DOD's High-Risk Areas: Successful Business Transformation	 
Requires Sound Strategic Planning and Sustained Leadership	 
(13-APR-05, GAO-05-520T).					 
                                                                 
In January 2005, GAO released its 2005 high-risk series update	 
report for the 109th Congress. GAO's high-risk series has	 
increasingly focused on major government programs and operations 
that need urgent attention and transformation to ensure that the 
U.S. government functions in the most economical, efficient, and 
effective manner possible. GAO also emphasizes those federal	 
programs and operations that are at high risk because of their	 
greater vulnerabilities to fraud, waste, abuse, and		 
mismanagement. Of the 25 areas on GAO's 2005 high-risk list, 8	 
are Department of Defense (DOD) programs or operations and 6 are 
governmentwide high-risk areas for which DOD shares some	 
responsibility. These high-risk areas touch on all of DOD's major
business operations. DOD's failure to effectively address these  
many high-risk areas results in billions of dollars of waste each
year and inadequate accountability to Congress and the American  
people. Congress asked GAO to provide its views on (1) DOD's	 
high-risk areas, including those it shares responsibility for	 
with other federal agencies; (2) an emerging challenge for DOD	 
that merits close attention, involving DOD's approach to risk	 
management; and (3) key elements, such as a chief management	 
official, to successfully address these high-risk areas and	 
achieve business transformation reform. 			 
-------------------------Indexing Terms------------------------- 
REPORTNUM:   GAO-05-520T					        
    ACCNO:   A21559						        
  TITLE:     DOD's High-Risk Areas: Successful Business Transformation
Requires Sound Strategic Planning and Sustained Leadership	 
     DATE:   04/13/2005 
  SUBJECT:   Accountability					 
	     Contract administration				 
	     Defense procurement				 
	     Federal agency reorganization			 
	     Fraud						 
	     Internal controls					 
	     Productivity in government 			 
	     Program abuses					 
	     Program evaluation 				 
	     Program management 				 
	     Risk management					 
	     Strategic planning 				 
	     Business operations				 
	     Enterprise architecture				 
	     Risk assessment					 
	     Army Medical Retention Processing			 
	     Program						 
                                                                 
	     DOD Airborne Laser Program 			 
	     DOD National Security Personnel System		 
	     DOD Operation Iraqi Freedom			 
	     DOD Space-Based Infrared System-low		 
	     F-22 Raptor Aircraft				 
	     F/A-22 Aircraft					 
	     GAO High Risk Series				 
	     Personnel Security Clearance Program		 

******************************************************************
** This file contains an ASCII representation of the text of a  **
** GAO Product.                                                 **
**                                                              **
** No attempt has been made to display graphic images, although **
** figure captions are reproduced.  Tables are included, but    **
** may not resemble those in the printed version.               **
**                                                              **
** Please see the PDF (Portable Document Format) file, when     **
** available, for a complete electronic file of the printed     **
** document's contents.                                         **
**                                                              **
******************************************************************
GAO-05-520T

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 10:00 a.m. EDT Wednesday, April 13,
2005

DOD'S HIGH-RISK AREAS

    Successful Business Transformation Requires Sound Strategic Planning and
                              Sustained Leadership

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

                                       A

GAO-05-520T

[IMG]

April 13, 2005

DOD HIGH-RISK AREAS

Successful Business Transformation Requires Sound Strategic Planning and
Sustained Leadership

                                 What GAO Found

GAO has reported on inefficiencies and inadequate transparency and
accountability across DOD's major business areas, resulting in billions of
dollars of wasted resources annually. As shown in the following table,
these problems have resulted in GAO's designation of eight DOD areas as
highrisk, two of which were newly added this year. Progress in addressing
one of these new high-risk areas-DOD's overall approach to business
transformation-is needed to confront the other seven areas. DOD also
shares some responsibility for six other governmentwide high-risk areas,
including strategic human capital management. Although DOD's senior
leaders have shown commitment to business management reform, little
tangible evidence of actual improvement has been seen to date.

Years When Specific DOD Areas on GAO's 2005 High-Risk List Were First
Designated as High Risk

Area Year designated as high risk

                  DOD approach to business transformation 2005

o  DOD personnel security clearance program 2005

o  DOD support infrastructure management 1997

o  DOD business systems modernization 1995

o  DOD financial management 1995

o  DOD weapon systems acquisition 1990

o  DOD contract management 1992

o  DOD supply chain managementa 1990

Source: GAO.

aThis area, formerly entitled DOD inventory management, was expanded to
include distribution and asset visibility.

In addition to the specific high-risk areas, there are other broad-based
challenges facing our government that merit continuing close attention.
One emerging area of concern involves the need for DOD along with other
agencies to develop and use a strategic risk-based approach for
establishing goals, evaluating and setting priorities, and making
difficult resource decisions across the department. Strategically managing
risks and investment decisions is crucial for DOD as it faces growing
questions about the affordability and sustainability of current defense
spending.

To move forward, there are three key elements that DOD must incorporate
into its business management reform efforts to successfully address the
systemic management problems related to its high-risk areas. First, any
reform efforts must include a comprehensive, integrated strategic plan
with results-oriented performance measures, including a well-defined
blueprint (an enterprise architecture) to guide and constrain
implementation of such a plan. Second, central control of system
investments is crucial for successful transformation. Finally, a
legislatively created Deputy Secretary of Defense for Management is
essential for providing the strong and sustained executive leadership
needed if reform efforts are to succeed.

                 United States Government Accountability Office

Mr. Chairman and Members of the Subcommittee:

Thank you for the opportunity to discuss the Department of Defense's (DOD)
"high-risk" programs and operations summarized in GAO's 2005 high-risk
series update report.1 During my tenure as Comptroller General, our
high-risk series has increasingly focused on those major government
programs and operations that need urgent attention and transformation to
ensure that our national government functions in the most economical,
efficient, and effective manner possible. We also emphasize those federal
programs and operations that are at high risk because of their greater
vulnerabilities to fraud, waste, abuse, and mismanagement. Some of these
high-risk programs and operations are in need of transformation, and
several will require action by both the executive branch and Congress for
successful transformation to occur.

Given its size and mission, DOD is one of the largest and most complex
organizations to effectively manage in the world. While DOD maintains
military forces with significant capabilities, it continues to confront
pervasive, decades-old management problems related to its business
operations, including systems and processes, that support these forces. Of
the 25 areas on our 2005 high-risk list, 8 are DOD programs or operations
and 6 are governmentwide high-risk areas for which DOD shares some
responsibility. These high-risk areas touch on all of DOD's major business
operations. DOD's failure to effectively address these high-risk areas
results in billions of dollars of wasted resources each year and
inadequate accountability to Congress and the American people. In some
cases, such as DOD's financial management and weapon systems acquisition
areas, we have been highlighting high-risk challenges for a decade or
more. To its credit, the Office of Management and Budget (OMB) has worked
closely with a number of agencies that have high risk issues, but to-date
has been less involved with DOD. Recently, Clay Johnson, OMB's Deputy
Director for Management reaffirmed plans to refocus on GAO's high risk
list in order to make as much progress as possible during the Bush
Administration's second term. He also committed to place additional
emphasis on DOD's high-risk areas, including working to help ensure that
DOD has action plans for addressing all new "high-risk" areas. Given the
magnitude of DOD's problems and the stakes involved, I believe it is
critical that OMB actively collaborate with the department to ensure it
establishes the action plans

1GAO, High-Risk Series: An Update, GAO-05-207 (Washington, D.C.: January
2005), issued for the 109th Congress.

and milestones needed to address its high risk areas. Continued oversight
by Congress, such as this hearing, is key to achieving change at DOD and,
in the case of some areas, legislative action will be needed.

Today, I will provide my perspectives on (1) DOD's high-risk areas,
including those for which it shares responsibility with other federal
agencies; (2) an emerging challenge that merits close attention, involving
the need for DOD and other federal agencies to develop comprehensive
approaches for risk management; and (3) three key elements to successfully
address these high-risk areas and achieve needed reforms. In particular, I
will emphasize two suggestions for legislative consideration- the need for
central control of systems investment funding and a chief management
official-that I have previously testified about.2 Implementation of these
two suggestions would provide the sustained toplevel leadership and
accountability needed by DOD to better permit the effective use of
transition plans, processes, systems, people, and tools and thereby
increase the likelihood of successful business transformation.

My statement is based on previous GAO reports and our work was performed
in accordance with generally accepted government auditing standards.

Summary	While DOD began the new millennium with military forces second to
none, it has not been effective in managing its business operations. At a
time when DOD is challenged to maintain a high level of operations while
competing for resources in an increasingly fiscally constrained
environment, weaknesses in DOD's business operations continue to result in
reduced efficiencies and effectiveness. The Secretary of Defense has
estimated that improving business operations could save 5 percent of DOD's
annual budget. This represents a savings of about $22 billion a year,
based on the fiscal year 2004 budget.

Continuing problems within DOD's business operations and transformation
initiatives have resulted in our designation of eight DOD-specific
programs and operations to our 2005 high-risk list, which includes two new
areas and the expansion of a third area. First, we added DOD's overall
approach to

2GAO, Department of Defense: Further Actions Are Needed to Effectively
Address Business Management Problems and Overcome Key Business
Transformation Challenges,

GAO-05-140T (Washington, D.C.: Nov. 18, 2004).

business transformation to the high-risk list because of our concern over
DOD's lack of adequate management accountability and the absence of a
strategic and integrated action plan for the overall business
transformation effort. Unless DOD makes progress in its overall business
transformation effort, we believe that it will continue to have
difficulties in confronting the other seven DOD-specific high-risk areas
in an integrated, departmentwide approach. Second, we added DOD's
personnel security clearance program to the list because the increased
delays and growing backlogs of security clearances for DOD personnel,
contractors, and others present a range of risks in today's security
environment. Finally, we expanded our prior highrisk area of inventory
management to include DOD's management of certain key aspects of its
supply chain, including distribution, inventory management, and asset
visibility, because of issues related to supporting the warfighter during
Operation Iraqi Freedom. The remaining DODspecific high-risk areas cover
other major business operations such as support infrastructure management,
business systems modernization, financial management, weapon systems
acquisition, and contract management. Although the Secretary of Defense
and senior leaders have shown commitment to business management
transformation, little tangible evidence of actual improvement has been
seen in DOD's business operations to date. In addition, DOD has not taken
the steps necessary to achieve and sustain business reform on a broad,
strategic, departmentwide, and integrated basis.

In addition to the DOD-specific high-risk areas, DOD shares responsibility
for six other high-risk areas that are governmentwide in scope. A first
and critical governmentwide high-risk area, strategic human capital
management, has remained high risk because some federal human capital
strategies are still not appropriately constituted to meet current and
emerging challenges or drive the transformations necessary for agencies to
meet these challenges. The National Defense Authorization Act for Fiscal
Year 20043 has given DOD significant authorities to address the way in
which defense civilian employees are hired, compensated, promoted, and
disciplined, and proposed regulations to implement these authorities have
been jointly released by the Secretary of Defense and the Acting Director
of the Office of Personnel Management (OPM). The remaining five
governmentwide high-risk areas include managing federal real property,
protecting federal information systems and the nation's critical

3Pub. 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).

infrastructure, establishing appropriate and effective information-sharing
mechanisms to improve homeland security, modernizing federal disability
programs, and managing interagency contracting more effectively.

There are other important broad-based challenges facing our government
that we will be closely monitoring even though we have not yet categorized
them as high risk. One emerging area of concern involves the need for DOD
along with other agencies to develop and use a strategic risk-based
approach for establishing goals, evaluating and setting priorities, and
making difficult resource decisions. Strategically managing risks and
investment decisions across the department is crucial for DOD as it faces
growing questions about the affordability and sustainability of the rate
of growth in defense spending and the shift in focus from conventional
threats posed by the Cold War era to more unconventional and asymmetric
threats evidenced in the events of September 11, 2001. To its credit, we
understand that DOD is attempting to implement a risk management framework
for making broad, strategic investment decisions across the department,
and we are monitoring this effort.

Regarding the way forward, there are three essential elements that DOD
must incorporate into its business transformation efforts if it is to
successfully address the systemic management problems related to its
high-risk areas. First, in our experience, a successful business
transformation effort must include a comprehensive, integrated business
transformation strategic and action plan with results-oriented performance
measures that link institutional, unit, and personnel goals, measures, and
expectations. Second, we propose that those responsible for business
systems modernization control the allocation and execution of funds for
DOD business systems. Finally, due to the complexity and long-term nature
of these efforts, strong and sustained executive leadership is needed if
they are to succeed. We believe one way to ensure this strong and
sustained leadership over DOD's business management reform efforts would
be to create a full-time, executive-level II position for a Chief
Management Official (CMO), who would serve as the Deputy Secretary of
Defense for Management. We believe that the new CMO position should 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 role and responsibilities of the position in statute and
establishing a term that spans administrations underscores the importance
of a professional, nonpartisan approach to this business
management-oriented position. This position would elevate, integrate, and
institutionalize the attention essential for addressing key stewardship
responsibilities, such as strategic

planning, enterprise architecture development and implementation,
information technology management, and financial management, while
facilitating the overall business management transformation within DOD.

DOD's High-Risk Areas, Including Governmentwide High-Risk Areas

Numerous systems problems, inefficiencies, and wasted resources continue
to trouble DOD's business operations, resulting in our designation of 14
high-risk areas that are either DOD-specific programs or governmentwide
high-risk areas for which DOD shares some responsibility. As shown in
table 1, we have designated two new high-risk areas for DOD this year. The
first, DOD's approach to business management transformation, represents an
overarching high-risk area, encompassing the other seven key DOD-specific
business operations that we have designated as individual high-risk areas.
The second, DOD's personnel security clearance program, was added to our
2005 high-risk list because of delays in completing hundreds of thousands
of background investigations and adjudications (a review of investigative
information to determine eligibility for a security clearance). Many of
the remaining DOD-specific areas have been on the list for a decade or
more. In addition to the DODspecific high-risk areas shown in table 1, I
will later discuss the six governmentwide areas, such as human capital
management, for which DOD shares responsibility with other federal
agencies.

Table 1: Years When Specific DOD Areas on GAO's 2005 High Risk List Were
First Designated as High Risk

                         Area Year designated high risk

DOD approach to business transformation

o  DOD personnel security clearance program

o  DOD support infrastructure management

o  DOD business systems modernization

o  DOD financial management 1995

o  DOD weapon systems acquisition 1990

o  DOD contract management 1992

o  DOD supply chain managementa 1990a

Source: GAO.

aThis area was formerly entitled DOD inventory management.

DOD's Approach to Business Transformation

DOD's approach to business management transformation represents an
overarching high-risk area, encompassing several other key business
operations. Over the years, DOD has embarked on a series of efforts to
reform its business management operations, including modernizing
underlying information technology (business) systems. However, serious
inefficiencies remain. As a result, the areas of support infrastructure
management, business systems modernization, financial management, weapon
systems acquisition, contract management, and supply chain management
remain high-risk DOD business operations. We now consider DOD's overall
approach to business transformation to be a high-risk area because (1)
DOD's business improvement initiatives and control over resources are
fragmented; (2) DOD lacks a clear strategic and integrated business
transformation plan and investment strategy, including a welldefined
enterprise architecture to guide and constrain implementation of such a
plan; and (3) DOD has not designated a senior management official
responsible and accountable for overall business transformation reform and
related resources.

Unless DOD makes progress in overall business transformation, we believe
it will continue to have difficulties in confronting other problems in its
business operations. DOD spends billions of dollars to sustain key
business operations intended to support the warfighter, including systems
and processes related to support infrastructure,4 finances, weapon systems
acquisition, the management of contracts, and the supply chain. We have
previously testified on inefficiencies in DOD's business operations, such
as the lack of sustained leadership, the lack of a comprehensive and
integrated business transformation strategic and action plan, and
inadequate incentives.5 Moreover, the lack of adequate transparency and
accountability across DOD's major business areas results in billions of
dollars of wasted resources annually at a time of increasing military
operations and growing fiscal constraints.

4Support infrastructure includes categories such as force installations,
central logistics, the defense health program, and central training.

5GAO-05-140T; GAO, Department of Defense: Long-standing Problems Continue
to Impede Financial and Business Management Transformation, GAO-04-907T
(Washington, D.C.: July 7, 2004), and DOD Business Systems Modernization:
Billions Continue to Be Invested with Inadequate Management Oversight and
Accountability, GAO-04-615 (Washington, D.C.: May 27, 2004).

Business transformation requires long-term cultural change, business
process reengineering, and a commitment from both the executive and
legislative branches of government. Although sound strategic planning is
the foundation on which to build, DOD needs clear, capable, sustained, and
professional leadership to maintain the continuity necessary for success.
Such leadership would provide the attention essential for addressing key
stewardship responsibilities-such as strategic planning, performance
management, business information management, and financial management-in
an integrated manner, while helping to facilitate the overall business
transformation effort within DOD.

Personnel Security Clearance The second high-risk area is DOD's personnel
security clearance program.

Program	Delays in completing hundreds of thousands of background
investigations and adjudications (a review of investigative information to
determine eligibility for a security clearance) have led us to add the DOD
personnel security clearance program to our 2005 high-risk list. Personnel
security clearances allow individuals to gain access to classified
information. In some cases, unauthorized disclosure of classified
information could reasonably be expected to cause exceptionally grave
damage to national defense or foreign relations. DOD has approximately 2
million active clearances as a result of worldwide deployments, contact
with sensitive equipment, and other security requirements. While our work
on the clearance process has focused on DOD, clearance delays in other
federal agencies suggest that similar impediments and their effects may
extend beyond DOD.

Since at least the 1990s, we have documented problems with DOD's personnel
security clearance process, particularly problems related to backlogs and
the resulting delays in determining clearance eligibility.6 Since fiscal
year 2000, DOD has declared its personnel security clearance
investigations program to be a systemic weakness7-a weakness that affects
more than one DOD component and may jeopardize the department's
operations. An October 2002 House Committee on Government Reform report
also recommended including DOD's

6GAO, DOD Personnel: Inadequate Personnel Security Investigations Pose
National Security Risks, GAO/NSIAD-00-12 (Washington, D.C.: Oct. 27,
1999).

7Department of Defense Annual Statement of Assurance, Fiscal Year 2000 and
Fiscal Year 2001; Department of Defense Performance and Accountability
Report, Fiscal Year 2002 (Jan. 31, 2003) and Fiscal Year 2003 (Dec. 23,
2003).

adjudicative process as a material weakness.8 As of September 30, 2003
(the most recent data available), DOD could not estimate the full size of
its backlog, but we identified over 350,000 cases exceeding established
time frames for determining eligibility.9

DOD has taken steps to address the backlog-such as hiring more
adjudicators and authorizing overtime for adjudicative staff-but a
significant shortage of trained federal and private-sector investigative
personnel presents a major obstacle to timely completion of cases. Other
impediments to eliminating the backlog include the absence of an
integrated, comprehensive management plan for addressing a wide variety of
problems identified by us and others. In addition to matching adjudicative
staff to workloads and working with OPM to develop an overall management
plan, DOD needs to develop and use new methods for forecasting clearance
needs and monitoring backlogs, eliminate unnecessary limitations on
reciprocity (the acceptance of a clearance and access granted by another
department, agency, or military service), determine the feasibility of
implementing initiatives that could decrease the backlog and delays, and
provide better oversight for all aspects of its personnel security
clearance process. The National Defense Authorization Act for Fiscal Year
200410 authorized the transfer of DOD's personnel security investigative
function and over 1,800 investigative employees to OPM. This transfer took
place in February 2005. While the transfer eliminated DOD's responsibility
for conducting the investigations, it did not eliminate the shortage of
trained investigative personnel needed to address the backlog. Although
DOD retained the responsibility for adjudicating clearances, OPM is now
accountable for ensuring that investigations are completed in a timely
manner.

Support Infrastructure The third high-risk area is DOD's support
infrastructure management,

Management	which we first identified as being high risk in 1997. DOD has
made progress and expects to continue making improvements in its
infrastructure management, but much work remains to be done. DOD's support

8Committee on Government Reform, Defense Security Service: The Personnel
Security Investigations (PSI) Backlog Poses a Threat to National Security,
H.R. Rep. No. 107-767 (Washington, D.C.: Oct. 24, 2002).

9GAO, DOD Personnel Clearances: DOD Needs to Overcome Impediments to
Eliminating Backlog and Determining Its Size, GAO-04-344 (Washington,
D.C.: Feb. 9, 2004).

10 Pub. L. No. 108-136 S: 906 (Nov. 24, 2003).

infrastructure includes categories such as force installations, central
logistics, the defense health program, and central training. DOD's
infrastructure costs continue to consume a larger-than-necessary portion
of its budget than DOD believes is desirable, despite reductions in the
size of the military force following the end of the Cold War. For several
years, DOD also has been concerned about its excess facilities
infrastructure, which affects its ability to devote more funding to weapon
systems modernization and other critical needs. DOD reported that many of
its business processes and much of its infrastructure are outdated and
must be modernized. Left alone, the current organizational arrangements,
processes, and systems will continue to drain scarce resources.

DOD officials recognize that they must achieve greater efficiencies in
managing their support operations. DOD has achieved some operating
efficiencies and reductions from such efforts as base realignments and
closures, consolidations, organizational and business process
reengineering, and competitive sourcing. It also has achieved efficiencies
by eliminating unneeded facilities through such means as demolishing
unneeded buildings and privatizing housing at military facilities. In
addition, DOD and the services are currently gathering and analyzing data
to support a new round of base realignments and closures in 2005 and
facilitating other changes as a result of DOD's overseas basing study.

Despite this progress, much work remains for DOD to transform its support
infrastructure to improve operations, achieve efficiencies, and allow it
to concentrate resources on the most critical needs. Organizations
throughout DOD need to continue reengineering their business processes and
striving for greater operational effectiveness and efficiency. DOD needs
to develop a plan to better integrate, guide, and sustain the
implementation of its diverse business transformation initiatives in an
integrated fashion. DOD also needs to strengthen its recent efforts to
develop and refine its comprehensive long-range plan for its facilities
infrastructure to ensure adequate funding to support facility sustainment,
modernization, recapitalization, and base operating support needs. DOD
generally concurs with our prior recommendations in this area and
indicates it is taking actions to address them. A key to any successful
approach to resolving DOD's support infrastructure management issues will
be addressing this area as part of a comprehensive, integrated business
transformation effort.

Business Systems Modernization 	The fourth high-risk area is DOD's
business systems modernization program, which we first designated as high
risk in 1995. We continue to

categorize DOD's business systems modernization program as a high-risk
area because of a lack of an enterprise architecture to guide and
constrain system investments and ineffective management oversight, system
acquisition, and investment management practices. As a result, DOD's
current operating practices and over 4,000 systems function in a
stovepiped, duplicative, and nonintegrated environment that contributes to
DOD's operational problems. For years, DOD has attempted to modernize
these systems, and we have provided numerous recommendations to help guide
its efforts. For example, in 2001 we provided DOD with a set of
recommendations to help it develop and implement an enterprise
architecture (or modernization blueprint) and establish effective
investment management controls.11 Such an enterprise architecture is
essential for DOD to guide and constrain how it spends billions of dollars
annually on information technology systems. We also made numerous
project-specific and DOD-wide recommendations aimed at getting DOD to
follow proven best practices when it acquired system solutions.12 While
DOD agreed with most of these recommendations, to date the department has
made limited progress in addressing them.

In May 2004, we reported that after 3 years and over $203 million in
obligations, DOD had not yet developed a business enterprise architecture
containing sufficient scope and detail to guide and constrain its
departmentwide systems modernization and business transformation.13 One
reason for this limited progress is DOD's failure to adopt key

11GAO, Information Technology: Architecture Needed to Guide Modernization
of DOD's Financial Operations, GAO-01-525 (Washington, D.C.: May 17,
2001).

12GAO-04-615 and 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, Accountability, 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).

13GAO, 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).

architecture management best practices that we recommended,14 such as
developing plans for creating the architecture; assigning accountability
and responsibility for directing, overseeing, and approving the
architecture; and defining performance metrics for evaluating the
architecture. Under a provision in the Ronald W. Reagan National Defense
Authorization Act for Fiscal Year 2005,15 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 (OMB). Additionally, the act requires the
development of a transition plan that includes an acquisition strategy for
new systems and 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.

In May 2004, we also reported that the department's approach to investing
billions of dollars annually in existing systems had not changed
significantly.16 As a result, DOD lacked an effective investment
management process for selecting and controlling ongoing and planned
business systems investments. While DOD issued a policy that assigns
investment management responsibilities for business systems, in May 2004
we reported17 that DOD had not yet defined the detailed procedures
necessary for implementing the policy, clearly defined the roles and
responsibilities of the business domain owners (now referred to as core
business mission areas), established common investment criteria, or
ensured that its business systems are consistent with the architecture.

To address certain provisions and requirements of the Ronald W. Reagan
National Defense Authorization Act for Fiscal Year 2005,18 on March 24,

14GAO-01-525.

15Ronald W. Reagan National Defense Authorization Act for Fiscal Year
2005, Pub. L. No. 108-375, S:332, 118 Stat. 1811, 1851 (Oct. 28, 2004)
(codified, in part, at 10 U.S.C. S:S:186, 2222).

16 GAO-04-731R.

17 GAO-04-731R.

18 10 U.S.C. S:2222.

2005, the Deputy Secretary of Defense directed the transfer of program
management, oversight, and support responsibilities regarding DOD business
transformation efforts from the Office of the Under Secretary of Defense,
Comptroller, to the Office of the Under Secretary of Defense for
Acquisition, Technology, and Logistics (OUSD(AT&L)). According to the
directive, this transfer of functions and responsibilities will allow the
OUSD(AT&L) to establish the level of activity necessary to support and
coordinate activities of the newly established Defense Business Systems
Management Committee (DBSMC). As required by the Act, the DBSMC, with
representation including the Deputy Secretary of Defense, the designated
approval authorities,19 and secretaries of the military services and heads
of the defense agencies, is the highest ranking governance body
responsible for overseeing DOD business systems modernization efforts.
While this committee may serve as a useful planning and coordination
forum, it is important to remember that committees and task forces do not
lead, people do. In addition, DOD still needs to designate a person to
have overall responsibility and accountability for this effort for a
sustained period of time. This person must have the background and
authority needed to successfully achieve the related objectives for
business systems modernization efforts.

On March 19, 2005, the Deputy Secretary of Defense delegated the authority
for the review, approval, and oversight of the planning, design,
acquisition, development, operation, maintenance, and modernization of
defense business systems to the designated approval authority for each
business area.20 However, according to DOD's annual report to

19 The designated approval authorities are the Under Secretary of Defense
for Acquisition, Technology, and Logistics for business systems related to
acquisition, logistics and installations and environment; the Under
Secretary of Defense (Comptroller)for business systems related to
financial management and strategic planning and budgeting; the Under
Secretary of Defense for Personnel and Readiness for business systems
related to human resource management; and the Assistant Secretary of
Defense for Networks and Information Integration/Chief Information Officer
of the Department of Defense for business systems related to information
technology infrastructure or information assurance.

20 Approval authorities include the Under Secretary of Defense for
Acquisition, Technology, and Logistics; the Under Secretary of Defense
(Comptroller); the Under Secretary of Defense for Personnel and Readiness;
and the Assistant Secretary of Defense for Networks and Information
Integration/Chief Information Officer of the Department of Defense. These
approval authorities are responsible for the review, approval, and
oversight of business systems and must establish investment review
processes for systems under their cognizance.

congressional defense committees on the status of the department's
business management modernization program, DOD has not yet established
investment review boards below the DBSMC for each core business mission.
The statutory requirements enacted as part of the Ronald W. Reagan
National Defense Authorization Act for Fiscal Year 200521 further require
that the DBSMC must agree with the designated approval authorities'
certification of funds exceeding $1 million for the modernization of
business systems before funds can be obligated. More importantly, the
obligation of these funds without the requisite approval by the DBSMC is
deemed a violation of the Anti-Deficiency Act.22

As DOD develops a comprehensive, integrated business transformation plan,
such a plan must include an approach to resolve the business systems
modernization problems. We were recently briefed on the department's
conceptual framework for business system modernization. While the
framework has merit and is a good first step, the department will need to
translate its framework into a comprehensive and integrated plan of
action. This plan should include priorities, key stakeholders, timeframes,
and accountability and it should be linked to institutional, unit, and
individual reward systems. To this end, it is critical that DOD provide
the implementation of our many business systems modernization-related
recommendations in this plan.

Financial Management 	The fifth high-risk area is DOD's financial
management program, which we first designated as high risk in 1995. As I
testified before the House Committee on Government Reform in February
2005,23 and as discussed in our report on the U.S. government's
consolidated financial statements for fiscal year 2004,24 DOD's financial
management deficiencies, taken together, represent a major impediment to
achieving an unqualified opinion

21Pub. L. No. 108-875, S: 332, 118 Stat. 1811, 1854 (Oct. 28, 2004)
(codified at 10 U.S.C. S: 2222 (a)(2)).

2231 U.S.C. S:1341(a)(1)(A); see 10 U.S.C. S: 2222(b).

23GAO, Fiscal Year 2004 U.S. Government Financial Statements: Sustained
Improvement in Federal Financial Management Is Crucial to Addressing Our
Nation's Future Fiscal Challenges, GAO-05-284T (Washington, D.C.: Feb. 9,
2005).

24For our report on the U.S. government's consolidated financial
statements for fiscal year 2004, see U.S. Department of the Treasury,
Financial Report on the United States Government (Washington, D.C.:
December 2004), 33-53, which can be found on GAO's Web site at
www.gao.gov.

on the U.S. government's consolidated financial statements. DOD continues
to face financial management problems that are pervasive, complex,
long-standing, and deeply rooted in virtually all of its business
operations. DOD's financial management deficiencies adversely affect the
department's ability to control costs, ensure basic accountability,
anticipate future costs and claims on the budget, measure performance,
maintain funds control, prevent fraud, and address pressing management
issues.

Our recent reports and testimonies on Army reserve and national guard pay
issues clearly illustrate the impact deficiencies in DOD's financial
management have had on the very men and women our country is depending on
to perform our military operations. For example, in February 2005, we
reported that the Army's process for extending active duty orders for
injured soldiers lacks an adequate control environment and management
controls25-including (1) clear and comprehensive guidance, (2) a system to
provide visibility over injured soldiers, and (3) adequate training and
education programs. The Army also has not established userfriendly
processes-including clear approval criteria and adequate infrastructure
and support services.

Poorly defined processes for extending active duty orders for injured and
ill reserve component soldiers have caused soldiers to be inappropriately
dropped from their active duty orders. For some, this has led to
significant gaps in pay and health insurance, which has created financial
hardships for these soldiers and their families. Based on our analysis of
Army manpower data during the period from February 2004 through April 7,
2004, almost 34 percent of the 867 soldiers who applied for extension of
active duty orders-because of injuries or illness-lost their active duty
status before their extension requests were granted. For many soldiers,
this resulted in being removed from active duty status in the automated
systems that control pay and access to benefits such as medical care and
access to a commissary or post exchange that allows soldiers and their
families to purchase groceries and other goods at a discount. Many Army
locations have used ad hoc procedures to keep soldiers in pay status;
however, these procedures often circumvent key internal controls and put
the Army at risk of making improper and potentially fraudulent payments.
Finally, the Army's nonintegrated systems, which require extensive
error-prone manual data entry, further delay access to pay and benefits.

25GAO, Military Pay: Gaps in Pay and Benefits Create Financial Hardships
for Injured Army National Guard and Reserve Soldiers, GAO-05-125
(Washington, D.C.: Feb. 17, 2005).

The Army recently implemented the Medical Retention Processing (MRP)
program, which takes the place of the previously existing process in most
cases. The MRP program, which authorizes an automatic 179 days of pay and
benefits, may resolve the timeliness of the front-end approval process.
However, the MRP program has some of the same problems as the existing
process and may also result in overpayments to soldiers who are released
early from their MRP orders.

DOD's senior civilian and military leaders have taken positive steps to
begin reforming the department's financial management operations. However,
to date, tangible evidence of improvement has been seen in only a few
specific areas, such as internal controls related to DOD's purchase card
and individually billed travel card programs. Further, we reported in
September 200426 that while DOD had established a goal of obtaining a
clean opinion on its financial statements by 2007, it lacked a written and
realistic plan to make that goal a reality. DOD's continuing, substantial
financial management weaknesses adversely affect its ability to produce
auditable financial information as well as provide accurate and timely
information for management and Congress to use in making informed
decisions.

Overhauling the financial management and related business operations of
one of the largest and most complex organizations in the world represents
a daunting challenge. Such an overhaul of DOD's financial management
operations goes far beyond financial accounting to the very fiber of the
department's wide-ranging business operations and its management culture.
It will require (1) sustained leadership and resource control, (2) clear
lines of responsibility and accountability, (3) plans and related
results-oriented performance measures, and (4) appropriate individual and
organizational incentives and consequences. DOD is still in the very early
stages of a departmentwide overhaul that will take years to accomplish.
DOD has not yet established a framework to integrate improvement efforts
in this area with related broad-based DOD initiatives, such as human
capital reform. However, successful, lasting reform in this area will only
be possible if implemented as part of a comprehensive and integrated
approach to transforming all of DOD's business operations.

26GAO, 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).

Weapon Systems Acquisition	The sixth high-risk area is DOD's acquisition
of weapon systems. We designated this as a high-risk area in 1990, and it
remains so today. While DOD's acquisition process has produced the best
weapons in the world, it also consistently yields undesirable
consequences-such as cost increases, late deliveries to the warfighter,
and performance shortfalls. Such problems were highlighted, for example,
in our reviews of DOD's F/A-22 Raptor, Space-Based Infrared System,
Airborne Laser, and other programs. Problems occur because DOD's weapon
programs do not capture early on the requisite knowledge that is needed to
efficiently and effectively manage program risks. For example, programs
move forward with unrealistic program cost and schedule estimates, lack
clearly defined and stable requirements, use immature technologies in
launching product development, and fail to solidify design and
manufacturing processes at appropriate junctures in development.

When programs require more resources than planned, the buying power of the
defense dollar is reduced and funds are not available for other competing
needs. It is not unusual for estimates of time and money to be off by 20
to 50 percent. When costs and schedules increase, quantities are cut and
the value for the warfighter-as well as the value of the investment
dollar-is reduced. In these times of asymmetric threats and netcentricity,
individual weapon system investments are getting larger and more complex.
Just 4 years ago, the top five weapon systems cost about $281 billion;
today, in the same base year dollars, the five weapon systems cost about
$521 billion. If these megasystems are managed with traditional margins of
error, the financial consequences-particularly the ripple effects on other
programs-can be dire.

While weapon systems acquisition continues to remain on our high-risk
list, DOD has undertaken a number of acquisition reforms over the past 5
years. Specifically, DOD has restructured its acquisition policy to
incorporate attributes of a knowledge-based acquisition model and has
reemphasized the discipline of systems engineering. In addition, DOD
recently introduced new policies to strengthen its budgeting and
requirements determination processes in order to plan and manage weapon
systems based on joint warfighting capabilities. While these policy
changes are positive steps, implementation in individual programs will
continue to be a challenge because of inherent funding, management, and
cultural factors that lead managers to develop business cases for new
programs that over-promise on cost, delivery, and performance of weapon
systems.

It is imperative that needs be distinguished from wants and that DOD's
limited resources be allocated to the most appropriate weapon system
investments. Once the best investments that can be afforded are
identified, then DOD must follow its own policy to employ the
knowledge-based strategies essential for delivering the investments within
projected resources. Making practice follow policy is not a simple matter.
It is a complex challenge involving many factors. One of the most
important factors is putting the right managers in their positions long
enough so that they can be both effective and accountable for getting
results.

Contract Management	The seventh high-risk area is DOD's contract
management program, which we designated as a high-risk area in 1992. DOD,
the government's largest purchaser at over $200 billion in fiscal year
2003, is unable to assure that it is using sound business practices to
acquire the goods and services needed to meet the warfighter's needs. For
example, over the past decade DOD has significantly increased its spending
on contractor-provided information technology and management support
services, but it has not yet fully implemented a strategic approach to
acquiring these services. In 2002, DOD and the military departments
established a structure to review individual service acquisitions valued
at $500 million or more, and in 2003 they launched a pilot program to help
identify strategic sourcing opportunities. To further promote a strategic
orientation, however, DOD needs to establish a departmentwide concept of
operations; set performance goals, including savings targets; and ensure
accountability for achieving them. In March 2004, we reported that if
greater management focus were given to opportunities to capture savings
through the purchase card program, DOD could potentially save tens of
millions of dollars without sacrificing the ability to acquire items
quickly or compromising other goals.27

DOD also needs to have the right skills and capabilities in its
acquisition workforce to effectively implement best practices and properly
manage the goods and services it buys. However, DOD reduced its civilian
workforce by about 38 percent between fiscal years 1989 and 2002 without
ensuring that it had the specific skills and competencies needed to
accomplish current and future DOD missions, and more than half of its
current workforce will be eligible for early or regular retirement in the
next 5 years. We found that inadequate staffing and the lack of clearly
defined roles and responsibilities contributed to contract administration
challenges

27GAO, Contract Management: Agencies Can Achieve Significant Savings on
Purchase Card Buys, GAO-04-430 (Washington, D.C., Mar. 12, 2004).

encountered in Operation Iraqi Freedom (OIF).28 Further, we have reported
that DOD's extensive use of military logistical support contracts in OIF
and elsewhere required strengthened oversight.29 Just recently, we
identified surveillance issues in almost a third of the contracts we
reviewed. We also noted that some personnel performing surveillance had
not received required training, while others felt that they did not have
sufficient time in a normal workday to perform their surveillance
duties.30 DOD has made progress in laying a foundation for reshaping its
acquisition workforce by initiating a long-term strategic planning effort,
but as of June 2004 it did not yet have the comprehensive strategic
workforce plan needed to guide its efforts.

DOD uses various techniques-such as performance-based service contracting,
multiple-award task order contracts, and purchase cards-to acquire the
goods and services it needs. We have found, however, that DOD personnel
did not always make sound use of these tools. For example, in June 2004,
we reported that more than half of the task orders to support Iraq
reconstruction efforts we reviewed were, in whole or in part, outside the
scope of the underlying contract.31 In July 2004, we found that DOD
personnel waived competition requirements for nearly half of the task
orders reviewed.32 As a result of the frequent use of waivers, DOD had
fewer opportunities to obtain the potential benefits of competition-
improved levels of service, market-tested prices, and the best overall
value. We also found that DOD lacked safeguards to ensure that waivers
were granted only under appropriate circumstances.

Our work has shown that DOD would benefit by making use of commercial best
practices, such as taking a strategic approach to acquiring services;

28GAO, Rebuilding Iraq: Fiscal Year 2003 Contract Award Procedures and
Management Challenges, GAO-04-605 (Washington, D.C.: June 1, 2004).

29GAO, Military Operations: DOD's Extensive Use of Logistics Support
Contracts Requires Strengthened Oversight, GAO-04-854 (Washington, D.C.:
July 19, 2004); and Defense Logistics: High-Level DOD Coordination Is
Needed to Further Improve the Management of the Army's LOGCAP Contract,
GAO-05-328 (Washington, D.C.: Mar. 21, 2005).

30GAO, Contract Management: Opportunities to Improve Surveillance on
Department of Defense Service Contracts, GAO-05-274 (Washington, D.C. Mar.
17, 2005).

31GAO-04-605.

32GAO, Contract Management: Guidance Needed to Promote Competition for
Defense Task Orders, GAO-04-874 (Washington, D.C.: July 30, 2004).

building on initial efforts to develop a strategic human capital plan for
its civilian workforce; and improving safeguards, issuing additional
guidance, and providing training to its workforce on the appropriate use
of contracting techniques and approaches.33 DOD is undertaking corrective
actions, but because most efforts are in their early stages, it is
uncertain whether they can be fully and successfully implemented in the
near term. A key to resolving DOD's contract management issues will be
addressing them as part of a comprehensive and integrated business
transformation plan.

Supply Chain Management	The eighth high-risk area is DOD's supply chain
management program. In 1990, we identified DOD's inventory management as a
high-risk area because inventory levels were too high and the supply
system was not responsive to the needs of the warfighter. We have since
expanded the inventory management high-risk area to include DOD's
management of certain key aspects of its supply chain, including
distribution, inventory management, and asset visibility, because of
significant weaknesses we have uncovered since our 2003 high-risk series
was published. For example, during OIF, the supply chain encountered many
problems, including backlogs of hundreds of pallets and containers at
distribution points, a $1.2 billion discrepancy in the amount of material
shipped to-and received by-Army activities, cannibalized equipment because
of a lack of spare parts, and millions of dollars spent in late fees to
lease or replace storage containers because of distribution backlogs and
losses. Moreover, we identified shortages of items such as tires, vehicle
track shoes, body armor, and batteries for critical communication and
electronic equipment. These problems were the result of systemic
deficiencies in DOD's supply chain, including inaccurate requirements,
funding delays, acquisition delays, and ineffective theater distribution.

While DOD reports show that the department currently owns about $67
billion worth of inventory, shortages of certain critical spare parts are
adversely affecting equipment readiness and contributing to maintenance
delays. The Defense Logistics Agency (DLA) and each of the military
services have experienced significant shortages of critical spare parts,
even though more than half of DOD's reported inventory-about $35 billion-

33GAO, Best Practices: Improved Knowledge of DOD Service Contracts Could
Reveal Significant Savings, GAO-03-661 (Washington, D.C.: June 9, 2003);
and Best Practices: Taking a Strategic Approach Could Improve DOD's
Acquisition of Services, GAO-02-230 (Washington, D.C.: Jan. 18, 2002).

exceeded current operating requirements. In many cases, these shortages
contributed directly to equipment downtime, maintenance problems, and the
services' failure to meet their supply availability goals. DOD, DLA, and
the military services each lack strategic approaches and detailed plans
that could help mitigate these critical spare parts shortages and guide
their many initiatives aimed at improving inventory management.

DOD's continued supply chain problems also resulted in shortages of items
in Iraq. In an April 8, 2005, report, we reported that demands for items
like vehicle track shoes, batteries, and tires exceeded their availability
because the department did not have accurate or adequately funded Army war
reserve requirements and had inaccurate forecasts of supply demands for
the operation.34 Furthermore, the Army's funding approval process delayed
the flow of funds to buy them. Meanwhile, rapid acquisition of other items
faced obstacles. Body armor production was limited by the availability of
Kevlar and other critical materials, whereas the delivery of up-armored
High Mobility Multi-Purpose Wheeled Vehicles and armor kits was slowed by
DOD's decisions to pace production. In addition, numerous problems, such
as insufficient transportation, personnel, and equipment, as well as
inadequate information systems, hindered DOD's ability to deliver the
right items to the right place at the right time for the warfighter. Among
the items the department had problems delivering were generators for
Assault Amphibian Vehicles, tires, and Meals Ready-to-Eat.

In addition to supply shortages, DOD also lacks visibility and control
over the supplies and spare parts it owns. Therefore, it cannot monitor
the responsiveness and effectiveness of the supply system to identify and
eliminate choke points.35 Currently, DOD does not have the ability to
provide timely or accurate information on the location, movement, status,
or identity of its supplies. Although total asset visibility has been a
departmentwide goal for over 30 years, DOD estimates that it will not
achieve this visibility until the year 2010. DOD may not meet this goal by
2010, however, unless it overcomes three significant impediments:
developing a comprehensive plan for achieving visibility, building the
necessary integration among its many inventory management information

34GAO, Defense Logistics: Actions Needed to Improve the Availability of
Critical Items during Current and Future Operations, GAO-05-275
(Washington, D.C.: Apr. 8, 2005).

35GAO, Defense Inventory: Improvements Needed in DOD's Implementation of
Its Long-Term Strategy for Total Asset Visibility of Its Inventory,
GAO-05-15 (Washington, D.C.: Dec. 6, 2004).

systems, and correcting long-standing data accuracy and reliability
problems within existing inventory management systems.

DOD, DLA, and the services have undertaken a number of initiatives to
improve and transform DOD's supply chain. Many of these initiatives were
developed in response to the logistics problems reported during OIF. While
these initiatives represent a step in the right direction, the lack of a
comprehensive, departmentwide logistics reengineering strategy to guide
their implementation may limit their overall effectiveness. A key to
successful implementation of a comprehensive logistics strategy will be
addressing these initiatives as part of a comprehensive, integrated
business transformation.

DOD Management Weaknesses Contribute to Governmentwide High-Risk Areas

Strategic Human Capital Management

I would now like to spend a few minutes discussing the six governmentwide
high-risk areas where DOD shares responsibility with other federal
agencies. First, I would like to provide our preliminary observations on
DOD's attempt to address a critically important governmentwide high-risk
area-strategic human capital management- through its new human resources
management system, the National Security Personnel System (NSPS). I also
will briefly discuss DOD's need to address five additional governmentwide
high-risk challenges as part of the transformation of its business
management practices.

Successful implementation of NSPS is essential for DOD as it attempts to
transform its military forces and defense business practices in response
to 21st century challenges. In addition, this new human resource
management system, if properly designed and effectively implemented, could
serve as a model for governmentwide human capital transformation. DOD is
one of several federal agencies that has been granted the authority by
Congress to design a new human capital system as a way to address the
first governmentwide high-risk area, strategic human capital management.
This effort represents a huge undertaking for DOD, given its massive size
and geographically and culturally diverse workforce. As I recently
testified on DOD's proposed NSPS regulations,36 our ongoing work continues
to raise questions about DOD's chances of success in its efforts to effect
fundamental business management reform, such as NSPS. I would like to

36GAO, Human Capital: Preliminary Observations on Proposed DOD National
Security Personnel System Regulations, GAO-05-432T (Washington, D.C.: Mar.
15, 2005).

acknowledge, however, that DOD's NSPS regulations take a valuable step
toward a modern performance management system as well as a more
market-based and results-oriented compensation system.

On February 14, 2005, the Secretary of Defense and the Acting Director of
OPM released the proposed NSPS regulations for public comment. Many of the
principles underlying those regulations are generally consistent with
proven approaches to strategic human capital management. For instance, the
proposed regulations provide for (1) elements of a flexible and
contemporary human resources management system, such as pay bands and pay
for performance; (2) rightsizing of DOD's workforce when implementing
reduction-in-force orders by giving greater priority to employee
performance in its retention decisions; and (3) continuing collaboration
with employee representatives. (It should be noted, however, that 10
federal labor unions have filed suit alleging that DOD failed to abide by
the statutory requirements to include employee representatives in the
development of DOD's new labor relations system authorized as part of
NSPS.)

Despite this progress, we have three primary areas of concern about the
proposed NSPS regulations. DOD's proposed regulations do not (1) define
the details of the implementation of the system, including such issues as
adequate safeguards to help ensure fairness and guard against abuse; (2)
require, as we believe they should, the use of core competencies to
communicate to employees what is expected of them on the job; and (3)
identify a process for the continuing involvement of employees in the
planning, development, and implementation of NSPS.

DOD also faces multiple implementation challenges once it issues its final
NSPS regulations. Given the huge undertaking NSPS represents, another
challenge is to elevate, integrate, and institutionalize leadership
responsibility for this large-scale organizational change initiative to
ensure its success. A chief management official or similar position can
effectively provide the continuing, focused leadership essential to
successfully completing these multiyear transformations. Additionally, DOD
could benefit if it develops a comprehensive communications strategy that
provides for ongoing, meaningful two-way communication to create shared
expectations among employees, employee representatives, managers,
customers, and stakeholders. Finally, appropriate institutional
infrastructure could enable DOD to make effective use of its new
authorities. At a minimum, this infrastructure includes a human capital
planning process that integrates DOD's human capital policies, strategies,

and programs with its program goals, mission, and desired outcomes; the
capabilities to effectively develop and implement a new human capital
system; and a set of adequate safeguards-including reasonable transparency
and appropriate accountability mechanisms-to help ensure the fair,
effective, and credible implementation and application of a new system.

We strongly support the need for government transformation and the concept
of modernizing federal human capital policies within both DOD and the
federal government at large. There is general recognition that the federal
government needs a framework to guide human capital reform. Such a
framework would consist of a set of values, principles, processes, and
safeguards that would provide consistency across the federal government
but be adaptable to agencies' diverse missions, cultures, and workforces.

Other Related Governmentwide In addition to the governmentwide human
capital high-risk area, DOD

High-Risk Areas	shares responsibility for five other high-risk areas.
These areas are managing federal real property, protecting federal
information systems and the nation's critical infrastructure, establishing
appropriate and effective information-sharing mechanisms to improve
homeland security, modernizing federal disability programs, and managing
interagency contracting more effectively.

o 	Managing federal real property: In January 2003, we designated federal
real property as a high-risk area due to long-standing problems with
excess and underutilized property, deteriorating facilities, unreliable
real property data, and costly space challenges. To better manage federal
real property, DOD is preparing for a round of base realignments and
closures (BRAC) in 2005 to eliminate excess physical capacity and
rationalize its infrastructure with the defense strategy. For BRAC 2005,
we will continue to serve as an independent and objective observer of the
process and will assess and report on DOD's decisionmaking processes
leading up to the proposed realignment and closure recommendations. From
our vantage point, we will determine to what extent DOD follows a clear,
transparent, consistently applied process- one where we can see a logical
flow between DOD's analysis and its decision making. Although we do not
attend or participate in deliberative meetings involving BRAC, we are
permitted access to the minutes of these meetings and to officials
involved in the process.

o 	Protecting federal information systems and the nation's critical
infrastructure: Although DOD has made some improvements, significant
information security weaknesses at DOD as well as other federal agencies
continue to place a broad array of federal operations and assets at risk
of fraud, misuse, and disruption. In November 2002, for example, a British
computer administrator was indicted on charges that he accessed and
damaged 98 computers in 14 states from March 2001 through March 2002,
causing some $900,000 in damage to the computers. The attacks rendered the
networks of the Earle Naval Weapons Station in New Jersey and the Military
District of Washington inoperable. We reported in 2003 that DOD had
undertaken a defensewide information assurance program to promote
integrated, comprehensive, and consistent practices across the department
to prevent similar attacks on its information systems and had recently
issued policy guidance and implementation instructions.37 However, we
found that DOD did not have mechanisms in place for comprehensively
measuring compliance with federal and department information security
policies and ensuring that those policies are consistently practiced
throughout DOD. In fact, DOD reported several material control weaknesses,
which included needing to decrease the time necessary for correcting
reported weaknesses and ensuring that computer security policies were
enforced and security capabilities were tested regularly.

o 	Establishing appropriate and effective information sharing mechanisms
to improve homeland security: Recent events and changes in the overall
security environment have served to reinforce the importance of having
appropriate and effective information and knowledge-sharing mechanisms in
place that cross organizational, geographic, and sectoral boundaries.
Progress has been made since the tragic events of September 11, 2001, but
much remains to be done. Achieving success in this area will involve the
combined efforts of many agencies, including DOD, as well as a range of
other key players.

o 	Modernizing federal disability programs: Our work examining federal
disability programs has found that these programs are neither well aligned
with 21st century realities nor positioned to provide meaningful and
timely support for Americans with disabilities. Since

37GAO, Information Security: Further Efforts Needed to Fully Implement
Statutory Requirements in DOD, GAO-03-1037T (Washington, D.C.: July 24,
2003).

GAO designated this area as high risk in 2003, the Department of Veterans
Affairs (VA) and the Social Security Administration (SSA) have made some
progress toward improving their disability programs. However, both VA and
SSA still have difficulties managing their disability programs. They
experience lengthy processing times for disability claims and lack a clear
understanding of the extent of possible inconsistencies in their
disability decisions. Furthermore, these programs remain grounded in
outmoded concepts of disability that have not been updated to reflect the
current state of science, medicine, technology, and labor market
conditions.

The U.S. government is faced with the return of more than 10,000
servicemembers who have sustained combat-related injuries in the current
conflicts in Afghanistan and Iraq. Reassessing the impact of disabilities
on their work capacity is especially important in light of recent advances
in medicine and improved prosthetics, which have enabled some service
members to return to active duty. This example illustrates the potential
for better aligning federal disability programs with social changes that
focus on supporting the work capacities of all people with disabilities.
In light of the projected shrinkage of the workforce, focusing on work
capacity is becoming increasingly important for the U.S. economy.

The last two National Defense Authorization Acts afford us an opportunity
to develop information and analysis that could be used to reassess the
basis for current federal disability policies. The National Defense
Authorization Act for Fiscal Year 2004 established the Veterans'
Disability Benefits Commission.38 This commission is charged with studying
the benefits provided to compensate and assist veterans who suffer
disabilities attributable to military service, and their survivors.39 The
law requires the commission to study, among other things, the
appropriateness of such benefits, the appropriate standard for determining
whether a veteran's disability should be compensated, and the
appropriateness of a schedule for rating disabilities based on average
impairment of earning capacity. The Ronald W. Reagan National Defense
Authorization Act for Fiscal Year 2005 mandated a GAO study of the
disability benefits that are payable under federal, state, and local

38 Pub. L. No. 108-136, S: 1501, 117 Stat. 1392, 1677 (Nov. 24, 2003). 39
S: 1502.

laws to federal, state, and local government employees.40 To the extent
feasible, the study is to focus on benefits for disabilities incurred in
the performance of jobs in which employees perform tasks with risks that
are analogous to the risks associated with the performance of military
tasks by members of the armed forces. In addition, DOD is mandated to
study the adequacy of current and projected disability benefits that are
available to disabled members and former members of the armed forces for
service-connected disabilities,41 including a comparison of the disability
benefits for members of the armed forces with commercial and other private
sector disability benefits. We believe these studies should provide
important information and analysis for deliberations on more fundamental
reform of the design, cost, and feasibility of federal disability
programs.

o 	Managing interagency contracting: In recent years, federal agencies
have been making a major shift in the way they procure many goods and
services. Rather than spending a great deal of time and resources
contracting for goods and services themselves, they are making greater use
of existing contracts already awarded by other agencies, in particular for
buying services. These contracts are designed to leverage the government's
aggregate buying power and provide a much-needed simplified method for
procuring commonly used goods and services. These contract vehicles offer
the benefits of improved efficiency and timeliness; however, they need to
be effectively managed. Our work and that of some agency inspectors
general has revealed instances of improper use of interagency contracts.
For example, we recently reviewed selected DOD contracts and task orders
for Iraq reconstruction and found some task orders under the General
Services Administration (GSA) schedules program that did not satisfy legal
requirements for competition because the work was not within the scope of
the underlying contracts.42 More broadly, the GSA Inspector General
conducted a comprehensive review of the contracting activities of GSA's
Federal Technology Service, an entity that provides contracting services
for agencies across the government, and reported that millions of dollars
in fiscal year 2003 awards did not comply with laws and regulations.

40Pub. L. No. 108-375, S: 666(d).
41S: 666(a).
42GAO-04-605.

Administration officials have acknowledged that the management of
interagency contracting needs to be improved. As the largest customer for
interagency contracts, it is particularly important that DOD successfully
tackle the challenge of better managing its use of interagency contracts.
We have reported on challenges DOD has faced in using interagency
contracts. For example, we found that DOD waived competition requirements
for a significant percentage of supply schedule orders we reviewed,
frequently based on an expressed preference to retain the services of
incumbent contractors.43 DOD concurred with our recommendations to develop
guidance for the conditions under which waivers of competition may be
used, require documentation to support waivers, and establish approval
authority based on the value of the orders.

In conjunction with the OMB and GSA, DOD is taking a number of
steps-including developing new skills assessments, setting standards for
the acquisition workforce, and coordinating training programs aimed at
improving the capacity of the federal acquisition workforce-to properly
handle the growing and more complex workload of service acquisitions. DOD
also has recently issued a new policy designed to improve oversight of its
use of other agencies' contracts.

Need for Risk Management Approaches Is an Emerging Concern

In addition to specific areas that we have designated as high risk, there
are other important broad-based challenges facing our government that are
serious and merit continuing close attention. One emerging area of concern
involves the need for instilling a disciplined approach within DOD, as
well as other agencies, for identifying and managing risk across a wide
range of programs, operations, and functions. As a framework for decision
making, we have advocated a comprehensive threat and risk management
approach that fully links strategic goals to plans and budgets, assesses
the values and risks of various courses of action as a tool for setting
priorities and allocating resources, and provides for the use of
performance measures to assess outcomes.

Emerging requirements from the changing security environment, coupled with
increasingly limited fiscal resources across the federal government,
emphasize the need for DOD to develop and use a risk-based strategic

43GAO-04-874.

framework for establishing realistic goals, evaluating and setting
priorities, and making difficult resource decisions.

In its strategic plan, the September 2001 Quadrennial Defense Review, DOD
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, these risk areas are to form
the basis for DOD's annual performance goals. They are to be used to track
performance results and link to planning and resource decisions. We
recognize what a large undertaking developing a departmentwide risk
management framework will be and understand that DOD is still in the
process of implementing this approach. However, it remains unclear how DOD
will use this risk management framework to measure progress in achieving
business and force transformation. It also remains unclear how the
framework will be used to correct limitations we have previously
identified in DOD's strategic planning and budgeting, including the use of
overly optimistic assumptions in estimating funding needs, which often
result in a mismatch between programs and budgets. We are currently
monitoring DOD's efforts to implement its risk management framework.

  Sound Strategic Planning, Centralized Control over Business Systems
  Investments, and Sustained Leadership Are Key to Successfully Addressing DOD's
  High-Risk Areas

Although DOD has a number of initiatives to address its high-risk areas,
we believe that DOD must fundamentally change its approach to the overall
business transformation effort before it is likely to succeed. We believe
there are three critical elements of successful transformation-developing
and implementing an integrated strategic and action plan along with an
enterprise architecture to guide and constrain implementation of such a
plan, establishing central control over systems investment funds, and
providing sustained leadership. To ensure these elements are incorporated
into the department's overall business management, we believe Congress
should legislatively create a full-time, high-level executive with
long-term "good government" responsibilities that are professional and
nonpartisan in nature. This executive should have appropriate authority
over all of DOD's business operations, as well as central control of all
business transformation-related funding with the designated approval
authorities assigned responsibility for transformation activities within
their specific business process areas.

Reform Efforts Must Include an Integrated, Comprehensive Strategic Plan

Our prior work indicates that agencies that are successful in achieving
business management transformation undertake strategic planning and strive
to establish goals and measures that align at all levels of the agency.44
The lack of a comprehensive and integrated strategic and action plan
linked with performance goals, objectives, and rewards has been a
continuing weakness in DOD's business management transformation. Since
1999, for example, we have recommended that a comprehensive and integrated
strategy and action plan be developed for reforming DOD's major business
operations and support activities.45 In 2004, we suggested that DOD
clearly establish management accountability for business reform.46 While
DOD has been attempting to develop an enterprise architecture for
modernizing its business processes and supporting information technology
assets for the last 4 years, it has not developed a comprehensive and
integrated strategy or action plan for managing its many business
improvement initiatives. Nor has DOD assigned overall management
responsibility and accountability for such an effort. Unless these
initiatives are addressed in a unified and timely fashion, DOD will
continue to see billions of dollars, which could be directed to other
higher priorities, wasted annually to support inefficiencies in its
business functions.

At a programmatic level, the lack of clear, comprehensive, and integrated
performance goals and measures has handicapped DOD's past reform efforts.
For example, we reported in May 200447 that the lack of performance
measures for DOD's business management transformation
initiative-encompassing defense policies, processes, people, and
systems-made it difficult to evaluate and track specific program progress,
outcomes, and results. As a result, DOD managers lacked straightforward
road maps showing how their work contributed to attaining the department's
strategic goals, and they risked operating autonomously rather than
collectively.

44GAO, Defense Management: Tools for Measuring and Managing Defense Agency
Performance Could Be Strengthened, GAO-04-919 (Washington, D.C.: Sept. 13,
2004).

45 GAO, Defense Reform Initiative: Organization, Status, and Challenges,
GAO/NSIAD-9987 (Washington, D.C.: Apr. 21, 1999).

46GAO-04-551T.

47GAO-04-731R.

Finally, DOD has not established a clear linkage among institutional,
unit, and individual results-oriented goals, performance measures, and
reward mechanisms for undertaking large-scale organizational change
initiatives that are needed for successful business management reform.
Traditionally, DOD has justified its need for more funding on the basis of
the quantity of programs it has pursued 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
establishment of an integrated, comprehensive strategic plan could help
DOD address these systemic management problems.

Central Control over Business Systems Investment Funds Is Crucial

DOD's current business systems investment process, in which system funding
is 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 to improve the management oversight
and control of its business systems modernization investments. However, as
previously discussed, a provision of the Ronald W. Reagan National Defense
Authorization Act for Fiscal Year 2005,48 consistent with the suggestion I
have made in prior testimonies,49 established specific management
oversight and accountability with the "owners" of the various core
business mission areas. This 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 core business mission areas 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.

48Pub. L. No. 108-375, S:332.

49GAO-04-551T; and GAO, Department of Defense: Further Actions Needed to
Establish and Implement a Framework for Successful Business
Transformation, GAO-04-626T (Washington, D.C.: Mar. 31, 2004).

This legislation also requires that the responsible approval authorities
establish a hierarchy of investment review boards, the highest level being
the DBSMC, 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 business enterprise
architecture. However, as I pointed out earlier, DOD has not yet
established the lowerlevel investment review boards as required by the
legislation.

Although this recently enacted legislation clearly defines the roles and
responsibilities of business systems investment approval authorities,
control over the budgeting for and execution of funding for systems
investment activities 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 those
responsible for business systems improvements control the allocation and
execution of funds for DOD business systems. However, implementation may
require review of the various statutory authorities for the military
services and other DOD components. Control over business systems
investment funds would improve the capacity of DOD's designated approval
authorities to fulfill their responsibilities and gain 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 systems modernization efforts with a chief
management official (CMO) who would chair the DBSMC. Cognizant business
area approval authorities would also be required to report to Congress
through a CMO and the Secretary of Defense on applicable business systems
that are not compliant with review requirements and to include a summary
justification for noncompliance.

Chief Management Official As DOD embarks on large-scale organizational
change initiatives, such as Is Essential for Sustained business management
transformation, the complexity and long-term nature Leadership of Business
of these initiatives requires the development of an executive position

capable of providing strong and sustained leadership-over a number of

Management Reform	years and various administrations. 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 CMO, who would
serve as the Deputy

Secretary of Defense for Management. This position would elevate,
integrate, and institutionalize the attention 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 management reforms within DOD.

The day-to-day demands placed on the Secretary of Defense, 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 and their overall
level within the department 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. A CMO could provide the sustained and focused leadership
that these other top officials are unable to provide.

If created, the new 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 would help to create
unambiguous expectations and underscore Congress's desire to follow a
professional, nonpartisan approach to the position. In that regard, an
individual appointed to the CMO position 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 DOD and serve as an integrator for DOD's needed
business transformation efforts. Further, to improve coordination and
integration activities, we suggest that all business systems modernization
approval authorities designated in the Ronald W. Reagan National Defense
Act of 200550 coordinate their efforts with the CMO, who would chair the
Defense Business Systems Management Committee that DOD recently
established to comply with the act. Cognizant business area approval
authorities would also be required to report to Congress through the CMO
and the Secretary of Defense on applicable business systems that are not
compliant with review requirements and include a summary justification for
noncompliance. In

5010 U.S.C. S: 222(f).

addition, the CMO 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 toward achieving agreed-upon
goals would be a basis for determining the level of compensation earned,
including any related bonus. In addition, the CMO's achievements and
compensation would be reported to Congress each year.

Mr. Chairman and Members of the Subcommittee, this concludes my prepared
statement. I would be happy to answer any questions you may have at this
time.

This is a work of the U.S. government and is not subject to copyright
protection in the United States. It may be reproduced and distributed in
its entirety without further permission from GAO. However, because this
work may contain copyrighted images or other material, permission from the
copyright holder may be necessary if you wish to reproduce this material
separately.

GAO's Mission	The Government Accountability Office, the audit, evaluation
and investigative arm of Congress, exists to support Congress in meeting
its constitutional responsibilities and to help improve the performance
and accountability of the federal government for the American people. GAO
examines the use of public funds; evaluates federal programs and policies;
and provides analyses, recommendations, and other assistance to help
Congress make informed oversight, policy, and funding decisions. GAO's
commitment to good government is reflected in its core values of
accountability, integrity, and reliability.

Obtaining Copies of The fastest and easiest way to obtain copies of GAO
documents at no cost

is through GAO's Web site (www.gao.gov). Each weekday, GAO postsGAO
Reports and newly released reports, testimony, and correspondence on its
Web site. To Testimony have GAO e-mail you a list of newly posted products
every afternoon, go to

www.gao.gov and select "Subscribe to Updates."

Order by Mail or Phone	The first copy of each printed report is free.
Additional copies are $2 each. A check or money order should be made out
to the Superintendent of Documents. GAO also accepts VISA and Mastercard.
Orders for 100 or more copies mailed to a single address are discounted 25
percent. Orders should be sent to:

U.S. Government Accountability Office 441 G Street NW, Room LM Washington,
D.C. 20548

To order by Phone:	Voice: (202) 512-6000 TDD: (202) 512-2537 Fax: (202)
512-6061

  To Report Fraud, Contact:
  Waste, and Abuse in Web site: www.gao.gov/fraudnet/fraudnet.htm

E-mail: [email protected] Programs Automated answering system: (800)
424-5454 or (202) 512-7470

Congressional	Gloria Jarmon, Managing Director, [email protected] (202)
512-4400 U.S. Government Accountability Office, 441 G Street NW, Room 7125

Relations Washington, D.C. 20548

Public Affairs	Paul Anderson, Managing Director, [email protected] (202)
512-4800 U.S. Government Accountability Office, 441 G Street NW, Room 7149
Washington, D.C. 20548
*** End of document. ***