Department of Defense: Further Actions Are Needed to Effectively 
Address Business Management Problems and Overcome Key Business	 
Transformation Challenges (18-NOV-04, GAO-05-140T).		 
                                                                 
In March 2004, GAO testified before the Subcommittee on Readiness
and Management Support, Senate Committee on Armed Services on the
impact and causes of financial and related business weaknesses on
the Department of Defense's (DOD) operations and the status of	 
DOD reform efforts. GAO's reports continue to show that 	 
fundamental problems with DOD's financial management and related 
business operations result in substantial waste and inefficiency,
adversely impact mission performance, and result in a lack of	 
adequate transparency and appropriate accountability across all  
major business areas. Over the years, DOD leaders have initiated 
a number of efforts to address these weaknesses and transform the
department. For years, GAO has reported that DOD is challenged in
its efforts to effect fundamental financial and business	 
management reform, and GAO's ongoing work continues to raise	 
serious questions about DOD's chances of success. The		 
Subcommittee asked GAO to provide a current status report on	 
DOD's progress to date and suggestions for improvement. 	 
Specifically, GAO was asked to provide (1) an overview of the	 
impact and causes of weaknesses in DOD's business operations, (2)
the status of DOD reform efforts, (3) the impact of recent	 
legislation pertaining to DOD's transformation and financial	 
improvement initiatives, and (4) suggestions for improving DOD's 
efforts to improve the reliability of its financial information. 
-------------------------Indexing Terms------------------------- 
REPORTNUM:   GAO-05-140T					        
    ACCNO:   A13598						        
  TITLE:     Department of Defense: Further Actions Are Needed to     
Effectively Address Business Management Problems and Overcome Key
Business Transformation Challenges				 
     DATE:   11/18/2004 
  SUBJECT:   Accountability					 
	     Defense cost control				 
	     Financial management				 
	     Financial management systems			 
	     Information resources management			 
	     Internal controls					 
	     Performance measures				 
	     Business operations				 
	     Human capital					 
	     DOD Business Management Modernization		 
	     Program						 
                                                                 
	     DOD National Security Personnel System		 

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GAO-05-140T

United States Government Accountability Office

                                 GAO Testimony

Before the Subcommittee on Readiness and Management Support, Committee on
Armed Services, U.S. Senate

For Release on Delivery Expected at 3:30 p.m. EST Thursday, November 18,
2004

DEPARTMENT OF DEFENSE

 Further Actions Are Needed to Effectively Address Business Management Problems
              and Overcome Key Business Transformation Challenges

Statement of David M. Walker Comptroller General of the United States

                                       A

GAO-05-140T

[IMG]

November 18, 2004

DEPARTMENT OF DEFENSE:

Further Actions Are Needed to Effectively Address Business Management Problems
and Overcome Key Business Transformation Challenges

                                 What GAO Found

Although senior DOD leaders have shown commitment to transformation as
evidenced by key initiatives such as human capital reform, the Business
Management Modernization Program, and the Financial Improvement
Initiative, little tangible evidence of improvement has been seen in DOD's
business operations. Overhauling the business operations of one of the
largest and most complex organizations in the world represents a huge
management challenge, especially given the increased demands on our
military forces. However, this challenge can be met if DOD employs key
elements, such as a comprehensive and integrated business transformation
plan. Six DOD program areas are on GAO's high-risk list, and the
department shares responsibility for three other governmentwide high-risk
areas. Substantial weaknesses in DOD business operations adversely affect
its ability to provide timely, reliable management information for DOD and
Congress to use in making informed decisions. Further, the lack of
adequate transparency and appropriate accountability across all of DOD's
major business areas results in billions of dollars annually in wasted
resources in a time of increasing fiscal challenges.

Examples of the Impact of Business Management Problems at DOD

Business area
affected Problem identified and its impact

Military pay 	782 of the 829 mobilized Army National Guard and Reserve
soldiers from 14 case study units GAO investigated had pay problems. These
problems distracted soldiers from their missions, imposed financial
hardships on their families, and had a negative impact on retention.

Logistics 	Asset visibility and other logistical support problems hampered
mission readiness during Operation Iraqi Freedom, including
cannibalization of vehicles for parts and duplication of requisitions.

Travel	Ineffective controls over DOD's centrally billed travel accounts
led to millions of dollars wasted on unused airline tickets,
reimbursements to travelers for improper or fraudulent ticket claims, and
issuance of tickets based on invalid travel orders.

Program Overly optimistic planning assumptions used to estimate DOD's
annual budget

planning	request limit visibility of projected costs. As a result, DOD has
too many programs for the available dollars, which often leads to program
instability, increased costs, and program termination.

Source: GAO.

Four underlying causes impede reform: (1) lack of clear and sustained
leadership for overall business transformation efforts, (2) cultural
resistance to change, (3) lack of meaningful metrics and ongoing
monitoring, and (4) inadequate incentives and accountability mechanisms.
To address these issues, GAO reiterates the key elements to successful
reform that are embodied in our prior recommendations and two suggestions
for legislative action. First, GAO suggests that a senior management
position be established to provide strong and sustained leadership over
all major transformation efforts. Second, GAO proposes that business
systems modernization money be appropriated to designated approval
authorities responsible and accountable for system investments within DOD
business areas. Absent this unified responsibility, authority,
accountability, and control of funding, the current transformation efforts
are likely to fail.

                 United States Government Accountability Office

Mr. Chairman and Members of the Subcommittee:

It is a pleasure to be back before this Subcommittee to discuss financial
management and overall business transformation efforts at the Department
of Defense (DOD). At the outset, I would like to thank the Subcommittee
for having this hearing and acknowledge the important role hearings such
as this one serve in addressing DOD's business transformation challenges.
DOD spends billions of dollars each year to sustain key business
operations that support our forces, including systems and processes
related to acquisition and contract management, financial management,
supply chain management, support infrastructure management, human capital
management, and other key areas. Recent and ongoing military operations in
Afghanistan and Iraq and new homeland defense missions have led to higher
demands on our forces in a time of growing fiscal challenges for our
nation. In an effort to better manage DOD's resources, the Secretary of
Defense has appropriately placed a high priority on transforming key
business processes to improve their efficiency and effectiveness in
supporting the department's military mission. However, as our reports
continue to show, fundamental problems with DOD's financial management and
related business operations continue to result in substantial waste and
inefficiency, adversely impact mission performance, and result in a lack
of adequate transparency and appropriate accountability across all major
business areas. Of the 25 areas on GAO's governmentwide high-risk list, 6
are DOD program areas, and the department shares responsibility for 3
other high-risk areas that are governmentwide in scope.1 The problems we
continue to identify relate to human capital challenges, ineffective
internal control and processes, and duplicative and nonintegrated business
information, systems, and operations. The seriousness of weaknesses in
DOD's business operations underscores the importance of no longer
condoning the "status quo" at DOD.

Although, the Secretary and several key agency officials have shown
commitment to transformation, as evidenced by key initiatives such as
human capital reform, the Business Management Modernization Program
(BMMP), and the Financial Improvement Initiative, little tangible evidence

1 GAO, High-Risk Series: An Update, GAO-03-119 (Washington, D.C.: January
2003). The nine interrelated high-risk areas that represent the greatest
challenge to DOD's development of world-class business operations to
support its forces are: contract management, financial management, human
capital management, information security, support infrastructure
management, inventory management, real property, systems modernization,
and weapon systems acquisition.

of significant broad-based and sustainable improvements has been seen in
DOD's business operations to date. Improvements have generally been
limited to specific business process areas, such as DOD's purchase card
program, and resulted in the incorporation of many key elements of reform,
such as increased management oversight and monitoring and resultsoriented
performance measures. It is important to note that current business
transformation initiatives are not integrated and lack many of the key
elements that contributed to the success of the narrowly defined
initiatives that I will highlight today.

For DOD to successfully transform its business operations, it will need a
comprehensive and integrated business transformation plan, people with the
skills, responsibility, and authority to implement the plan, an effective
process and related tools, such as a Business Enterprise Architecture
(BEA), 2 and results-oriented performance measures that link
institutional, unit, and individual personnel goals and expectations to
promote accountability for results. Over the last 3 years, we have made a
series of recommendations to DOD and suggested legislative changes that,
if implemented, could help DOD move forward in establishing the means to
successfully address the challenges it faces in transforming its business
operations.3 The framework that we have proposed includes several key
elements for successful reform, recognizes the complexity of the
challenges facing DOD in its efforts to transform the department, and the
long-term nature of overcoming these challenges. Moreover, it recognizes
that the lack of clearly defined and sustained leadership, an enterprise

2 A BEA is a well-defined blueprint for operational and technological
change. It generally consists of three integrated components: a snapshot
of the enterprise's current operational and technological environment, a
snapshot of its target environment, and a capital investment roadmap for
transitioning from the current to the target environment.

3 GAO, DOD Business Systems Modernization: Billions Continue to Be
Invested with Inadequate Management Oversight and Accountability,
GAO-04-615 (Washington, D.C.: May 27, 2004), Department of Defense:
Further Actions Needed to Establish and Implement a Framework for
Successful Financial and Business Management Transformation, GAO-04-551T
(Washington, D.C., Mar. 23, 2004), DOD Business Systems Modernization:
Important Progress Made to Develop Business Enterprise Architecture, but
Much Work Remains, GAO-03-1018 (Washington, D.C.: Sept. 19, 2003), DOD
Financial Management: Integrated Approach, Transparency, and Incentives
Are Keys to Effective Reform, GAO-02-497T (Washington, D.C., Mar. 6,
2002), Defense Management: New Management Reform Program Still Evolving,
GAO-03-58 (Washington, D.C.: Dec. 12, 2002), Information Technology:
Architecture Needed to Guide Modernization of DOD's Financial Operations,
GAO-01-525 (Washington, D.C.: May 17, 2001), and DOD Financial Management:
Integrated Approach, Accountability, and Incentives Are Keys to Effective
Reform, GAO-01-681T (Washington, D.C.: May 8, 2001).

architecture to guide and direct business operational changes, cultural
resistance to change, and internal parochialism have impeded the success
of previous reform efforts. DOD has agreed with our recommendations and
launched efforts intended to implement many of them, but progress has been
slow. Unless DOD can address the underlying causes that have contributed
to the failure of previous broad-based reform efforts, improvements will
remain marginal and confined to narrowly defined business process areas
and incremental improvements in human capital policies, business
processes, internal controls, and information technology systems.

Today, I will provide my perspectives on (1) the impact that long-standing
weaknesses continue to have on the economy, efficiency, and effectiveness
of DOD's business operations, (2) underlying causes that have impeded the
success of prior efforts, (3) keys to successful reform, and (4) DOD
business transformation efforts and interim improvements. In addition,
while statutory requirements enacted recently as a part of the Ronald W.
Reagan National Defense Authorization Act for Fiscal Year 20054 are a
positive step towards improving leadership and accountability over DOD's
systems transformation efforts, I will offer two suggestions for
legislative consideration related to sustained top-level leadership,
responsibility, and accountability that would better permit the effective
use of transition plans, processes, people, and tools and thereby increase
the likelihood of successful business transformation. My statement is
based on previous GAO reports and routine efforts to track the status of
open recommendations, as well as on our review of the work of other
Supreme Audit Institutions and DOD auditors, and recent DOD reports and
studies. Our work was performed in accordance with generally accepted
government auditing standards.

4Ronald W. Reagan National Defense Authorization Act for Fiscal Year 2005,
Pub. L. No. 108375, S:S:332, 352, 118 Stat. 1811 (Oct. 28, 2004)
(codified, in part, at 10 U.S.C. S:S:185, 2222).

  Impact of Financial Management and Related Business Process Weaknesses

As I previously stated, and we have reported on for several years, DOD
faces a range of challenges that are complex, long-standing, pervasive,
and deeply rooted in virtually all major business operations throughout
the department. As I testified last March and as discussed in our latest
financial audit report,5 DOD's financial management deficiencies, taken
together, continue to represent the single largest obstacle to achieving
an unqualified (clean) audit opinion on the U.S. government's consolidated
financial statements. While it is important to note that some DOD
organizations, such as the Defense Finance Accounting Service (DFAS),6 the
Defense Contract Audit Agency, and the Office of the Inspector General,
have clean audit opinions for fiscal year 2004, significant DOD components
do not. To date, none of the military services has passed the test of an
independent financial audit because of pervasive weaknesses in internal
control and processes and fundamentally flawed business systems. Moreover,
the lack of adequate transparency and appropriate accountability across
DOD's major business areas results in billions of dollars of wasted
resources annually at a time of growing fiscal constraints.

In identifying improved financial performance as one of its five
governmentwide initiatives, the President's Management Agenda recognized
that obtaining an unqualified financial audit opinion is a basic
prescription for any well-managed organization. At the same time, it
recognized that without sound internal control and accurate and timely
financial and performance information, it is not possible to accomplish
the President's agenda and secure the best performance and highest measure
of accountability for the American people. The Joint Financial Management
Improvement Program (JFMIP)7 principals have defined certain measures, in
addition to receiving an unqualified financial statement audit opinion,
for achieving financial management success. These additional measures

5 GAO, Fiscal Year 2003 U.S. Government Financial Statements: Sustained
Improvement in Federal Financial Management Is Crucial to Addressing Our
Nation's Future Fiscal Challenges, GAO-04-477T (Washington, D.C.: Mar. 3,
2004).

6 DFAS's financial statements and corresponding audit opinion pertain only
to the administrative functions of DFAS itself and, consequently, do not
provide any assurance as to the reliability of the accounting processes
and systems DFAS uses to provide services to other DOD components,
including the military services.

7 JFMIP is a joint undertaking of the Office of Management and Budget,
GAO, the Department of Treasury, and the Office of Personnel Management,
working in cooperation with each other and with operating agencies to
improve financial management practices throughout the government.

include (1) being able to routinely provide timely, accurate, and useful
financial and performance information, (2) having no material internal
control weaknesses or material noncompliance with laws and regulations,
and (3) meeting the requirements of the Federal Financial Management
Improvement Act of 1996 (FFMIA).8 Unfortunately, DOD does not meet any of
these conditions. For example, for fiscal year 2004, the DOD Inspector
General issued a disclaimer of opinion on DOD's financial statements,
citing 11 material weaknesses in internal control and noncompliance with
FFMIA requirements.

Recent audits and investigations by GAO and DOD auditors continue to
confirm the existence of pervasive weaknesses in DOD's financial
management and related business processes and systems. These problems have
(1) resulted in a lack of reliable information needed to make sound
decisions and report on the status of DOD activities, including
accountability of assets, through financial and other reports to Congress
and DOD decision makers, (2) hindered its operational efficiency, (3)
adversely affected mission performance, and (4) left the department
vulnerable to fraud, waste, and abuse, of which I have a few examples.

o 	782 of the 829 mobilized Army National Guard and Reserve soldiers from
14 case study units we reviewed had at least one pay problem- including
overpayments, underpayments, and late payments- associated with their
mobilization. DOD's inability to provide timely and accurate payments to
these soldiers, many of whom risked their lives in dangerous combat
missions in Iraq or Afghanistan, distracted them from their missions,
imposed financial hardships on the soldiers and their families, and has
negatively impacted retention. (GAO-04-89, Nov. 13, 2003 and GAO-04-911,
Aug. 20, 2004)

o 	DOD incurred substantial logistical support problems as a result of
weak distribution and accountability processes and controls over supplies
and equipment shipments in support of Operation Iraqi Freedom, similar to
those encountered during the prior gulf war. These weaknesses resulted in
(1) supply shortages, (2) backlogs of materials delivered in-theater but
not delivered to the requesting activity, (3) a discrepancy of $1.2
billion between the amount of materiel shipped and that acknowledged by
the activity as received, (4) cannibalization of

8 Pub. L. No. 104-208, div. A., S: 101 (f), title VIII, 110 stat. 3009,
3009-389 (Sept. 30, 1996).

vehicles, and (5) duplicate supply requisitions. (GAO-04-305R, Dec. 18,
2003)

o 	Inadequate asset accountability also resulted in DOD's inability to
locate and remove from its inventory over 250,000 defective chemical and
biological protective garments known as Battle Dress Overgarments
(BDOs)-the predecessor of the new Joint Service Lightweight Integrated
Suit Technology (JSLIST). Subsequently, we found that DOD had sold many of
these defective suits to the public, including 379 that we purchased in an
undercover operation. In addition, DOD may have issued over 4,700 of the
defective BDO suits to local law enforcement agencies. Although local law
enforcement agencies are most likely to be the first responders to a
terrorist attack, DOD failed to inform these agencies that using these BDO
suits could result in death or serious injury. (GAO-04-15NI, Nov. 19,
2003)

o 	Ineffective controls over Navy foreign military sales using blanket
purchase orders placed classified and controlled spare parts at risk of
being shipped to foreign countries that may not be eligible to receive
them. For example, we identified instances in which Navy country managers
(1) overrode the system to release classified parts under blanket purchase
orders without filing required documentation justifying the release and
(2) substituted classified parts for parts ordered under blanket purchase
orders, bypassing the control-edit function of the system designed to
check a country's eligibility to receive the parts. (GAO-04-507, June 25,
2004)

o 	DOD and congressional decision makers lack reliable data upon which to
base sourcing decisions due to recurring weaknesses in DOD datagathering,
reporting, and financial systems. As in the past, we have identified
significant errors and omissions in the data submitted to Congress on the
amount of each military service's depot maintenance work outsourced or
performed in-house. As a result, both DOD and Congress lack assurances
that the dollar amounts of public-private sector workloads reported by the
military services are reliable. (GAO04-871, Sept. 29, 2004)

o 	Ineffective controls over DOD's centrally billed travel accounts led to
millions of dollars wasted on unused airline tickets, reimbursements to
travelers for improper and potentially fraudulent airline ticket claims,
and issuance of airline tickets based on invalid travel orders. For
example, we identified 58,000 airline tickets-primarily purchased in

fiscal years 2001 and 2002-with a residual value of more than $21 million
that were unused and not refunded as of October 2003. On the basis of
limited airline data, we determined that since 1997, the potential
magnitude of DOD's unused tickets could be at least $115 million.
(GAO-04-825T, June 9, 2004 and GAO-04-398, Mar. 31, 2004)

o 	The Navy's lack of detailed cost information hinders its ability to
monitor programs and analyze the cost of its activities. For example, we
found that the Navy lacked the detailed cost and inventory data needed to
assess its needs, evaluate spending patterns, and leverage its
telecommunications buying power. As a result, we found that at the sites
reviewed, the Navy paid for telecommunications services it no longer
required, paid too much for services it used, and paid for potentially
fraudulent or abusive long-distance charges. For instance, we found that
DOD paid over $5,000 in charges for one card that was used to place 189
calls in one 24-hour period from 12 different cities to 12 different
countries. (GAO-04-671, June 14, 2004)

o 	DOD continues to use overly optimistic planning assumptions to estimate
its annual budget request. These assumptions are reflected in its Future
Years Defense Program (FYDP), which reports projected spending for the
current budget year and at least 4 succeeding years. Such overly
optimistic assumptions limit the visibility of costs projected throughout
the FYDP period and beyond. As a result, DOD has too many programs for the
available dollars, which often leads to program instability, costly
program stretch-outs, and program termination. For example, in January
2003, we reported that the estimated costs of developing eight major
weapons systems had increased from about $47 billion in fiscal year 1998
to about $72 billion by fiscal year 2003. In addition, in September 2004
the Congressional Budget Office projected that if the costs of weapons
programs and certain other activities continued to grow as they have
historically rather than as DOD currently projects, executing today's
defense plans would require spending an average of $498 billion a year
through 2009. Without realistic projections, Congress and DOD will not
have visibility over the full range of budget options available to achieve
defense goals. (GAO-0398, Jan. 2003 and GAO-04-514, May 7, 2004)

o 	DOD did not know the size of its security clearance backlog at the end
of September 2003 and had not estimated this backlog since January 2000.
Using September 2003 data, we estimated that DOD had a backlog of roughly
360,000 investigative and adjudicative cases, but the actual

backlog size is uncertain. DOD's failure to eliminate and accurately
assess the size of its backlog may have adverse affects. For example,
delays in updating overdue clearances for personnel doing classified work
may increase national security risks and slowness in issuing new
clearances can increase the costs of doing classified government work.
(GAO-04-344, Feb. 9, 2004)

These examples clearly demonstrate not only the severity of DOD's current
problems, but also the importance of reforming the department's business
operations to more effectively support DOD's core mission, to improve the
economy and efficiency of its operations, and to provide for transparency
and accountability to Congress and American taxpayers.

  Underlying Causes of Financial and Related Business Process Transformation
  Challenges

The underlying causes of DOD's financial management and related business
process and system weaknesses are generally the same ones I have outlined
in my prior testimonies before this Subcommittee over the last 3 years.
Unfortunately, DOD has made little progress in addressing these
fundamental issues and thus is at high risk that its current major reform
initiatives will fail. For each of the problems I cited previously, we
found that one or more of these long-standing causes were contributing
factors. Over the years, the department has undertaken many well-intended
initiatives to transform business operations departmentwide and improve
the reliability of information for decision making and reporting. However,
many of these efforts resulted in costly failures because the department
did not fully address the following four underlying causes of
transformation challenges.

Lack of Sustained Leadership and Management Accountability

DOD has not routinely assigned accountability for performance to specific
organizations or individuals who have sufficient authority, resource
control, and continuity in their position to accomplish desired goals. In
addition, top management has not had a proactive, consistent, and
continuing role in integrating daily operations with business
transformation-related performance goals. It is imperative that major
improvement initiatives have the direct, active support and involvement of
the Secretary and Deputy Secretary of Defense to ensure that daily
activities throughout the department remain focused on achieving shared,
agencywide outcomes and success. However, sustaining top management
continuity and commitment to performance goals, long-term planning, and
follow-through that will necessarily span several years is particularly

challenging for DOD. For example, in fiscal year 2004, DOD's Comptroller,
Deputy Under Secretary of Defense for Management Reform, and Deputy Chief
Financial Officer-to whom the Secretary delegated the leadership role for
key transformation initiatives-all resigned from the department within a
5-month period. Moreover, the department's primary transformation
program-BMMP-has had three different directors responsible for leading the
program since Secretary Rumsfeld initiated it a little over 3 years ago.
Given the importance of DOD's business transformation effort, it is
imperative that it receives sustained, focused departmentwide leadership
needed to improve the economy, efficiency, and effectiveness of DOD's
business operations. As I will discuss in more detail later, we continue
to advocate the establishment of a new executive position to provide
strong and sustained leadership to the entire spectrum of DOD business
transformation initiatives.

Cultural Resistance and Parochialism

The department has acknowledged that it confronts decades-old problems
deeply grounded in the bureaucratic history and operating practices of a
complex, multifaceted organization. Many of DOD's current operating
practices and systems were developed piecemeal to accommodate different
organizations, each with its own policies and procedures. As we have
reported over the last 3 years,9 DOD has continued to use a stovepiped
approach to develop and fund its business system investments. The existing
systems environment evolved over time as DOD components- each receives its
own system funding and follows decentralized acquisition and investment
practices-developed narrowly focused parochial solutions to their business
problems. While the Ronald W. Reagan National Defense Authorization Act
for Fiscal Year 200510 more clearly defines the roles and responsibilities
of business system investment approval authorities, control over the
budgeting for and execution of funding for system investment activities
remains at the component level. As I will discuss later, unless business
systems modernization money is appropriated to those who are responsible
and accountable for reform, DOD is at risk for continuing its current
stovepiped approach to developing and funding system investments and
failing to fundamentally improve its

9 GAO-01-681T, GAO-04-551T, GAO-03-1018, and GAO, DOD Business Systems
Modernization: Limited Progress in Development of Business Enterprise
Architecture and Oversight of Information Technology Investments,
GAO-04-731R (Washington, D.C.: May 17, 2004).

10Pub. L. No. 108-375, S:332.

business operations. DOD's ability to address its current
"business-asusual" approach to business system investments is further
hampered by its lack of an effective methodology and process for obtaining
a complete picture of its current business systems environment-a condition
we first highlighted in 1997.11 In September 2004, DOD reported that the
department had identified over 4,000 business systems-up from the 1,731
the department reported in October 2002. Unfortunately, due to its lack of
an effective methodology and process for identifying business systems,
including a clear definition of what constitutes a business system, DOD
continues to lack assurance that its systems inventory is reliable. This
lack of visibility over business systems in use throughout the department
hinders DOD's ability to identify and eliminate duplicate and
nonintegrated systems and transition to an integrated systems environment.

Lack of Results-Oriented Goals and Performance Measures

At a programmatic level, the lack of clear, comprehensive, and integrated
performance goals and measures has handicapped DOD's past reform efforts.
As a result, DOD managers lacked straightforward roadmaps showing how
their work contributed to attaining the department's strategic goals, and
they risked operating autonomously rather than collectively. As of March
2004, DOD had formulated departmentwide performance goals and measures and
continues to refine and align them with the outcomes described in its
strategic plan-the September 2001 Quadrennial Defense Review (QDR). The
QDR outlined a new risk management framework consisting of four dimensions
of risk-force management, operational, future challenges, and
institutional-to use in considering trade-offs among defense objectives
and resource constraints. According to DOD's Fiscal Year 2003 Annual
Report to the President and the Congress, these risk areas are to form the
basis for DOD's annual performance goals. They will be used to track
performance results and will be linked to planning and resource decisions.
As of October 2004, the department was still in the process of
implementing this approach departmentwide. However, it remains unclear how
DOD will use this approach to measure progress in achieving business
reform.

11 GAO, Financial Management: DOD Inventory of Financial Management
Systems is Incomplete, GAO/AIMD-97-29 (Washington, D.C.: Jan. 31, 1997).

As we reported in May 2004, DOD had yet to establish measurable,
resultsoriented goals for BMMP.12 BMMP is the department's major business
transformation initiative encompassing defense policies, processes,
people, and systems that guide, perform, or support all aspects of
business management, including development and implementation of the BEA.
A key element of any major program is its ability to establish clearly
defined goals and performance measures to monitor and report its progress
to management. The lack of BMMP performance measures has made it is
difficult to evaluate and track specific program progress, outcomes, and
results, such as explicitly defined performance measures to evaluate the
architecture's quality, content, and utility of subsequent major updates.
Given that DOD had reported total obligations for BMMP of over $203
million since architecture development began 3 years ago, with little
tangible improvements in DOD operations, this is a serious performance
management weakness.

Further, DOD has not established measurable criteria that decision makers
must consider for its revised weapons system acquisition policy, issued in
May 2003.13 The revisions make major improvements to DOD acquisition
policy by adopting knowledge-based, evolutionary practices used by
successful commercial companies. However, DOD has not provided the
necessary controls to ensure such an approach is followed. For example,
the policy does not establish measures to gauge design and manufacturing
knowledge at critical junctures in the product development process,
allowing significant unknowns to be judged as acceptable risks. Without
controls in the form of measurable criteria that decision makers must
consider, DOD runs the risk of making decisions based on overly optimistic
assumptions.

Lack of Incentives for The final underlying cause of the department's
long-standing inability to

Change 	carry out needed fundamental reform has been the lack of a clear
linkage of institutional, unit, and individual results-oriented goals,
performance measures, and reward mechanisms for making more than
incremental changes to existing "business-as-usual" operations, systems,
and organizational structures. Traditionally, DOD has focused on
justifying its

12 GAO-04-731R.

13 GAO, Defense Acquisitions: DOD's Revised Policy Emphasizes Best
Practices, but More Controls Are Needed, GAO-04-53 (Washington, D.C.: Nov.
10, 2003).

need for more funding rather than on the outcomes its programs have
produced. DOD has historically measured its performance by resource
components, such as the amount of money spent, people employed, or number
of tasks completed. Incentives for its decision makers to implement
behavioral changes have been minimal or nonexistent.

The lack of incentives to change is evident in the business systems
modernization area. We have identified numerous business system
modernization efforts that were not economically justified on the basis of
cost, benefits, and risk; took years longer than planned; and fell far
short of delivering planned or needed capabilities. Despite this track
record, DOD continues to invest billions in business systems while at the
same time it lacks the effective management and oversight needed to
achieve real results. Without appropriate incentives and accountability
mechanisms, as well as more centralized control of systems modernization
funding, DOD components will continue to develop duplicative and
nonintegrated systems that are inconsistent with the Secretary's vision
for reform. To effect real change, actions are needed to (1) develop a
well-defined blueprint for change, such as an enterprise architecture,
that provides a common framework of reference for making informed system
investment decisions, (2) adopt an investment decision-making model that
uses the architecture to break down parochialism and reward behaviors that
meet DOD-wide goals, (3) establish incentives that motivate decision
makers to initiate and implement efforts that are consistent with better
architecture and program outcomes, including saying "no" or pulling the
plug early on a system or program that is failing, (4) address human
capital issues, such as the adequacy of staffing level, skills, and
experience available to achieve the institutional, unit, and individual
objectives and expectations, and (5) facilitate a congressional focus on
results-oriented management, particularly with respect to resource
allocation decisions.

  Keys to Successful Reform and Current Status of Reform Efforts

The success of DOD's current broad-based business reform initiatives is
threatened, as prior initiatives were, by DOD's continued failure to
incorporate key elements that are critical to achieve successful reform.
Any efforts at reform must include (1) a comprehensive, integrated
business transformation plan, (2) personnel with the necessary skills,
experience, responsibility, and authority to implement the plan, (3)
effective processes and related tools, such as a BEA and business system
investment decision making controls, and (4) results-oriented performance
measures that link institutional, unit, and individual personnel goals,
measures, and expectations. Today, I would like to discuss three of

those broad-based initiatives. In addition, I will briefly highlight some
of the several smaller, more narrowly focused initiatives DOD has started
in recent years that, through incorporation of many of the key elements,
have been successful in making tangible improvements in DOD operations.
Furthermore, I would like to reiterate two suggestions for legislative
consideration that I believe are essential in order for DOD to be
successful in its overall business transformation effort.

Keys to Successful Reform	As I have previously testified,14 and as
illustrated by the success of the more narrowly defined DOD initiatives I
will discuss later, there are several key elements that collectively would

o 	enable the department to effectively address the underlying causes of
its inability to resolve its

o 	long-standing business management problems. These elements, which we
believe are key to any

o 	successful approach to transforming the department's business
operations, include

o 	addressing the department's financial management and related business
operational challenges as part of a comprehensive, integrated, DODwide
strategic plan for business reform;

o 	providing for sustained, committed, and focused leadership by top
management, including but not limited to the Secretary of Defense;

o  establishing resource control over business systems investments;

o  establishing clear lines of responsibility, authority, and
accountability;

o 	incorporating results-oriented performance measures that link key
institutional, unit, and individual personnel transformation objectives
and expectations, and monitoring progress;

14 GAO-04-551T and GAO-02-497T.

o 	addressing human capital issues, such as the adequacy of staff levels,
skills, and experience available to achieve the institutional, unit, and
individual personnel performance goals and expectations;

o  providing appropriate incentives or consequences for action or
inaction;

o 	establishing an enterprise architecture to guide and direct business
systems modernization investments; and

o  ensuring effective oversight and monitoring.

These elements, which should not be viewed as independent actions but
rather as a set of interrelated and interdependent actions, are reflected
in the recommendations we have made to DOD over the last 3 years and are
consistent with those actions discussed in the department's April 2001
financial management transformation report.15 The degree to which DOD
incorporates them into its current reform efforts-both long and short
term-will be a deciding factor in whether these efforts are successful.
Thus far, the department's progress in implementing our recommendations
pertaining to its broad-based initiatives has been slow. Further, while
the new legislation16 on business systems oversight directs DOD to take
action on some of these elements, we have not yet seen a comprehensive,
cohesive, and integrated strategy that details how some of the ongoing
efforts are being integrated. For example, we have not seen how the
department plans to integrate its objective of obtaining an unqualified
audit opinion in fiscal year 2007 with the BMMP.17 It appears as if these
two efforts are being conducted without the degree of coordination that
would generally be expected between efforts that share similar objectives.

Human Capital Initiative	The first broad-based administrative initiative
is effective implementation of the National Security Personnel System
(NSPS). In November 2003, Congress authorized the Secretary of Defense to
establish a new human

15 Department of Defense, Transforming Department of Defense Financial
Management: A Strategy for Change, (Washington, D.C.: Apr. 13, 2001).

16 Pub. L. No. 108-375, S:332.

17 GAO, Financial Management: Further Actions Are Needed to Establish
Framework to Guide Audit Opinion and Business Management Improvement
Efforts at DOD, GAO-04910R (Washington, D.C.: Sept. 20, 2004).

capital management system-NSPS-for its civilian employees, which is
modern, flexible, and consistent with the merit principles outlined by the
act.18 This legislation requires DOD to develop a personnel system that is
consistent with many of the practices that we have identified as elements
of an effective human capital management system, including a modern and
results-oriented performance management system. For several years, we have
reported19 that many of DOD's business process and control weaknesses were
attributable in part to human capital issues. For example, GAO audits of
DOD's Army Reserve and National Guard payroll and the centrally billed
travel card programs20 further highlight the adverse impact that outdated
and inadequate human capital practices, such as insufficient staffing,
training, and monitoring of performance, continue to have on DOD business
operations. If properly developed and implemented, NSPS could result in
significant improvements to DOD's business operations.

I strongly support the need for modernizing federal human capital policies
both within DOD and for the entire federal government. Since April 2003 I
have testified on four different occasions, including before this
Subcommittee, on NSPS and related DOD human capital issues.21 In the near
future, we will issue a summary of the forum GAO and the National
Commission on the Public Service Implementation Initiative cohosted to
advance the discussion of how human capital reform should proceed.
Participants discussed whether there should be an overall governmentwide

18 National Defense Authorization Act for Fiscal Year 2004, Pub. L. No.
108-136, S: 1101, 117 Stat. 1392, 1621 (Nov. 24, 2003) (amending subpart I
of part III of title 5, United States Code).

19 GAO, Major Management Challenges and Program Risks: Department of
Defense, GAO01-244 (Washington, D.C.: Jan.1, 2001).

20 GAO, Military Pay: Army Reserve Soldiers Mobilized to Active Duty
Experienced Significant Pay Problems, GAO-04-911, (Washington, D.C.: Aug.
20, 2004), Military Pay: Army National Guard Personnel Mobilized to Active
Duty Experienced Significant Pay Problems, GAO-04-89, (Washington, D.C.:
Nov. 13, 2003), and DOD Travel Cards: Control Weaknesses Led to Millions
in Fraud, Waste, and Improper Payments, GAO-04-825T, (Washington, D.C.:
June 9, 2004).

21 GAO, Defense Transformation: Preliminary Observations on DOD's Proposed
Civilian Personnel Reforms, GAO-03-717T (Washington, D.C.: April 29,
2003); Defense Transformation: DOD's Proposed Civilian Personnel System
and Governmentwide Human Capital Reform, GAO-03-741T (Washington, D.C.:
May 1, 2003); Human Capital: DOD's Civilian Personnel Strategic Management
and the Proposed National Security Personnel System, GAO-03-493T
(Washington, D.C.: May 12, 2003); Building on DOD's Reform Effort to
Foster Governmentwide Improvements, GAO-03-851T (Washington, D.C.: June 4,
2003).

framework for human capital reform and, if yes, what such a framework
should include. While the forum neither sought nor achieved consensus on
all of the issues identified in the discussion, there was broad agreement
that there should be a governmentwide framework to guide human capital
reform built on a set of timeless beliefs and boundaries. Beliefs entail
the fundamental principles that should govern all approaches to human
capital reform and should not be altered or waived by agencies seeking
human capital authorities. Boundaries include the criteria and processes
that establish the checks and limitations when agencies seek and implement
human capital authorities.

A modern, effective, credible, and integrated performance management
system can help improve DOD's business operations. Specifically, such a
performance management system aligns individual performance expectations
with organizational goals and thus defines responsibility and assures
accountability for achieving them.22 In addition, a performance management
system can help manage and direct a transformation process by linking
performance expectations to an employee's role in the process. Individual
performance and contributions are evaluated on competencies such as change
management. Leaders, managers, and employees who demonstrate these
competencies are rewarded for their success in contributing to the
achievement of the transformation process.

There are significant opportunities to use the performance management
system to explicitly link senior executive expectations for performance to
results-oriented goals. There is a need to hold senior executives
accountable for demonstrating competencies in leading and facilitating
change and fostering collaboration both within and across organizational
boundaries to achieve results. Setting and meeting expectations such as
these will be critical to achieving needed transformation changes.
Recently, Congress established a new performance-based pay system for
members of the Senior Executive Service (SES) that is designed to provide
a clear and direct link between SES performance and pay. An agency can
raise the pay cap for its senior executives if the agency's performance
management system makes meaningful distinctions based on relative

22 GAO, Results-Oriented Cultures: Creating a Clear Linkage Between
Individual Performance and Organizational Success, GAO-03-488 (Washington,
D.C.: Mar. 14, 2003).

performance.23 This visible step in linking pay to the achievement of
measurable performance goals within a context of a credible human capital
system that includes adequate safeguards is helpful in constructing a
results-oriented culture.

In my March 2004 testimony on DOD's financial management and related
business management transformation efforts,24 I stated that as DOD
develops regulations to implement its new human capital management system,
the department needs to do the following:

o 	Ensure the active involvement of the Office of Personnel Management in
the development process, given the significant implications that changes
in DOD regulations may have on governmentwide human capital policies.25 In
this regard, the Office of Personnel Management has assigned a senior
representative to support and advise DOD on the development of jointly
prescribed NSPS regulations and the implementation of NSPS.

o 	Ensure the involvement of civilian employees and unions in the design
and development of a new personnel system. The law calls for DOD to
involve employees, especially in the design of its new performance
management system. Involving employees in planning helps to develop agency
goals and objectives that incorporate insights about operations from a
front-line perspective. It can also serve to increase employees'
understanding and acceptance of organizational goals and improve
motivation and morale. In this regard, DOD has launched a new Web site to
educate its employees about the new National Security Personnel System. In
addition, DOD leadership has indicated that it has sought input from
civilian employees through town hall meetings, focus groups, and
discussions with union leaders.

o 	Use a phased approach to implement the system, recognizing that
different parts of the organization will have different levels of
readiness and different capabilities to implement new authorities. A
phased

23 GAO, Human Capital: Senior Executive Performance Management Can Be
Significantly Strengthened to Achieve Results, GAO-04-614 (Washington,
D.C.: May 26, 2004).

24 GAO-04-551T.

25 GAO-03-717T.

approach allows for learning so that appropriate adjustments and midcourse
corrections can be made before the regulations are fully implemented
departmentwide. In this regard, DOD had initially indicated that it
planned to implement its new human capital system for 300,000 civilian
employees by October 1, 2004. DOD has since indicated that it has adjusted
its timelines to reflect a more cautious, deliberative approach involving
more stakeholders. DOD has now indicated that it plans to phase in its new
human capital system beginning in July 2005.

We are currently evaluating DOD's NSPS design process and look forward to
sharing our findings with Congress upon completion of our review.

Business Management Modernization Program

While BMMP26 is vital to the department's efforts to transform its
business operations, DOD has not effectively addressed many of the
impediments to successful reform that I mentioned earlier, including (1) a
lack of sustained, effective, and focused leadership, (2) a lack of
results-oriented goals and performance measures, and (3) long-standing
cultural resistance and parochialism. As a result, the program has yielded
very little, if any, tangible improvements in DOD's business operations.
We have made numerous recommendations to DOD that center on the need to
incorporate the key elements to successful reform, which I discussed
previously, into the program. In May 2004 we reported27 that no
significant changes had been made to the architecture since the initial
version was released. Further, we reported that DOD had not yet adopted
key architecture management best practices, such as assigning
accountability and responsibility for directing, overseeing, and approving
the architecture and explicitly defining performance metrics to evaluate
the architecture's quality, content, and utility. For these and other
reasons, DOD's verification and validation contractor concluded that this
latest version of the architecture retained most of the critical problems
of the initial version, such as how the

26 Originally named the Financial Management Modernization Program, BMMP
was chartered in July 2001 to oversee the development of the financial
management enterprise architecture. Such an architecture was required by
10 U.S.C. S:185 (b) (4) and by section 1004 of the Bob Stump National
Defense Authorization Act for Fiscal Year 2003. Pub. L. No. 107-314,
S:116, Stat 2458, 2629 (Dec. 2, 2002). The Ronald W. Reagan National
Defense Authorization Act for Fiscal Year 2005 now requires DOD (through
the Defense Business Systems Management Committee) to develop a business
enterprise architecture and a transition plan by September 2005, covering
all defense business systems. See 10 U.S.C. S: 2222 (c).

27GAO-04-731R.

architecture should be used by the military services and other DOD
components in making acquisition and portfolio investment decisions. I
will now expand on the problems facing BMMP.

The purpose of BMMP is to provide world-class mission support to the war
fighter through transformation of DOD's business processes and systems. A
key element of BMMP is the development and implementation of a welldefined
BEA. Properly developed and implemented, a BEA can provide assurance that
the department invests in integrated enterprisewide business solutions
and, along with effective project management and resource controls, it can
be instrumental in developing corporatewide solutions and moving resources
away from nonintegrated business system development efforts. As we
reported in July 2003,28 DOD had developed an initial version of BEA and
had expended tremendous effort and resources in doing so. However, we also
reported that substantial work remains before the architecture would be
sufficiently defined to have a tangible impact on improving DOD's overall
business operations. In May 2004, we reported29 that after about 3 years
of effort and over $203 million in reported obligations for BMMP
operations, BEA's content and DOD's approach to investing billions of
dollars annually in existing and new systems had not changed
significantly. Under a provision in the recently enacted Ronald W. Reagan
National Defense Authorization Act for fiscal year 2005,30 DOD must
develop an enterprise architecture to cover all defense business systems
and related business functions and activities that is sufficiently defined
to effectively guide, constrain, and permit implementation of a
corporatewide solution and is consistent with the policies and procedures
established by the Office of Management and Budget. Further, the act
requires the development of a transition plan that includes not only an
acquisition strategy for new systems, but also a listing of the
termination dates of current legacy systems that will not be part of the
corporatewide solution, as well as a listing of legacy systems that will
be modified to become part of the corporatewide solution for addressing
DOD's business management deficiencies. Transforming DOD's business
operations and making them more efficient through the elimination of

28 GAO, Business Systems Modernization: Summary of GAO's Assessment of the
Department of Defense's Initial Business Enterprise Architecture,
GAO-03-877R (Washington, D.C.: July 7, 2003).

29 GAO-04-731R.

30Codified at 10 U.S.C. S:2222 (c)-(e).

nonintegrated and noncompliant legacy systems would free up resources that
could be used to support the department's core mission, enhance readiness,
and improve the quality of life for our troops and their families.

I cannot overemphasize the degree of difficulty DOD faces in developing
and implementing a well-defined architecture to provide the foundation
that will guide its overall business transformation. The department's
business transformation depends on its ability to develop and implement
business systems that provide corporate solutions. Successful
implementation of corporate solutions through adherence to a well-defined
enterprise architecture and effective project management and fund control
would go a long way toward precluding the continued proliferation of
duplicative, stovepiped systems and reduce spending on multiple systems
that are supposed to perform the same function. Without these things, we
have continued to see31 that DOD is still developing systems that are not
designed to solve corporatewide problems.

For example, the Defense Logistics Agency's (DLA) Business Systems
Modernization (BSM) and the Army's Logistics Modernization Program (LMP),
both of which were initiated prior to commencement of the BEA effort, were
not directed towards a corporate solution to the department's
long-standing weaknesses in inventory and logistics management, such as
the lack of total asset visibility. Rather, both projects focused on their
respective entity's inventory and logistics management operations. As a
result, neither project will provide asset visibility beyond the
stovepiped operation for which they were designed. For example, BSM is
only designed to provide visibility over the items within the DLA
environment- something DLA has stated already exists within its current
system environment. As a result, DOD continues to lack the capability to
identify the exact location of items, such as defective chemical and
biological protective suits, that were distributed to end-users, such as
the military services, or sold to the public. The department would have to
resort to inefficient and ineffective data calls, as it has done in the
past, to identify and withdraw defective items from use. 32

31 GAO-04-615.

32 GAO, Chemical and Biological Defense: Improved Risk Assessment and
Inventory Management Are Needed, GAO-01-667 (Washington, D.C.: Sept. 28,
2001).

Another major impediment to the successful transformation of DOD's
business systems is funds control. DOD invests billions of dollars
annually to operate, maintain, and modernize its business systems. For
fiscal year 2004, the department requested approximately $28 billion in IT
funding to support a wide range of military operations as well as DOD
business systems operations, of which DOD reported that approximately
$18.8 billion 33-$5.8 billion for business systems and $13 billion for
business systems infrastructure-relates to the operation, maintenance, and
modernization of the department's reported thousands of business systems.
The $18.8 billion is spread across the military services and defense
agencies, with each receiving and controlling its own funding for IT
investments. Although the recently enacted Ronald W. Reagan National
Defense Authorization Act for fiscal year 2005 more clearly defines the
roles and responsibilities of business system investment approval
authorities, control over the budgeting for and execution of funding for
system investment activities remains at the component level. Under a
provision in the act,34 effective October 1, 2005, DOD must identify each
defense system for which funding is proposed in its budget, including the
identification of all funds, by appropriation, for current services (to
operate and maintain the system) and modernization. Further, DOD may not
obligate funds for a defense business system modernization that will have
a total cost in excess of $1 million unless specific conditions called for
in the act are met.35 The Defense Business Systems Management Committee,
also required by the act to be established, must then approve the
designated

33 The remaining $9 billion is for national security systems. These
systems are intelligence systems, cryptologic activities related to
national security, military command and control systems, and equipment
that is an integral part of a weapon or weapons system or is critical to
the direct fulfillment of military or intelligence missions.

34 Codified at 10 U.S.C. S:2222 (a).

35 A key condition identified in the act includes certification by
designated approval authorities that the defense business system
modernization is (1) in compliance with the enterprise architecture, (2)
necessary to achieve critical national security capability or address a
critical requirement in an area such as safety or security or (3)
necessary to prevent a significant adverse effect on a project that is
needed to achieve an essential capability, taking into consideration the
alternative solutions for preventing such an adverse effect.

approval authorities'36 certification before funds can be obligated.
Further, obligation of funds for modernization programs without
certification and approval by the Defense Business Systems Management
Committee is deemed a violation of the Anti-Deficiency Act.37 Although
proper implementation of this legislation should strengthen oversight of
DOD's systems modernization efforts, it is questionable whether DOD has
developed or improved its processes and procedures to identify and control
system investments occurring at the component level. Unless DOD
establishes effective processes and controls to identify and control
system investments occurring within DOD components and overcome parochial
interests when corporatewide solutions are more appropriate, it will lack
the ability to ensure compliance with the act.

We fully recognize that developing and implementing an enterprise
architecture for an organization as large and complex as DOD is a
formidable challenge. Nevertheless, a well-defined architecture is
essential to enabling some of the elements for successful reform that I
discussed earlier. Accordingly, we remain supportive of the need for BMMP,
but are deeply concerned about the program's lack of meaningful progress
and inability to address management challenges. Accordingly, we plan to
continue working constructively with the department to strengthen the
program and will report to this Subcommittee on DOD's progress and
challenges in the spring of 2005.

Financial Improvement While DOD's former Comptroller started the financial
improvement

Initiative	initiative with the goal of obtaining an unqualified audit
opinion for fiscal year 2007 on its departmentwide financial statements,
we found that the initiative was simply a goal that lacked a clearly
defined, well-documented, and realistic plan to make the stated goal a
reality.

36Approval authorities, including the Under Secretary of Defense for
Acquisition, Technology, and Logistics; the Under Secretary of Defense
(Comptroller); the Assistant Secretary of Defense for Networks and
Information Integration and the Chief Information Officer of the
Department of Defense, and the Deputy Secretary of Defense or Under
Secretary of Defense, as designated by the Secretary of Defense, are
responsible for the review, approval, and oversight of business systems
and must establish investment review processes for systems under their
cognizance.

37 31 U.S.C. S:1341(a)(1)(A); see 10 U.S.C S: 2222(b).

In September 2004 we reported 38 that DOD's financial improvement
initiative lacked several of the key elements critical to success,
including (1) a comprehensive, integrated plan, (2) results-oriented goals
and performance measures, and (3) effective oversight and monitoring.
Specifically, we found that DOD had not established a framework to
integrate the improvement efforts planned by DOD components with
broad-based DOD initiatives such as human capital and BMMP. Rather, DOD
intended to rely upon the collective efforts of DOD components, as shown
in their discrete plans, to address its financial management deficiencies
while at the same time continuing its broad-based initiatives. However,
the component plans we reviewed did not consistently identify whether a
proposed corrective action included a manual work-around or business
system enhancement or replacement. Further, the component plans lacked
sufficient information regarding human capital needs, such as the staffing
level and skills required to implement and sustain the plans. In addition,
as we have previously reported,39 the department currently lacks a
mechanism to effectively identify, monitor, and oversee business system
investments, including enhancements, occurring within the department.
Because of this lack of visibility over how DOD components plan to advance
their financial management functionality, the DOD Comptroller and BMMP may
not have sufficient information to assess the feasibility of a work-around
or to review and approve all modifications to existing legacy business
systems to ensure that they (1) are sound investments, (2) optimize
mission performance and accountability, and (3) are consistent with
applicable requirements and key architectural elements in DOD's business
enterprise architecture.

In addition, our review of key individual component plans revealed that
the plans varied in levels of detail, completeness, and scope, such that
it will be difficult for DOD Comptroller staff to use the departmental
database of component plans it was developing to oversee and monitor
component efforts. We found that the component plans did not consistently
identify how staff (human capital), processes, or business systems would
be changed to implement corrective actions. Such changes are key elements
in assessing the adequacy of a component's plan and in monitoring progress
and sustainability.

38 GAO-04-910R. 39 GAO-04-615.

Further, DOD lacked effective oversight and accountability mechanisms to
ensure that the plans are implemented and corrective actions are
sustainable. The database the department is currently using was not
integrated electronically with subordinate component plans and the
milestone dates identified in the component plans were generally based on
assertion dates prescribed by the DOD Comptroller and not on actual
estimates of effort required. Furthermore, task dependencies were not
clearly identified, including critical corrective tasks that would need to
be completed in order for the fiscal year 2007 audit opinion to be
achieved.

On the positive side, DOD had developed business rules,40 which if
implemented as planned, should clearly establish a process for ensuring
that corrective actions, as described in the component plans, are
implemented and validated in order to minimize the department's risk of
unsupported claims by DOD components that reported financial information
is auditable. Further, the business rules clearly recognize that
management, not the auditor, is responsible for documenting business
processes, systems, and internal control for collecting and maintaining
transaction data. In addition, DOD's involvement of its components in
developing and implementing solutions to long-standing deficiencies in
their business operations under this initiative is a critical and positive
step toward obtaining the commitment and buy-in that has not been readily
apparent in BMMP. Further, the recently enacted Ronald W. Reagan National
Defense Authorization Act for Fiscal Year 200541 has placed a limitation
on continued preparation or implementation of DOD's financial improvement
initiative pending a report to congressional defense committees containing
the following: (1) a determination that BEA and the transition plan have
been developed, as required by section 332 of the act, (2) an explanation
of the manner in which fiscal year 2005 operation and maintenance funds
will be used by DOD components to prepare or implement the midrange
financial improvement plan, and (3) an estimate of future year costs for
each DOD component to implement the plan. DOD Comptroller staff
acknowledged that their goal was ambitious, but believed that they were in
the process of laying a framework, which they believe would address our
issues, to facilitate movement towards sustainable

40 Business rules are statements of fact, policy, law, regulation, or a
combination of these that drive business activities.

41 Pub. L. No. 108-375, S:352.

financial management improvements and eventually obtain an unqualified
audit opinion.

Interim Initiatives	In contrast to its broad-based initiatives, DOD has
incorporated many of the key elements for successful reform in its interim
initiatives. As the following examples demonstrate, leadership, real
incentives, accountability, and oversight and monitoring were clearly key
elements in DOD's efforts to improve its operations. For example, the
former DOD Comptroller developed a Financial Management Balanced Scorecard
that is intended to align the financial community's strategy, goals,
objectives, and related performance measures with the departmentwide risk
management framework established as part of DOD's Quadrennial Defense
Review, and with the President's Management Agenda. To effectively
implement the balanced scorecard, the DOD Comptroller has cascaded the
performance measures down to the military services and defense agency
financial communities, along with certain specific reporting requirements.
At the departmentwide level, certain financial metrics are selected,
consolidated, and reported to the top levels of DOD management for
evaluation and comparison. These "dashboard" metrics are intended to
provide key decision makers, including Congress, with critical performance
information at a glance, in a consistent and easily understandable format.

DFAS has been reporting the metrics cited below for several years, which
under the leadership of DFAS's Director and DOD's Comptroller, have
reported improvements including the following.

o 	From April 2001 to September 2004, DOD reduced its commercial pay
backlogs (payment delinquencies) by 72 percent.

o 	From March 2001 to September 2004, DOD reduced its payment recording
errors by 77 percent.

o 	From September 2001 to September 2004, DOD reduced its delinquency rate
for individually billed travel cards from 9.4 percent to 4.3 percent.

Using DFAS's metrics, management can quickly see when and where problems
are arising and can focus additional attention on those areas. While these
metrics show significant improvements from 2001 to today, our

report last year on DOD's metrics program42 included a caution that,
without modern integrated systems and the streamlined processes they
engender, reported progress may not be sustainable if workload is
increased.

DOD and the military services have also acted to improve their oversight
and monitoring of the department's purchase card program and have taken
actions, that when fully implemented, should effectively address all of
our 109 recommendations. For example, they issued policy guidance on
monitoring charge card activity and disciplinary actions that will be
taken against civilian or military employees who engage in improper,
fraudulent, abusive, or negligent use of a government charge card. In
addition, they substantially reduced the number of purchase cards issued.
According to the General Services Administration records, DOD had reduced
the total number of purchase cards from about 239,000 in March 2001 to
about 131,875 in June 2004. These reductions have the potential to
significantly improve the management of this program.

Further, the DOD IG and the Navy have prototyped and are now expanding a
data-mining capability to screen for and identify high-risk transactions
(such as potentially fraudulent, improper, and abusive use of purchase
cards) for subsequent investigation. On April 28, 2004, the DOD IG
testified43 on ways the department could save money through the prudent
use of government purchase cards. The testimony highlighted improvements
made in the management of the department's purchase card program and areas
for which additional improvements are needed. Specifically, the testimony
identified actions the DOD IG had taken to partner with the DOD purchase
card program management offices so that DOD could more proactively
identify and prevent potential fraud, waste, and mismanagement. However,
more still needs to be done because the testimony also discussed more than
$12 million in fraudulent, wasteful, or abusive purchases identified by
the DOD IG.

42 GAO, Financial Management: DOD's Metrics Program Provides Focus for
Improving Performance, GAO-03-457, (Washington, D.C.: Mar. 28, 2003).

43 Department of Defense, Office of the Inspector General, Statement of
David K. Steensma, Assistant Inspector General, Contract Management, COL
William J. Kelley, Program Director, Data Mining Division, Office of the
Inspector General of the Department of Defense to the Senate Committee
Governmental Affairs on How to Save the Taxpayers Money Through Prudent
Use of the Purchase Card, D-2004-076-T (Arlington, VA: Apr. 28, 2004).

In addition to the oversight and monitoring performed by DOD over these
business areas, we believe that consistent congressional oversight played
a major role in bringing about these improvements in DOD's purchase and
travel card programs. From 2001 through 2004, 10 separate congressional
hearings were held on DOD's purchase and travel card programs. Numerous
legislative initiatives aimed at improving DOD's management and oversight
of these programs also had a positive impact. Most recently, the fiscal
year 2005 Defense Appropriations Act44 reduced DOD's appropriation by $100
million to "limit excessive growth" in DOD's travel expenses.

Another important initiative under way at the department pertains to the
quarterly financial statement review sessions held by the DOD Comptroller,
which have led to the discovery and correction of numerous recording and
reporting errors. Under the leadership of DOD's former Comptroller, and
continuing under its new leadership, DOD is working to instill discipline
into its financial reporting processes to improve the reliability of the
department's financial data. Specifically, the DOD Comptroller requires
DOD's major components to prepare quarterly financial statements along
with extensive footnotes that explain any improper balances or significant
variances from previous year quarterly statements. All of the statements
and footnotes are analyzed by Comptroller office staff and reviewed by the
Comptroller. In addition, the midyear and end-of-year financial statements
must be briefed to the DOD Comptroller by the military service Assistant
Secretary for Financial Management or the head of the defense agency.
Under DOD's former Comptroller, GAO and the DOD IG were invited to observe
several of these briefings and noted that the practice of preparing and
explaining interim financial statements has improved the reliability of
reported information through more timely discovery and correction of
numerous recording and reporting errors. Although these meetings are
continuing under the current Comptroller, GAO and the DOD IG have not been
invited to attend.

Suggestions for Legislative I would like to reiterate two suggestions for
legislative consideration that I

Consideration	discussed in my testimony last March, which I believe could
further improve the likelihood of successful business transformation at
DOD. Most of the key elements necessary for successful transformation
could be

44 Department of Defense Appropriations Act, 2005, Pub. L. No. 108-287,
S:8141, 118, Stat. 951, 1003 (Aug. 5, 2004).

achieved under the current legislative framework; however, addressing
sustained and focused leadership for DOD business transformation and
funding control will require additional legislation. These suggestions
include the creation of a chief management official and the appropriation
of business system investment funding to the approval authorities
responsible and accountable for business system investments under
provisions enacted by the Ronald W. Reagan National Defense Authorization
Act for Fiscal Year 2005.45

Chief Operating Officer/Chief While the Secretary and other key DOD
leaders have demonstrated their

Management Official	commitment to the current business transformation
efforts, in our view, the complexity and long-term nature of these efforts
requires the development of an executive position capable of providing
strong and sustained executive leadership-over a number of years and
various administrations. The day-to-day demands placed on the Secretary,
the Deputy Secretary, and others make it difficult for these leaders to
maintain the oversight, focus, and momentum needed to resolve the
weaknesses in DOD's overall business operations. This is particularly
evident given the demands that the Iraq and Afghanistan postwar
reconstruction activities and the continuing war on terrorism have placed
on current leaders. Likewise, the breadth and complexity of the problems
preclude the under secretaries, such as the DOD Comptroller, from
asserting the necessary authority over selected players and business areas
while continuing to fulfill their other responsibilities.

While sound strategic planning is the foundation upon which to build,
sustained and focused leadership is needed for reform to succeed. One way
to ensure sustained leadership over DOD's business transformation efforts
would be to create a full-time executive-level II position for a chief
operating officer or chief management official (COO/CMO), who would serve
as the Principal Under Secretary of Defense for Management.46 This
position would elevate, integrate, and institutionalize the attention

45 Pub. L. No. 108-375, S:332.

46On September 9, 2002, GAO convened a roundtable of government leaders
and management experts to discuss the chief operating officer concept. For
more information see GAO, Highlights of a GAO Roundtable: The Chief
Operating Officer Concept: A Potential Strategy to Address Federal
Governance Challenges, GAO-03-192SP (Washington, D.C.: Oct. 4, 2002) and
The Chief Operating Officer Concept and its Potential Use as a Strategy to
Improve Management at the Department of Homeland Security, GAO-04-876R
(Washington, D.C.: June 28, 2004).

essential for addressing key stewardship responsibilities, such as
strategic planning, human capital management, performance and financial
management, acquisition and contract management, and business systems
modernization, while facilitating the overall business transformation
operations within DOD.

The COO/CMO concept is consistent with the commonly agreed-upon governance
principle that there needs to be a single point within agencies with the
perspective and responsibility-as well as authority-to ensure the
successful implementation of functional management and transformation
efforts. Governments around the world, such as the United Kingdom and
Ireland, have established term appointed positions, similar to the COO/CMO
concept we propose, that are responsible for advancing and continuously
improving agency operations.

The DOD COO/CMO position could be filled by an individual, appointed by
the President and confirmed by the Senate, for a set term of 7 years with
the potential for reappointment. Articulating the roles and
responsibilities of the position in statute helps to create unambiguous
expectations and underscores Congress' desire to follow a professional,
nonpartisan approach to the position. In that regard, such an individual
should have a proven track record as a business process change agent in
large, complex, and diverse organizations-experience necessary to
spearhead business process transformation across the department and serve
as an integrator for the needed business transformation efforts. In
addition, this individual would enter into an annual performance agreement
with the Secretary that sets forth measurable individual goals linked to
overall organizational goals in connection with the department's business
transformation efforts. Measurable progress towards achieving agreed-upon
goals would be a basis for determining the level of compensation earned,
including any related bonus. In addition, this individual's achievements
and compensation would be reported to Congress each year.

Funding Control over System DOD's current systems investment process in
which system funding is

Investments	controlled by DOD components has contributed to the evolution
of an overly complex and error-prone information technology environment
containing duplicative, nonintegrated, and stovepiped systems. We have
made numerous recommendations to DOD intended to improve the management
oversight and control of its business systems modernization investments.
However, as previously mentioned, progress in achieving this

control has been slow. Recent legislation,47consistent with the suggestion
I made in my prior testimony, established specific management oversight
and accountability with the "owners" of the various functional areas or
domains. The legislation defined the scope of the various business areas
(e.g., acquisition, logistics, finance and accounting) and established
functional approval authority and responsibility for management of the
portfolio of business systems with the relevant under secretary of defense
for the departmental domains and the Assistant Secretary of Defense for
Networks and Information Integration (information technology
infrastructure). For example, the Under Secretary of Defense for
Acquisition, Technology, and Logistics is now responsible and accountable
for any defense business system intended to support acquisition
activities, logistics activities, or installations and environment
activities for DOD.

The legislation also requires that the responsible approval authorities
establish a hierarchy of investment review boards with DOD-wide
representation, including the military services and Defense agencies. The
boards are responsible for reviewing and approving investments to develop,
operate, maintain, and modernize business systems for their business area
portfolio, including ensuring that investments are consistent with DOD's
BEA.

Although the new legislation clearly assigns responsibility and
accountability for system modernization to designated approval
authorities, control over system investment funding remains at the DOD
component level. As a result, DOD continues to have little or no assurance
that its business systems modernization investment money is being spent in
an economical, efficient, and effective manner. Given that DOD spends
billions on business systems and related infrastructure each year, we
believe it is critical that funds for DOD business systems be appropriated
to those responsible and accountable for business system improvements.
However, implementation may require review of the various statutory
authorities for the military services and other DOD components. Control
over the funds would improve the capacity of DOD's designated approval
authorities to fulfill their responsibilities and transparency over DOD
investments, and minimize the parochial approach to systems development
that exists today. In addition, to improve coordination and integration
activities, we suggest that all approval authorities coordinate their
business system modernization efforts with the chief management official
who

47 Pub. L. No. 108-375, S:332.

would chair the Defense Business Systems Management Committee. Cognizant
business area approval authorities would also be required to report to
Congress through the chief management official and the Secretary of
Defense on applicable business systems that are not compliant with review
requirements and to include a summary justification for noncompliance.

Conclusion	The United States is facing large and growing long-term fiscal
pressures created by the impending retirement of the baby boom generation,
rising health care costs, increased homeland security and defense
commitments, and a reduction in federal revenues. These pressures not only
sharpen the need to look at competing claims on existing federal budgetary
resources and emerging new priorities, they underscore the need for
transparent and reliable information upon which to base decisions at all
levels within the federal government. This includes timely, useful, and
reliable financial and management information that demonstrates what
results are being achieved and what risks are being incurred by various
government programs, functions, and activities. As I have discussed, DOD
lacks the efficient and effective financial management and related
business operations, including processes and systems, to support the war
fighter, DOD management, and Congress. With a large and growing fiscal
imbalance facing our nation, achieving tens of billions of dollars of
annual savings through successful DOD transformation is increasingly
important. DOD's senior leaders have demonstrated a commitment to
transforming the department and improving its business operations. Recent
legislation pertaining to defense business systems, enterprise
architecture, accountability, and modernization, if properly implemented,
should improve oversight and control over DOD's significant system
investment activities. However, DOD's transformation efforts and
legislation to date have not adequately addressed key underlying causes of
past reform failures. Successful transformation will require an effective
transformation plan; adequate human capital; effective processes and
transformation tools, such as a BEA; and results-oriented performance
measures that link institutional, unit, and individual personnel goals and
expectations. Reforming DOD's business operations is a monumental
challenge and many well-intentioned efforts have failed over the last
several decades. Lessons learned from these previous reform attempts
include the need for sustained and focused leadership at the highest
level, with appropriate authority over all of DOD's business operations,
as well as centralized control of all business transformation-related
funding with the designated approval authorities assigned responsibility
for transformation activities within their

specific business process areas. This leadership could be provided through
the establishment of a Chief Operating Officer/Chief Management Official.
Absent this leadership, authority, and control of funding, the current
transformation efforts are likely to fail.

I commend the Subcommittee for holding this hearing and I encourage you to
use this vehicle, on an annual basis, as a catalyst for long overdue
business transformation at DOD.

Mr. Chairman, this concludes my statement. I would be pleased to answer
any questions you or other members of the Subcommittee may have at this
time.

  Contacts and Acknowledgments

(192149)

For further information about this testimony, please contact Gregory D.
Kutz at (202) 512-9095 or [email protected], Randolph C. Hite at (202) 5123439
or [email protected], Sharon Pickup at (202) 512-9619 or [email protected], or
Evelyn Logue at (202) 512-3881 or [email protected]. Other key contributors
to this testimony include Catherine Baltzell, Sandra Bell, Molly Boyle,
Peter Del Toro, Francine DelVecchio, Bill Doherty, Abe Dymond, Cynthia
Jackson, John Kelly, Neelaxi Lakhmani, Elizabeth Mead, Chris Mihm, Mai
Nguyen, John Ryan, Lisa Shames, Darby Smith, and Marilyn Wasleski.

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