Department's lack of adequate control over its inventory. Since 1990, we
have consistently identified DOD's management of secondary inventories
(spare and repair parts, clothing, medical supplies, and other items to
support the operating forces) as a high- risk area because levels of
inventory were too high and management systems and procedures were
ineffective and wasteful.

Figure 8 shows that DOD's inventory value for the last 10 years has been
generally declining. However, our past and current work in this area
indicates that DOD (1) continues to store unnecessarily large amounts of
material, (2) purchases material for which there is no valid requirement,
(3) experiences equipment readiness

problems because of a lack of key spare parts, and (4) fails to maintain
adequate visibility over material being shipped to and from military
activities. At the same time, we are seeing selected instances where
insufficient inventory support is causing weapon

systems to be unavailable for use.

Figure 8: DOD Secondary Inventory Value

120 Current Year-- Dollars in Billions

100

90.4 88.1 80.2 77.5 80

73.6 69.7 68.5 64.8 61.2 64.0

60 40 20

0 1990 1991 1992 1993 1994 1995 1996 1997 1998 1999 Fiscal Year

Note: Based on latest DOD acquisition cost method of value. Source: DOD
Supply System Inventory Report, Sept. 30, 1999.

As of September 30, 1999, nearly half of DOD's $64 billion inventory exceded
war reserve or current operating requirements. DOD had this excess partly
because demands decreased, fluctuated, or did not materialize; items became
obsolete or were phased out of service; and some of the initial requirements
and demand forecasts were not accurate. We recommended

in previous reports that DOD improve the effectiveness and efficiency of its
inventory activities and adopt new leading- edge business practices. As of
September 30, 1999, DOD records showed that the Department had inventory on
order valued at about $1. 6 billion that would not have been ordered based
on current requirements. We reported in June 2000 that DOD managers needed
the items when they placed

orders, but either the records contained errors that resulted in overstating
the requirements or the requirements changed after the orders were made. We
also reported in November 1999 that the Air Force did not always cancel
purchases that exceeded current

operating requirements. The Air Force had canceled contracts for about $5. 5
million of the $162. 4 million excess inventory that we reviewed, but it
could have canceled more. Contracts for unnecessary items were not being
canceled primarily because the Air Force

process for canceling contracts takes a long time, during which costs are
incurred for which the government is liable. To correct these problems, we
recommended that the Air Force improve the timeliness and accuracy of data
that managers use for identifying and canceling excess inventory on order.

DOD has experienced equipment readiness problems because of a lack of key
spare parts. For years, insufficient spare parts have been recognized as a
major contributor to aircraft performing at lower mission capable rates than
expected. In June 2000, we reported that insufficient quantities of spare
parts was one of the

primary reasons airlift and aerial refueling aircraft had performed below
the Air Force Air Mobility Command's mission- capable standard rates. In
April 1999 we reported that some Air Force major aircraft were unfit to fly
because supply problems had risen from 6. 4 percent in fiscal year 1990 to
13. 9 percent in fiscal year 1998. Table 2 shows the reported not mission
capable rates due to supply problems for the Air Force's

major aircraft for fiscal years 1990- 98.

Table 2: Reported Total Not Mission Capable Rates for Air Force Major
Aircraft

Percent of aircraft not mission Fiscal year capable due to supply problems

1990 6.4 1991 8.6 1992 9.5 1993 10.2 1994 10.3 1995 10.8 1996 11.0 1997 12.6
1998 13.9 Source: The Air Force's Multi- Echelon Resource and Logistics
Information Network and the Reliability and Maintainability Information
System.

Our April 1999 report noted that to support the mission capability rates,
the military was routinely cannibalizing aircraft for parts and using parts
from units' war reserve kits that were intended to support deployed
operations. The aircraft spare parts shortages were due in part to DOD's
weaknesses in forecasting inventory requirements and the failure of DOD's
logistics system to achieve expected inventory management

improvements. The inventory forecasting error, for example, caused a $500-
million shortfall in funding in the Air Force supply activity group's budget
in fiscal year 1997. This shortfall severely limited the Air Force's ability
to buy new spare parts for its inventory and pay for the repair of broken
aircraft parts.

DOD's inability to maintain adequate oversight of material being shipped to
and from military activities is another long- standing inventory management
problem. The tracking of this inventory from origin to destination continues
to raise concerns about the vulnerability of

this inventory to waste, fraud, and abuse. We reported in June 2000 that the
Army did not know the extent to which shipped inventory had been lost or
stolen because of weaknesses in its inventory control procedures and
financial management practices. The Army reported inventory shipment losses
of $297,000, but our analysis indicated the Army could not account for about
$900 million in shipped inventory in fiscal year 1998. We also reported in
March 1999 that the Navy was unable to

account for more than $3 billion worth of inventory being shipped, including
some classified and sensitive items.

Because DOD had not fully corrected its long- standing problems in tracking
inventory during shipment, the Congress (section 349 of the Strom Thurmond
National Defense Authorization Act for Fiscal Year 1999) required DOD to
submit a comprehensive plan addressing how it

planned to ensure visibility over the shipment of all end items and
secondary items. In February 2000, we reported that DOD's September 1999
plan did not

contain some key management elements needed to effectively implement its
proposed actions or to adequately address underlying weaknesses that have
led

to the lack of control over inventory shipments. For example, the plan did
not fully address how the Department will correct errors in the automated

systems that the military services use to manage this inventory. In
addition, the plan did not adequately address the underlying problems that
have been consistently highlighted in our and DOD's prior audit reports.
Additionally, we reported in July 1999 that DOD had developed comprehensive
procedures to track excess property being shipped to disposal but that these
procedures were not working effectively. DOD reported that, during fiscal
year 1998, property valued at about $2. 7 billion was shipped to disposal
but had not been recorded as received by disposal offices. In each of our

recent reports regarding DOD's inability to track inventory during shipment
we have recommended that DOD correct the weaknesses in its inventory
management systems, adhere to the standardized DOD- wide policies and
procedures for tracking inventory shipments, and develop long- range plans
to enhance the Department's overall management of its inventory. Key Actions
Needed To enhance DOD's reengineering efforts, we have recommended that DOD
develop an overarching plan that integrates the individual service and
defense agency

logistics reengineering plans to include an investment strategy for funding
reengineering initiatives and details for how DOD plans to achieve its final
logistics system end state. We also recommended that DOD reassess its
schedule for testing, evaluating, and implementing the initiatives;
establish a methodology showing the savings or improvements that come from
reengineering concepts; and reassess its approach for addressing various
combat command concerns, such as the presence of increasing numbers of
contractor personnel

on the battlefield. Also, to improve inventory management, we recommended
that DOD make more use of supply- chain best management practices similar to
those used in the

private sector to help cut costs and improve customer service. These include
practices such as using highly accurate information systems to track and
control inventory and employing various methods to speed the flow of parts
through the logistics pipeline. Key Contact David R. Warren, Director

Defense Capabilities and Management (202) 512- 8412 warrend@ gao. gov

Related GAO Products Strategic Planning Future Years Defense Program: Risks
in Operation and

Maintenance and Procurement Programs (GAO- 01- 33, Oct. 5, 2000).

Force Structure: Air Force Expeditionary Concept Offers Benefits but Effects
Should Be Assessed (GAO/ NSIAD- 00- 201, Aug. 15, 2000).

Force Structure: Army Is Integrating Active and Reserve Combat Forces, but
Challenges Remain (GAO/ NSIAD- 00- 162, July 18, 2000). Contingency
Operations: Providing Critical Capabilities Poses Challenges (GAO/ NSIAD-
00- 164, July 6, 2000).

Observations on the Department of Defense's Fiscal Year 1999 Performance
Report and Fiscal Year 2001 Performance Plan (GAO/ NSIAD- 00- 188R, June 30,
2000). Future Years Defense Program: Funding Increase and Planned Savings in
Fiscal Year 2000 Program Are at Risk (GAO/ NSIAD- 00- 11, Nov. 22, 1999).

Military Operations: Impact of Operations Other Than War on the Services
Varies (GAO/ NSIAD- 99- 69, May 24, 1999). DOD Budget: Substantial Risks in
Weapons Modernization Plans (GAO/ T- NSIAD- 99- 20, Oct. 8, 1998).

Quadrennial Defense Review: Opportunities to Improve the Next Review (GAO/
NSIAD- 98- 155, June 25, 1998).

Results Act: DOD's Annual Performance Plan for Fiscal Year 1999 (GAO/ NSIAD-
98- 188R, June 5, 1998). The Results Act: Observations on DOD's Draft
Strategic Plan (GAO/ NSIAD- 97- 219R, Aug. 5, 1997).

Human Capital Defense Headquarters: Status of Efforts to Redefine and Reduce
Headquarters Staff (GAO/ NSIAD- 00- 224,

Sept. 6, 2000). Military Personnel: Services Need to Assess Efforts to Meet
Recruiting Goals and Cut Attrition (GAO/ NSIAD- 00- 146, June 23, 2000).

Human Capital: Strategic Approach Should Guide DOD Civilian Workforce
Management (GAO/ T- GGD/ NSIAD- 00- 120, Mar. 9, 2000). Military Personnel:
First- Term Recruiting and Attrition Continue to Require Focused Attention
(GAO/ T- NSIAD- 00- 102, Feb. 24, 2000).

Military Attrition: DOD Needs to Follow Through on Actions Initiated to
Reduce Early Separations (GAO/ T- NSIAD- 99- 80, Feb. 24, 1999).

Financial Department of Defense: Implications of Financial

Management Management Issues (GAO/ T- AIMD/ NSIAD- 00- 264, July 20, 2000).

Department of Defense: Progress in Financial Management Reform (GAO/ T-
AIMD/ NSIAD- 00- 163, May 9, 2000).

DOD Inventory: Weaknesses in Controls Over Category I Rockets (GAO/ AIMD-
00- 62R, Apr. 13, 2000).

Executive Guide: Creating Value Through World- Class Financial Management
(GAO/ AIMD- 00- 134, Apr. 2000).

Financial Management: Differences in Army and Air Force Disbursing and
Accounting Records (GAO/ AIMD- 00- 20, Mar. 7, 2000).

Financial Management: Analysis of DOD's First Biennial Financial Management
Improvement Plan (GAO/ AIMD- 99- 44, Jan. 29, 1999).

Information Information Management and Technology Financial Management and

Management: Significant Weaknesses in Corps of Technology Engineers Computer
Controls (GAO- 01- 89, Oct. 11, 2000).

Year 2000 Computing Challenge: Lessons Learned Can Be Applied to Other
Management Challenges (GAO/ AIMD- 00- 290, Sept. 12, 2000). Information
Security: Controls Over Software Changes at Federal Agencies (GAO/ AIMD- 00-
151R, May 4, 2000). Defense Information Management: Continuing
Implementation Challenges Highlight the Need for Improvement (GAO/ T- AIMD-
99- 93, Feb. 25, 1999). Defense IRM: Alternatives Should Be Considered in
Developing the New Civilian Personnel System (GAO/ AIMD- 99- 20, Jan. 27,
1999).

Acquisition Reform Future Years Defense Program: Risks in Operations and
Maintenance and Procurement Programs

(GAO/ NSIAD- 01- 33, Oct. 5, 2000). Missile Defense: Schedule for Navy
Theater Wide Program Should Be Revised to Reduce Risk (GAO/ NSIAD- 00- 121,
May 31, 2000).

Defense Acquisitions: Improvements Needed in Military Space Systems'
Planning and Education (GAO/ NSIAD- 00- 81, May 18, 2000).

Defense Acquisition: Employing Best Practices Can Shape Better Weapon System
Decisions (GAO/ T- NSIAD- 00- 137, Apr. 26, 2000).

Missile Defense: Status of the National Missile Defense Program (GAO/ NSIAD-
00- 131, Mar. 31, 2000).

Defense Acquisitions: Reduced Operational Effectiveness of Joint Standoff
Weapon (GAO/ NSIAD- 99- 137, Aug. 31, 1999). Missile Defense: THAAD
Restructure Addresses Problems But Limits Early Capability (GAO/ NSIAD- 99-
142, June 30, 1999).

Major Management Challenges and Program Risks: Department of Defense (GAO/
OCG- 99- 4, Jan. 1999).

Army Medium Trucks: Information on Delivery Delays and Corrosion Problems
(GAO/ NSIAD- 99- 26, Jan. 13, 1999).

Contracting Contract Management: Little Assurance of Best Prices for DOD
Information Technology Services Using GSA's

Schedule (GAO- 01- 125, Nov. 30, 2000). Contract Management: Not Following
Procedures Undermines Best Pricing Under GSA's Schedule (GAO- 01- 125, Nov.
28, 2000)

Financial Management: Billions in Improper Payments Continue to Require
Attention (GAO- 01- 44, Oct. 27, 2000). Contract Management: Few Competing
Proposals for Large DOD Information Technology Orders (GAO/ NSIAD- 00- 56,
Mar. 20, 2000).

Contract Management: DOD Pricing of Commercial Items Needs Continued
Emphasis (GAO/ NSIAD- 99- 90, June 24, 1999). Acquisition Reform: Multiple
Award Contracting at Six Federal Organizations (GAO/ NSIAD- 98- 215, Sept.
30, 1998).

Defense Health Care: Operational Difficulties and System Uncertainties Pose
Continuing Challenges for TRICARE (GAO/ T- HEHS- 98- 100, Feb. 26, 1998).

Defense Future Years Defense Program: Risks in Operation and

Infrastructure Maintenance and Procurement Programs (GAO- 01- 33,

Oct. 5, 2000). Defense Management: Actions Needed to Sustain Reform
Initiatives and Achieve Greater Results (GAO/ NSIAD- 00- 72, July 25, 2000).

Military Housing: Continued Concerns in Implementing the Privatization
Initiative (GAO/ NSIAD- 00- 71, Mar. 30, 2000). Military Real Property
Maintenance: Improvements Are Needed to Ensure That Critical Mission
Facilities Are Adequately Maintained (GAO/ T- NSIAD- 00- 51,

Oct. 26, 1999). Military Infrastructure: Real Property Management Needs
Improvement (GAO/ NSIAD- 99- 100, Sept. 7, 1999).

Logistics Defense Inventory: Process for Canceling Inventory Reengineering

Orders Needs Improvement (GAO/ NSIAD- 00- 160, June 30, 2000).

Defense Logistics: Integrated Plans and Improved Implementation Needed to
Enhance Engineering Efforts (GAO/ T- NSIAD- 00- 206, June 27, 2000). Defense
Inventory: Army Needs to Strengthen and Follow Procedures to Control Shipped
Items (GAO/ NSIAD- 00- 109, June 23, 2000).

Defense Logistics: Actions Needed to Enhance Success of Reengineering
Initiatives (GAO/ NSIAD- 00- 89, June 23, 2000).

Military Readiness: Air Transport Capability Falls Short of Requirements
(GAO/ NSIAD- 00- 135, June 22, 2000). Defense Inventory: Plan to Improve
Management of Shipped Inventory Should Be Strengthened (GAO/ NSIAD- 00- 39,
Feb. 22, 2000).

Defense Inventory: Improvements Needed to Prevent Excess Purchases by the
Air Force (GAO/ NSIAD- 00- 5, Nov. 10, 1999).

Defense Inventory: Property Being Shipped to Disposal Is Not Properly
Controlled (GAO/ NSIAD- 99- 84, July 1, 1999). Air Force Supply: Management
Actions Create Spare Parts Shortages and Operational Problems (GAO/ NSIAD/
AIMD- 99- 77, Apr. 29, 1999).

Defense Inventory: Status of Inventory and Purchases and Their Relationship
to Current Needs (GAO/ NSIAD- 99- 60, Apr. 16, 1999).

Defense Inventory: Navy's Procedures for Controlling InTransit Items Are Not
Being Followed (GAO/ NSIAD- 99- 61, Mar. 31, 1999).

Performance and Accountability Series

Major Management Challenges and Program Risks: A Governmentwide Perspective
(GAO- 01- 241)

Major Management Challenges and Program Risks: Department of Agriculture
(GAO- 01- 242)

Major Management Challenges and Program Risks: Department of Commerce (GAO-
01- 243)

Major Management Challenges and Program Risks: Department of Defense (GAO-
01- 244)

Major Management Challenges and Program Risks: Department of Education (GAO-
01- 245)

Major Management Challenges and Program Risks: Department of Energy (GAO-
01- 246)

Major Management Challenges and Program Risks: Department of Health and
Human Services (GAO- 01- 247)

Major Management Challenges and Program Risks: Department of Housing and
Urban Development (GAO- 01- 248)

Major Management Challenges and Program Risks: Department of the Interior
(GAO- 01- 249)

Major Management Challenges and Program Risks: Department of Justice (GAO-
01- 250)

Major Management Challenges and Program Risks: Department of Labor (GAO- 01-
251)

Major Management Challenges and Program Risks: Department of State (GAO- 01-
252)

Major Management Challenges and Program Risks: Department of Transportation
(GAO- 01- 253)

Major Management Challenges and Program Risks: Department of the Treasury
(GAO- 01- 254)

Major Management Challenges and Program Risks: Department of Veterans
Affairs (GAO- 01- 255)

Major Management Challenges and Program Risks: Agency for International
Development (GAO- 01- 256)

Major Management Challenges and Program Risks: Environmental Protection
Agency (GAO- 01- 257)

Major Management Challenges and Program Risks: National Aeronautics and
Space Administration (GAO- 01- 258)

Major Management Challenges and Program Risks: Nuclear Regulatory Commission
(GAO- 01- 259)

Major Management Challenges and Program Risks: Small Business Administration
(GAO- 01- 260)

Major Management Challenges and Program Risks: Social Security
Administration (GAO- 01- 261)

Major Management Challenges and Program Risks: U. S. Postal Service (GAO-
01- 262)

High- Risk Series: An Update (GAO- 01- 263)

GAO United States General Accounting Office

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Contents

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Comptroller General of the United States

Page 3 GAO- 01- 244 DOD Challenges United States General Accounting Office

Washington, D. C. 20548

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Related GAO Products Page 75 GAO- 01- 244 DOD Challenges

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