Human Capital: Major Human Capital Challenges at the Departments 
of Defense and State (29-MAR-01, GAO-01-565T).			 
								 
GAO discussed the human capital issues facing the Department of  
Defense (DOD) and the Department of State. The issues facing the 
agencies are not fundamentally different from those facing other 
federal agencies. In the wake of extensive downsizing over the	 
last decade, agency workforces are experiencing significant	 
imbalances in terms of shape, skills, and retirement eligibility,
with the likelihood of a huge loss of personnel to retirement	 
over the next few years and a resulting decline in the ability to
accomplish agency missions. While both DOD and State have begun  
to address their human capital issues, GAO identified several	 
areas where additional efforts are needed. DOD and State must	 
step up their efforts to identify current and future workforce	 
needs, assess where they are relative to those needs, and develop
strategies for addressing any related gaps. Such efforts should  
address workforce shape, skills, knowledge, and succession	 
planning.							 
-------------------------Indexing Terms------------------------- 
REPORTNUM:   GAO-01-565T					        
    ACCNO:   A00696						        
    TITLE:   Human Capital: Major Human Capital Challenges at the     
             Departments of Defense and State                                 
     DATE:   03/29/2001 
  SUBJECT:   Human resources utilization			 
	     Personnel management				 
	     Personnel recruiting				 
	     Strategic planning 				 

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GAO-01-565T

HUMAN CAPITAL Major Human Capital Challenges at the Departments of Defense
and State

Statement of Henry L. Hinton, Jr, Managing Director, Defense Capabilities
and Management

United States General Accounting Office

GAO Testimony Before the Subcommittee on Oversight of Government

Management, Restructuring and the District of Columbia, Senate Committee on
Governmental Affairs and the Subcommittee on Civil Service and Agency
Organization, House Committee on Government Reform

For Release on Delivery Expected at 10: 00 a. m. Thursday March 29, 2001

GAO- 01- 565T

1 GAO-01-565T

Chairman Voinovich, Chairman Scarborough, and Members of the Subcommittees:
I appreciate the opportunity to appear before this joint hearing to discuss
the human capital challenges confronting two key agencies in the national
security establishment. As you are aware, GAO has been a leading promoter of
more systematic attention toward human capital issues. I am particularly
gratified to come before your Subcommittees as you have been committed
advocates of our efforts, sponsoring much of our work in this area. The
leadership provided by your Subcommittees has been especially important in
focusing attention on the federal government's human capital challenges and
in helping to lay the foundation for eventual human capital legislative
reform. Senator Voinovich, your recent report, entitled “Report to the
President: The Crisis in Human Capital,” captures in compelling terms
both the urgency of the government's human capital problems and the
opportunity that now exists to make the federal government's “people
management” a top priority for both Congress and the new
administration. 1

As you know, the U.S. Commission on National Security in the 21 st Century
has focused a key part of its analysis on human capital issues. The
magnitude of the federal government's challenge in the human capital arena
will take the dedicated efforts of many to catalog all the problems and
correct the past neglect of “people management.” The Congress,
the Office of Management and Budget (OMB) and the Office of Personnel
Management (OPM), special commissions and advisory groups, oversight
agencies such as GAO and the inspector general offices, and the individual
agencies themselves all have a role to play.

Over the past two years, our work on the major management challenges and
program risks across the government has identified human capital as a
primary factor affecting current and future agency performance. My statement
today will address (1) the general issue of human capital issues in the
federal government and (2) specific human capital challenges in the
Departments of Defense and State.

SUMMARY The human capital issues facing the Department of Defense and the
Department of State are not fundamentally different from those facing other
federal agencies today. In the wake of extensive downsizing over the last
decade, agency workforces are experiencing significant imbalances in terms
of shape, skills, and retirement eligibility, with the likelihood of a huge
loss of personnel to retirement over the next few years and a resulting
decline in the ability to accomplish agency missions. Yet, until recently,
there has been very little action taken to address this problem.

While both the Department of Defense and the Department of State are
beginning to address their human capital issues, each has a considerable way
to go. Our review of their most recent performance reports and performance
plans identified several areas

1 Report to the President: The Crisis in Human Capital, report prepared by
Senator George V. Voinovich, Chairman, Subcommittee on Oversight of
Government Management, Restructuring, and the District of Columbia,
Committee on Governmental Affairs, United States Senate, December 2000.

2 GAO-01-565T

where additional efforts are needed. Although the specific problems in each
agency are somewhat different, they all have a common origin-the lack of an
overall strategic approach to the management of the workforce. Agencies must
step up their efforts to identify current and future workforce needs, assess
where they are relative to those needs, and develop strategies for
addressing any related gaps. Such efforts should address workforce shape,
skills, knowledge, and succession planning.

HUMAN CAPITAL: A GOVERNMENTWIDE HIGH RISK AREA Strategic human capital
management is a pervasive challenge throughout the federal government. The
human capital problems of the Department of Defense and the Department of
State can be seen as part of a broader pattern of human capital weaknesses
that have eroded mission capabilities across the federal government. As you
know, we recently designated human capital as a governmentwide high-risk
area. 2 After a decade of government downsizing and curtailed investments in
our vital “people” assets, it has become increasingly clear that
today's federal human capital strategies are not appropriately constituted
to adequately meet current and emerging needs of government and its citizens
in the most effective, efficient, and economical manner possible. While
legislation and other actions have been put in place over the last decade to
address most of the major management areas, such as financial management,
information technology, and results-oriented management, human capital
remains as the critical link to reforming and modernizing the federal
government's management practices. While my focus today will be on specific
human capital issues, it is important to note that human capital has a
pervasive impact on the organization, affecting virtually every aspect of
operations. To a certain extent, any problem or management challenge that
exists in an organization is likely to have some connection to human
capital. Simply stated, human capital problems often lead to programmatic
problems and increased risks.

Our work has found human capital challenges across the government in four
key areas:

Strategic human capital planning and organizational alignment,

Leadership continuity and succession planning,

Acquiring and developing staffs whose size, skills, and deployment meet
agency needs, and

Creating results-oriented organizational cultures. Both State and Defense
are facing significant challenges in each of these areas.

The Comptroller General recently testified before the Subcommittee on
National Security, Veterans Affairs, and International Relations of the
House Committee on Government Reform. 3 He noted there were several areas
where action was needed to shape an efficient and effective federal
government for the 21 st century, and help us meet the challenges to the
well-being and financial security of the American people, address

2 High Risk Series: An Update (GAO-01-263, January 2001). 3 Major Management
Challenges and Program Risks: Departments of Defense, State, and Veterans
Affairs

(GAO-01-492T, March 7, 2001).

3 GAO-01-565T

security threats facing our nation, and deal with the issues raised by
global interdependence. One of the primary actions he cited was the urgent
need to revamp the federal government's entire strategic approach to human
capital (people) management before the erosion of government's capacity to
perform more dramatically undermines agencies' abilities to efficiently and
effectively serve the American people. In Senator Voinovich's Report to the
President, he noted that the federal government was in dire need of a
unified strategy to build and maintain a world-class civil service. These
challenges, many of which have been long-standing in scope, also underscore
the critical role that the principles of performance-based management, as
embraced in the Government Performance and Results Act (GPRA), can play in
successfully providing the products, services, and results that taxpayers
expect.

HUMAN CAPITAL ISSUES IN THE DEPARTMENT OF DEFENSE The last few decades of
the 1900s have seen a dramatic shift in the position occupied by the
Department of Defense vis-ï¿½-vis the rest of the government. Defense spending
currently represents about 16 percent of the federal budget, down from about
50 percent in 1962. The DOD military and civilian workforce has been reduced
by more than 1 million personnel from a high of 4.1 million in 1987 to about
3 million today. While it has come down considerably in size and proportion
of the budget, it is still by far the largest employer in the government.
Because it is the largest employer of 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 workforce plays in support of our
national security makes DOD's approach to managing its people a matter of
fundamental public interest.

DOD uses the term “total force” to refer to the different
categories of workers that it uses to accomplish its mission. The total
force includes military personnel, both active duty and reserve, federal
civilian personnel, and private-sector contract personnel. Each plays a
vital role in our national defense, and each has undergone considerable
change in roles over the last part of the 20 th century. Since the end of
the Cold War, the nation has become increasingly reliant upon the reserves
and National Guard for performing various defense missions. The roles of the
civilian and contractor workforce have also expanded, now including
participation in combat functions. For example, available DOD reports show
that over 5,000 DOD civilian employees and nearly 9,200 contractor personnel
voluntarily deployed to the Persian Gulf area to support the military forces
during the Gulf War. 4

4 DOD Force Mix Issues: Greater Reliance on Civilians in Support Roles Could
Provide Significant Benefits (GAO/NSIAD-95-5, October 19, 1994).

4 GAO-01-565T

Internal Department of Defense Studies Identify Human Capital Practices That
Need to Be Updated

A number of recent DOD studies have identified some fundamental problems
regarding the Department's management of its human capital. In 1997, the 8
th Quadrennial Review of Military Compensation noted that personnel costs
represent nearly 50 percent of the defense budget, yet leaders in the
Department of Defense have no institution-wide process for systematically
examining future human resource needs or for translating those needs into a
coherent strategy that supports DOD's overall strategic plan. 5 In contrast,
the Department's research, development, and procurement community-reflecting
only 30 percent of the budget-uses a formal process and structure to present
leaders with acquisition issues and solutions to support future operational
needs.

Last year, the Defense Science Board task force reported a similar
conclusion. 6 The task force report stated that:

“Today there is no overarching framework within which the future DOD
workforce is being planned aside from the planning conducted within the
military services and ad hoc fora in the Office of the Secretary of Defense.
An overarching strategic vision is needed that identifies the kind of
capabilities, and the changes in human resources planning and programs that
will be required. In short, the Department's force concept-embodied in Joint
Vision 2010-needs to be linked to manpower requirements for the total force,
military and civilian, public and private. (p. viii)”

The task force voiced a concern that today's force is merely what was
“left over” from the drawdown, and states that more deliberate
civilian and military force shaping is needed. It went on to warn that
unless the Department makes changes in its personnel and compensation
systems, the force will be unprepared for 21st century needs; quality people
will not stay in sufficient numbers, and those who do will lack necessary
skills and experience.

The task force identified key issues now evident across the total defense
force. Within the civilian workforce, they cited:

The insufficient number of properly trained candidates in the pipeline, an
aging workforce with little turnover and limited professional development
opportunities;

The lack of a continuing professional development program for career
civilian employees;

The need for an integrated personnel management plan that includes
accounting for the increasing use of private sector personnel; and

The long confirmation cycle for political appointees. 5 Rewarding,
Organizing and Managing People in the 21st Century: Time for a Strategic
Approach (Report of the 8th Quadrennial Review of Military Compensation,
June 30, 1997). 6 Final Report of the Defense Science Board Task Force on
Human Resources Strategy (Office

of the Under Secretary of Defense for Acquisition, Technology, and
Logistics, February 28, 2000).

5 GAO-01-565T

Within the military, they identified:

Recruiting challenges and training and first-term attrition in enlisted
grades;

Retention of experienced individuals to fill key leadership, specialty, and
technical positions in the non-commissioned officer corps;

Improving job satisfaction, retention, and commitment to service within the
junior officer grades; and

Retention and professional development of the “best and
brightest” within the senior officer grades, including flag rank.

The task force went on to recommend that the Department of Defense establish
a strategic human resources plan encompassing all elements of the total
force: military, civilian, and private sector personnel.

Defense Beginning to Address Human Capital Challenges, But Has a Long Way To
Go

Given the large number of military and civilian personnel within the
Department, human capital management represents a huge challenge that
impacts virtually every major activity. Human capital challenges are
involved to some extent in each of the six high risk areas we
identified-financial management, information technology, acquisition,
contracting, support infrastructure, and logistics. For example, in
testimony last year before the Subcommittee on Government Management,
Information, and Technology, House Committee on Government Reform, I noted
that the government now spends more for services than any other acquisition
category. 7 This shift toward greater reliance on the private sector for
professional, administrative, technical, and information management support
will have a strong impact on the way in which human capital is used
throughout the government, but particularly in DOD which is still the
dominant purchaser in the federal community.

DOD is dealing with a variety of military personnel issues, such as
shortages of junior officers for the career force, problems in retaining
certain skills (such as intelligence analysts, computer programmers,
aircraft mechanics, and pilots), and the military services' failure to meet
recruiting goals. The Department also faces significant challenges in
managing its civilian workforce. The sizable reduction in civilian personnel
since the end of the Cold War has led to an imbalance in shape, skills,
experience, and retirement eligibility that is jeopardizing certain
acquisition and logistics capabilities within DOD.

Many of the human capital problems that DOD is dealing with today are the
result of its approach to downsizing in the early 1990s. While DOD's
approach to civilian force reductions was less oriented toward shaping the
makeup of the workforce than was the approach it used to manage its military
downsizing, it missed strategic planning opportunities in both arenas to
move closer to a workforce that was balanced in terms of

7 Federal Acquisition: Trends, Reforms, and Challenges (GAO/T-OCG-00-7,
March 16, 2000).

6 GAO-01-565T

composition (active military, reserves, civilian employees, and contract
personnel), skills, and experience.

Military Personnel DOD has encountered considerable difficulties in recent
years in achieving its desired military strength. The military services have
struggled to meet recruiting goals, with 3 out of 4 services having missed
their recruiting goals in the last several years due to factors such as the
robust economy, lower propensity to join the military, low civilian
unemployment, and high college attendance. With its attrition rate at an
all-time high, DOD continues to lose more than one-third of its enlistees
before they successfully complete their first-term of service. The services
face shortages among junior officers, and problems in retaining intelligence
analysts, computer programmers, and pilots. Reduced accessions during the
drawdown have resulted in smaller year-groups from which to retain personnel
for the career force. While overall retention rates have continued to be
adequate, retention in certain skills and grade levels has been problematic.

To improve the results of its recruiting efforts, DOD has added more
recruiters, increased advertising budgets, and increased enlistment bonuses.
Notwithstanding these efforts, it is not clear what aspects of military
service can be improved in order to increase retention in areas that are
having problems. Additionally, DOD does not have a mechanism for determining
which of its actions in the recruiting arena are responsible for its recent
improvement in achieving its goals.

Much of DOD's force shape problems in the active duty military stem from the
way in which it chose to absorb the force reductions at the end of the Cold
War. DOD gave priority to achieving voluntary reductions and reducing new
accessions. Between 1987 and 1992, active duty military end-strength levels
decreased by 17 percent, while over the same period, the number of new
recruits decreased by 35 percent. 8 Our work at the beginning of the
drawdown found that the services tended to use cut-backs on new recruits as
a preferred downsizing tool because such actions could be implemented
quickly and were seen as less disruptive to those members already in the
force. 9 However, over time, this approach can create significant
distortions in the shape and experience of the force.

We recently reviewed DOD retention data and found that aggregate retention
and continuation rates in 1996-98 (after the drawdown) were not
significantly different from those before the drawdown (1988-90). 10
Aggregate measures of retention, however, mask significant reductions that
occurred among specific groups of military personnel in

8 Military Downsizing: Balancing Accessions and Losses is Key to Shaping the
Future Force (GAO/NSIAD-93-241, September 30, 1993). 9 Enlisted Force
Management: Past Practices and Future Challenges (GAO/NSIAD-91-48, January
22,

1991). 10 Military Personnel: Systematic Analyses Needed to Monitor
Retention in Key Careers and Occupations

(GAO/NSIAD-00-60, March 8, 2000).

7 GAO-01-565T

different career stages and occupational specialties. Retention rates at the
occupational level showed reductions in retention rates of 10 percent or
more occurred among certain segments of the enlisted population. Two
occupational areas involving technical skills- communications and
intelligence and electrical and mechanical equipment repair- accounted for
the majority of occupations with substantial enlisted retention rate
reductions. The services have recently reported growing retention problems
among pilots. The Air Force reported that the cumulative continuation rate
among pilots (the likelihood that pilots who complete 6 years of service
would go on to complete 11 years) dropped 41 percent from 1995 through 1998
(from 87 to 46 percent). Similarly, the Navy reported that cumulative
aviation continuation rates decreased from about 50 percent in 1996 to about
32 percent in 1998. We are in the process of reviewing data from the 1999
DOD Survey of Active Duty Personnel to determine how the views, experiences,
and retention intent of personnel in critical occupations differ from that
of the rest of the force.

Civilian Personnel DOD has undergone a sizeable 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 years 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. President
Clinton's fiscal year 2001 budget request projected additional reductions in
DOD's civilian workforce down to a level of 637,500 by fiscal year 2005-a
cumulative reduction of nearly 43 percent from the fiscal year 1989 level.

DOD's approach to civilian downsizing in the early years relied primarily on
voluntary turnover and retirements and varying freezes on hiring authority
to achieve force reductions. 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-“buyouts”,
to induce the voluntary separation of civilian employees. DOD has credited
the use of these separation incentives, early retirement authority, and
various job placement opportunities for enabling it to avoid nearly 200,000
involuntary demotions and separations.

While the tools available to DOD to manage its civilian downsizing helped
mitigate the adverse effects of force reductions, DOD's approach to civilian
force reductions was not really 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. 11 “Institutional memory” provided by career civilians is
particularly important in

11 Defense Force Management: Expanded Focus in Monitoring Civilian Force
Reductions Is Needed

(GAO/T-NSIAD-92-19, March 18, 1992) and Defense Force Management: Challenges
Facing DOD As It Continues to Downsize Its Civilian Work Force
(GAO/NSIAD-93-123, February 12, 1993).

8 GAO-01-565T

DOD because of the frequent rotation of military personnel and the short
tenure of the average political appointee.

The consequences of the lack of attention to force shaping can be seen in
the current age distribution of the DOD civilian workforce in comparison to
the distribution at the start of the drawdown. There has been a strong shift
toward an older workforce. Today's workforce is older and more experienced,
but, not surprisingly, 58 percent of the workforce will be eligible for
early or regular retirement in the next five years. Since 1989, there has
been a 69 percent drop in the number of civilians with less than five years
of service, but only a 4 percent drop in the number of civilians with 11-30
years of service. As of September 1999, only 6.4 percent of DOD's civilian
workforce was under the age of 31, compared to about 17 percent in 1989.

The net effect is a workforce that is not balanced by age or experience and
that puts at risk the orderly transfer of institutional knowledge. Although
we cannot say what the appropriate balance between younger and older
employees should be, the continuing increase in the number of retirement-age
employees could make it difficult for DOD to infuse its workforce with new
and creative ideas and develop the skilled civilian workers, managers, and
leaders it will need to meet future mission requirements.

The problems I just described are even more severe in certain areas, such as
acquisition. This is a part of the workforce that the United States has
relied upon to maintain the technological superiority that plays an
essential role in our national security strategy. Our nation's warfighters
will continue to depend on technologically superior weapon systems provided
by the acquisition system. Congress has also been concerned with the human
capital issues in the acquisition workforce. For example, the Defense
Authorization Act for Fiscal Year 1996 (P.L. 104-106), among other
requirements, required DOD to submit a plan for a 25 percent reduction in
the number of acquisition personnel employed at DOD's acquisition
organizations by the beginning of fiscal year 2001. That plan fell short of
what was needed in that it did not clearly define what constitutes the
acquisition workforce and it did not ensure that organizations and functions
were appropriately adjusted to achieve better program outcomes and not just
“hollowed out.” 12

According to the Acquisition 2005 task force, the rate of reduction in the
civilian Acquisition Workforce has substantially exceeded that of the rest
of the DOD workforce. 13 From September 1989 to September 1999, the civilian
Acquisition Workforce has been reduced by almost 47 percent. This compares
to a 37 percent decrease in the total DOD civilian workforce and a nearly 17
percent in the total federal civilian workforce. Eleven consecutive years of
downsizing have produced serious imbalances in the skills and experience of
the highly talented and specialized civilian acquisition workforce, putting
DOD on the verge of a retirement-driven talent drain.

12 Defense Acquisition Organizations: Linking Workforce Reductions With
Better Program Outcomes

(GAO/T-NSIAD-97-140, April 8, 1997). 13 Shaping the Civilian Acquisition
Workforce of the Future (Final Report of the Acquisition 2005 Task

Force to the Under Secretary of Defense, Acquisition, Technology, and
Logistics and the Under Secretary of Defense, Personnel and Readiness,
October 2000).

9 GAO-01-565T

More than 50 percent of DOD's civilian Acquisition Workforce will be
eligible to retire by 2005, and in some occupations, half the current
employees will actually be gone by 2006.

Perhaps one of the more serious cases is the example that Senator Voinovich
cited in his recent Report to the President. That case involved
Wright-Patterson Air Force Base in Dayton, Ohio, headquarters of the Air
Force Materiel Command, which employs over 10,000 civilian federal workers.
It is an excellent example of the aging and skills imbalance currently
affecting the defense workforce. Demographically, 60 percent of
Wright-Patterson's civilian employees will be eligible for either early or
regular retirement by 2005. Over and above the problem of continuity and
succession, the Wright-Patterson example also demonstrates a growing skill
imbalance among DOD's engineering workforce as the need for new skills
emerge in areas such as space operations, lasers, optics, advanced
materials, and directed energy fields.

GPRA Reports Identify Human Capital Issues at Defense The strategic planning
requirements of the Government Performance and Results Act provide a useful
framework for agencies to integrate their human capital strategies with
their strategic and programmatic planning-and in particular, to identify the
workforce size, skills mix, and deployment needed for mission accomplishment
and to create strategies to fill the gaps. However, while the agencies'
fiscal year 2001 annual performance plans all included at least some
discussion of human capital, the discussions varied widely in scope and
specificity. In reviewing DOD's fiscal year 1999 GPRA performance report and
fiscal year 2001 performance plan, we found several management challenges
associated with human capital that were not adequately addressed. 14

One of DOD's key agency outcomes is to obtain military forces that are
adequate in number, well qualified, and highly motivated. However, DOD's
performance measures do not fully address the extent to which U.S. military
forces are highly motivated or DOD's efforts to develop military personnel.

The performance indicators used to assess tempo-the pace of operations for
people and equipment-vary by service. However, they do not present a
complete picture of tempo from the standpoint of the individual service
member. Tempo is relevant to maintaining trained and ready forces because it
has been cited as a reason for personnel leaving the military. Consequently,
what is most relevant to service personnel and their families is the extent
to which the individual is required to be away from home, rather than the
more indirect measure of the extent to which units are deployed.

DOD's stated combat readiness objective 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 provide a complete picture
of the forces and

14 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).

10 GAO-01-565T

performance required to accomplish this and whether the desired objective is
being achieved. For example, in its performance report and plan, DOD
included measures for the level of combat forces, but not for support
forces, although the report recognizes the existence of support force
shortfalls and discusses Army plans for correcting them. As another example,
the report does not discuss the long-standing training and readiness
problems of the Army National Guard's 15 Enhanced Brigades.

DOD has identified specific recruiting goals representing the projected
number of new personnel needed each year to maintain statutorily defined
military end-strengths and the proper distribution of grade levels. But
because retention varies monthly, recruitment goals are adjusted over the
year. That process yields a revised DOD-wide annual goal against which
recruiting is evaluated. However, because DOD only reports a composite
recruitment goal, the measures can mask significant differences in
performance across the services.

Over the last several years we have identified early attrition of first-term
active duty personnel as a key problem. About one-third of new recruits fail
to complete their obligated tour of duty. However, the DOD performance plan
has still not incorporated any goals dealing with the early attrition
problem.

DOD goals for enlisted retention provide a picture of overall retention by
service and term of enlistment. However, such aggregate measures may mask
variations in retention by occupational area (e.g., pilots, mechanics,
intelligence analysts, and computer programmers) and skill levels (e.g.,
mid-career non-commissioned officers and junior officers). As such, their
goals provide only a partial measure of the military's ability to retain
adequate numbers of qualified personnel.

We view these shortcomings in DOD's performance report and plans as a result
of the lack of an overall, strategic approach to human capital planning.
Considering the enormous changes that the DOD total workforce has undergone
and continues to undergo, and the external pressures and demands that
virtually all federal departments and agencies are experiencing, taking a
strategic view of human capital becomes ever more crucial to organizational
results. DOD will need to build a solid foundation in strategic planning and
organizational alignment, leadership and succession planning, recruiting and
training the best possible talent, and establishing a performance culture.

HUMAN CAPITAL ISSUES IN THE DEPARTMENT OF STATE As the lead agency
representing U.S. interests overseas, the Department of State is vested with
a wide range of responsibilities. The successful practice of U.S. diplomacy
is essential to ensuring security at home, laying the groundwork for better
jobs and a higher standard of living, providing a healthier environment, and
assuring safe travel and the ongoing conduct of business abroad. To help
manage these responsibilities, State maintains an international network of
operations through a cadre of about 28,000 employees deployed across 260
diplomatic and consular posts worldwide. The Secretary

11 GAO-01-565T

of State has stated that that the core of our overseas presence is a
talented, highly trained, dedicated, and motivated staff. Yet, over the last
few years, a number of studies and reviews have identified a range of human
capital challenges and problems within the State Department that raise
concerns about how effectively State is managing its people.

Although State has traditionally attracted some of the nation's most
talented people, a 1999 Department-wide study by McKinsey and Company
concluded that an increasingly competitive job market and expanded private
sector opportunities for geographic mobility have drawn potential Foreign
Service Officers into other professions. 15 According to the study, the
challenges that State faces in recruiting and retaining top-quality
employees fall into several areas. These include the need for State to (1)
establish a strong link between current performance and promotions, (2)
improve the quality of life at overseas posts, and (3) improve the quality
of its management.

In a November 1999 report, the Overseas Presence Advisory Panel also
concluded that State needed to reform its human resource practices because
it does not currently have the flexibility, resources, or strategic
organization required to support its mission. 16 The panel visited 23
overseas posts in conducting its work and found that personnel matters
topped the list of issues discussed. The panel reported that employees were
dissatisfied with evaluation processes, career advancement opportunities,
sensitivity to lifestyle issues, the degree of autonomy and responsibility
offered by their positions, and the quality of management. Employees wanted,
among other things, more training in languages, leadership, and management.
The panel recommended that State develop a comprehensive human resource
strategy based on a detailed statement of its mission, definition of the
work to be done, and identification of personnel requirements; and, that
State develop and implement a recruitment strategy designed to fulfill these
needs. This approach of strategically aligning human capital with
organizational goals and objectives is consistent with our studies of best
practices used by high performance organizations, and similar studies done
by other organizations.

Yet another recent assessment comes from the Independent Task Force on State
Department Reform, chaired by Frank Carlucci. 17 The task force reported
that resignations of foreign service generalists have doubled between 1994
and 2000, while resignations of foreign service specialists have quadrupled
over the same period. They also note that declining applicant pools and
rising attrition rates have left the State Department with workforce
shortfalls, including a deficit of about 700 Foreign Service Officers, or
nearly 15 percent of the requirement.

Failure to address human capital weaknesses in the Department of State could
have a significant negative impact on U.S. interests. On June 15, 2000
State's Under Secretary for Management testified before the House Committee
on International Relations. She

15 The War for Talent: Maintaining a Strong Talent Pool (McKinsey and
Company report to the State Department, 1999). 16 America's Overseas
Presence in the 21 st Century (Overseas Presence Advisory Panel, 1999).

17 State Department Reform (Report to the President by the Independent Task
Force on State Department Reform, co-sponsored by the Council on Foreign
Relations and the Center for Strategic and International Studies, January
2001).

12 GAO-01-565T

noted that the Overseas Presence Advisory Panel's report cited a number of
serious problems, including outmoded human resources practices and
competition from the private sector for talented staff, that threatened the
effectiveness of our overseas presence. She stated that the U.S. was face to
face with a crisis of “diplomatic readiness” and that the
country risked relying on an ineffective, “hollow” diplomatic
force to defend America's interests. She cited serious potential
consequences:

less effective representation and advocacy of U.S. interests abroad;

a loss of U.S. exports, investments, and jobs;

inadequate political and economic information, leading to unexpected crises;

less effectiveness in promoting democracy and the rule of law;

a weakening of the fight against international terrorism and drug
trafficking; and

a failure to provide U. S. citizens traveling abroad with the assistance
they need. State is Beginning to Address its Human Capital Problems, But
More Still Needs to be Done

We have not performed a comprehensive review of human capital issues at the
State Department. However, according to State, it has begun to implement
many of the recommendations stemming from the various studies. For example,
it has started to develop a new, unified human resources strategy for the
Department. The strategy will include a domestic and overseas staffing
picture along with a 5-year projection based on State's overseas staffing
model and bureau budget presentation documents. To improve the quality of
life at its overseas posts, State has negotiated bilateral work agreements
with 126 nations and is reviewing Department rules restricting employment
opportunities for spouses of employees working overseas. It has also
developed a pilot, 360-degree review process that will allow employees to
give meaningful feedback on how their supervisors performed as leaders,
managers, and mentors-in a nonthreatening and constructive fashion designed
for personal and professional development. The Department also plans to
expand leadership and management training, increase security training,
reshape the reporting and policy functions, and examine ways of making the
assignment process more responsive to management and employee needs. While
these efforts indicate that State recognizes the importance of addressing
human capital issues, much more still needs to be done.

According to the Office of Personnel Management, the State Department is
using existing pay flexibilities to create incentives for learning. 18 It
pays retention allowances ranging from 5 to 15 percent to certain
information technology workers who obtain job-related degrees and
certifications. OPM reported that after 1 year of operation, this program
has helped to significantly reduce turnover and increase the skills base of
State's information technology workforce.

Like other federal agencies, State's staffing situation is likely to be
exacerbated by a significant increase in civil service retirements over the
next decade. In testimony in 1999 before the Subcommittee on International
Operations, Senate Foreign Relations

18 Letter from OPM to GAO dated December 11, 2000.

13 GAO-01-565T

Committee, the Under Secretary of State for Management projected that
between 1998 and 2010, over 1,200 (24 percent) out of 5,000 Civil Service
employees at State will become eligible to retire. This could undermine the
continuity in State's senior level civil service management and policy
positions. State officials are working on this continuity and succession
problem and recently reported meeting their target for training employees in
leadership and management to handle the expected increase in “baby
boomer” retirements.

Issues related to the quality of life at overseas posts, career development
opportunities, and talent management are hampering recruitment and retention
of Foreign Service Officers. Efforts to determine the right size and
composition of overseas posts have begun, but State faces challenges in
aligning its workforce with new economic, political, security, and
technological requirements. Also, staffing shortfalls are hampering
counternarcotics programs and efforts to combat visa fraud.

GPRA Reports Identify Human Capital Issues at State In reviewing State's
fiscal year 1999 GPRA performance report and fiscal year 2001 performance
plan, we found several management challenges associated with the hiring of
staff that were not adequately addressed. 19

One of State's key performance goals associated with enhancing the ability
of American citizens to travel and live abroad securely, involved reducing
the number of parental child abduction cases per caseworker. However,
State's performance report contained only a brief, generic explanation as to
why it was unable to meet its target of 80 cases per officer. The report
said simply that a request for additional full-time positions was not
approved, hampering its ability to reduce caseload. State did not explain
what efforts it made, if any, to reassign staff to work on this activity.

State's performance plan listed improving the visa processing system and
streamlining and developing a reasonable basis for visa workloads as a major
management challenge. This area was also cited by State's Inspector General
as a key management challenge. However, its plan did not contain any goals
that specifically addressed issues identified by GAO and the Inspector
General, such as insufficient staffing overseas.

State noted it had met its target of increasing the number of authorized
positions in selected global bureaus. However, since the Bureau of Personnel
was not one of the six bureaus and offices included in the 2001 plan, there
was no discussion of the Department-wide workforce plan or other agency-wide
efforts to hire and retain staff with the needed skills. Separate
submissions from various bureaus and offices will make it difficult to
assess agency-wide progress.

19 Observations on the Department of State's Fiscal Year 1999 Performance
Report and Fiscal Year 2001 Performance Plan (GAO/NSIAD-00-189R, June 30,
2000).

14 GAO-01-565T

A management challenge identified by the State Inspector General involved
the adequacy of training and preparation for both Foreign Service and Civil
Service personnel. Inadequate training can have a strong impact on the
ability of the agency to perform its mission. For example, the Under
Secretary of State for Management testified that in 1998, almost 40 percent
of language designated positions were filled with officers lacking the
requisite skills. 20

State's Foreign Service Institute is the federal government's primary
training institution for officers and support personnel of the foreign
affairs community. In addition to State, the Institute provides training for
employees from more than 40 other government agencies that have employees
stationed abroad. State's Diplomatic Security Training Center also provides
specialized training for diplomatic security agents to supplement training
they receive from the Institute.

In recognizing the importance of training, the Under Secretary of State for
Management noted that the Foreign Service Institute was offering more
training than ever before. It was expanding language, area studies, and
tradecraft training. They were also expanding “distance
learning” allowing employees to receive training in the field as well
as at the Institute.

State Department officials have indicated they are making progress toward
identifying and measuring the knowledge and skills needed to support
missions and goals. They told us that the agency completed a job analysis of
its foreign service generalist corps in 1998 to identify the tasks and
activities performed by those employees, as well as the human attributes and
foreign language proficiency required for high performance. In addition,
they reported completing an informal update of a baseline needs assessment
for its diplomatic security agents in the mid-1980s. The agency officials
also said that State had adopted OPM's leadership competencies for senior
executives. State now measures employees' existing knowledge and skills by
testing periodically for language proficiency, requiring certain employees
to pass tests to fulfill agency certification requirements, and providing
leaders access to 360-degree self-assessment instruments that allowed them
to identify areas where they may need further development. New diplomatic
security agents are required to achieve certain baseline test scores at the
completion of their training programs. State is also developing
competency-based models for several occupations-including passport agents,
information technology support staff, and human resource management
occupations-that will identify the competencies needed for high performance,
measurement methods for determining the extent to which staff have these
competencies, and suggested training courses and developmental activities.

State officials told us that they were also making progress implementing
training programs that develop employees' knowledge and skills. They said
the agency had an extensive training curriculum, which included
profession-specific areas of study (e.g., acquisitions) and training on
foreign languages, information technology, overseas

20 Testimony of Under Secretary of State for Management Bonnie R. Cohen
before the Subcommittee on International Operations, Senate Forecign
Relations Committee, March 4, 1999.

15 GAO-01-565T

briefings, leadership and management, and diplomatic security. The agency
also required certain employees to complete specific training courses. For
example, new diplomatic security agents received approximately 24 weeks of
training in such areas as firearms, criminal investigations, and the law.

Department officials indicated that State was working on explicitly linking
training to the agency's mission and strategic goals. They also reported
that they had a variety of approaches to training evaluation in place or
under development, such as feedback from units, end-of course evaluations,
Inspector General reviews, and analysis of post-training assessment data.

CONCLUSION-HUMAN CAPITAL NEEDS TO BE VIEWED FROM A STRATEGIC STANDPOINT
ACROSS THE GOVERNMENT

This brings me back to where I began. Longstanding inattention to the issue
of human capital presents a significant risk across the federal government,
not just at State and Defense. The Departments of State and Defense have
each taken some action to begin addressing the various human capital
challenges and problems that have been discussed here. However, much more
needs to be done, not just by these two agencies, but by the entire federal
government.

About a year ago, the Comptroller General testified before Senator
Voinovich's Subcommittee. 21 In addressing the issue of managing human
capital in the 21 st century, he stated that there was no time to waste-that
changes in the demographics of the federal workforce, in the education and
skills required of its workers, and in basic federal employment structures
and arrangements were all continuing to unfold. None of that has changed,
and in fact we are getting closer to the time when the federal government
will experience an unprecedented loss of experience and talent. While GAO,
your two Subcommittees, and others have sounded the alarm, there is still a
long way to go. Agency management must accelerate the adoption of a
strategic perspective with regard to its workforce.

The Comptroller General also made the point that one of the emerging
challenges for new presidential appointees will be to add an understanding
of the importance of human capital issues to their traditional policy
portfolios. Senator Voinovich has taken the lead in requesting that we
develop questions that could assist the Senate in determining nominees'
views on these vital issues. 22 However, as we have noted in other work, the
typical political appointee requiring Senate confirmation serves for only
around 2 years. 23 Given the customarily high turnover rate among political
appointees, it is perhaps not surprising that most have tended to focus on
managing their agencies for today, giving

21 Human Capital: Managing Human Capital in the 21 st Century
(GAO/T-GGD-00-77, March 9, 2000). 22 Confirmation of Political Appointees:
Eliciting Nominees' Views on Leadership and Management Issues

(GAO/GGD-00-174, August 11, 2000); Potential Questions to Elicit Nominees'
Views on Agencies' Management Challenges (GAO-01-332R, January 18, 2001). 23
Political Appointees: Turnover Rates in Executive Schedule Positions
Requiring Senate Confirmation

(GAO/GGD-94-115FS, April 21, 1994).

16 GAO-01-565T

too little attention to preparing them for tomorrow. Consequently, the
solution will not lie totally in the hands of political appointees. The
continuity of effort needed to transform the government's management of its
human capital must come from within the career force.

We developed a human capital self-assessment checklist based on our
examination of current laws and regulations and our work with leading
organizations in the private sector and among governments at the state and
local levels as well as abroad. 24 This checklist was designed to help
agency leaders conduct their own review of their human capital programs and
provides a means for agency leaders to put the spotlight on improving the
alignment of human capital management with strategic planning and core
business practices. The checklist is not a set of performance criteria or
measures. Instead, it is a framework or “line of inquiry” for
federal agency leaders to follow in examining their agencies' human capital
approaches and determining if they make sense in light of their
organizations' missions, goals, and other needs and circumstances.

As we have previously reported, not all barriers to more effective strategic
human capital management in the federal government stem from law or
regulation. 25 Some arise out of long-standing perceptions about the
limitations placed on agency officials' managerial prerogatives or basic
philosophies about how people should be managed. In addition to assessing
their human capital programs, agency management needs to be energetic and
innovative in their use of the human capital flexibilities available to
them. For example, potential flexibility in the “up or out”
policies of the military and the foreign service can be examined as a way of
minimizing the loss of personnel in whom a substantial investment has been
made and who still have valuable contributions to make. Agencies need to use
those flexibilities to create a performance culture that empowers and
motivates employees while fostering responsibility, accountability, and
fairness.

It is clear that OPM and OMB have substantial roles to play in fostering a
more results- oriented approach to strategic human capital management across
government. OPM has begun stressing to agencies the importance of
integrating strategic human capital management into agency planning. 26 One
publication that OPM developed, the HR Innovator's Tool Kit, includes nearly
100 tools and flexibilities available to agencies, such as recruiting
bonuses and retention allowances. 27 To date, OMB has played a much more
limited role in promoting strategic human capital management. However, OMB's
role in setting governmentwide management priorities and defining resource
allocations will be critical in inducing agencies to integrate strategic
human capital management into their core business processes.

In addition, the audit and inspector general communities have a key role to
play. In assessing agency and program performance, audit and inspection
staffs should be

24 Human Capital: A Self-Assessment Checklist for Agency Leaders
(GAO/GGD-99-179, September 1999). 25 Transforming the Civil Service:
Building the Workforce of the Future-Results of a GAO-Sponsored

Symposium (GAO/GGD-96-35, December 20, 1995). 26 See OPM's Strategic Human
Resources Management: Aligning With the Mission (U.S. Office of

Personnel Management, September 1999). 27 HR Innovators' Tool Kit (U.S.
Office of Personnel Management).

17 GAO-01-565T

particularly alert to strategic human capital issues. The direct link that
the inspectors general have to the top management of their respective
agencies put them in a good position to reinforce the need to pay more
attention to the “people” side of the organization as a primary
vehicle for improving effectiveness, efficiency, and economy of agency
operations. Federal agencies need to develop better performance measures and
link them to their incentive and reward systems to foster improved
organizational, team, and individual performance.

The key first step in improving federal agencies' human capital management
is for agency management to focus on people as a strategic asset. Workforce
planning is an essential step. Agencies need to determine their current and
future workforce needs, assess how their current and anticipated future
workforce compares to these needs, and develop effective strategies to fill
the gaps. It will not be easy and it will not be quick- but it must proceed
right away. We are running out of time.

Chairman Voinovich, Chairman Scarborough, this concludes my prepared
statement. I would be pleased to answer any questions you or other Members
of the Subcommittees may have at this time.

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