Defense Management: Key Elements Needed to Successfully Transform
DOD Business Operations (28-APR-05, GAO-05-629T).		 
                                                                 
In addition to external security threats, our nation is 	 
threatened from within by growing fiscal imbalances. The	 
combination of additional demands for national and homeland	 
security resources, the long-term rate of growth of entitlement  
programs, and rising health care costs create the need to make	 
difficult choices about the affordability and sustainability of  
the recent growth in defense spending. At a time when the	 
Department of Defense (DOD) is challenged to maintain a high	 
level of military operations while competing for resources in an 
increasingly fiscally constrained environment, DOD's business	 
management weaknesses continue to result in billions in annual	 
waste, as well as reduced efficiencies and effectiveness.	 
Congress asked GAO to provide its views on (1) the fiscal trends 
that prompt real questions about the affordability and		 
sustainability of the rate of growth of defense spending, (2)	 
business management challenges that DOD needs to address to	 
successfully transform its business operations, and (3) key	 
elements for achievement of reforms. One key element would be to 
establish a full-time chief management official (CMO) to take the
lead in DOD for the overall business transformation effort. In	 
this regard, we support the need for legislation to create a CMO 
in DOD with "good government" responsibilities that are 	 
professional and nonpartisan in nature, coupled with an adequate 
term in office. 						 
-------------------------Indexing Terms------------------------- 
REPORTNUM:   GAO-05-629T					        
    ACCNO:   A22857						        
  TITLE:     Defense Management: Key Elements Needed to Successfully  
Transform DOD Business Operations				 
     DATE:   04/28/2005 
  SUBJECT:   Defense cost control				 
	     Financial management				 
	     Fiscal policies					 
	     Internal controls					 
	     Investment planning				 
	     Investments					 
	     Program evaluation 				 
	     Program management 				 
	     Risk management					 
	     Strategic planning 				 
	     Business operations				 
	     DOD Airborne Laser Program 			 
	     DOD National Security Personnel System		 
	     F-22 Raptor Aircraft				 
	     F/A-22 Aircraft					 
	     Space-Based Infrared System			 

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GAO-05-629T

United States Government Accountability Office

GAO Testimony

Before the Subcommittee on Oversight of Government Management, the Federal
Workforce, and the District of Columbia, Committee on Homeland Security
and Governmental Affairs, U.S. Senate

For Release on Delivery Expected at 2:00 p.m. EDT Thursday, April 28, 2005

DEFENSE MANAGEMENT

     Key Elements Needed to Successfully Transform DOD Business Operations

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

                                       A

GAO-05-629T

[IMG]

April 28, 2005

DEFENSE MANAGEMENT

Key Elements Needed to Successfully Transform DOD Business Operations

                                 What GAO Found

Our nation's current fiscal policy is on an imprudent and unsustainable
course and the projected fiscal gap is too great to be solved by economic
growth alone or by making modest changes to existing spending and tax
policies. In fiscal year 2004, DOD's spending represented about 51 percent
of discretionary spending, raising concerns about the affordability and
sustainability of the current growth in defense spending and requiring
tough choices about how to balance defense and domestic needs against
available resources and reasonable tax burdens.

GAO has reported that DOD continues to confront pervasive, decades-old
management problems related to business operations that waste billions of
dollars annually. As shown below, these management weaknesses cut across
all of DOD's major business areas. These areas, along with six
governmentwide areas that also apply to the department, mean that DOD is
responsible for 14 of 25 high-risk areas.

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.

To move forward, in our view, there are three key elements that DOD must
incorporate into its business transformation efforts to successfully
address its systemic business management challenges. First, these efforts
must include an integrated strategic plan, coupled with a well-defined
blueprint- referred to as a business enterprise architecture-to guide and
constrain implementation of such a plan. Second, central control of system
investments is crucial for successful business transformation. Finally, a
CMO is essential for providing the sustained leadership needed to achieve
lasting transformation. The CMO would not assume the day-to-day management
responsibilities of other DOD officials nor represent an additional
hierarchical layer of management, but rather would serve as a strategic
integrator who would lead DOD's overall business transformation efforts.
Additionally, a 7-year term would also enable the CMO to work with DOD
leadership across administrations to sustain the overall business
transformation effort.

                 United States Government Accountability Office

Mr. Chairman and Members of the Subcommittee:

I appreciate the opportunity to be here today to discuss business
transformation at the Department of Defense (DOD). At the onset, I would
like to thank the Subcommittee for its continued oversight of key
government operations and management issues, including DOD's related
activities. The active involvement of this Subcommittee is essential to
ultimately assuring DOD's continued progress in business transformation,
including human capital reform, while enhancing public confidence in DOD's
stewardship of the hundreds of billions of taxpayer funds it receives each
year. Senator Voinovich and Senator Akaka, along with Senator Ensign, I
would also like to commend your leadership in sponsoring proposed
legislation to establish a position at the highest levels of DOD that
would be accountable and responsible for overall business transformation
efforts-a position that we believe is critical to successfully
transforming DOD's business operations.

In addition to external security threats, our nation is threatened from
within by growing fiscal imbalances. Over the long term, the nation's
growing fiscal imbalance stems primarily from the aging of the population
and rising health care costs. These trends are compounded by the presence
of near-term deficits arising from new discretionary and mandatory
spending as well as lower revenues as a share of the economy.1 If left
unchecked, these fiscal imbalances will ultimately impede economic growth,
have an adverse effect on our future standard of living, and in due course
impact our ability to address key national and homeland security needs.
These factors create the need to make choices that will only become more
difficult the longer they are postponed. Among these difficult choices
will be decisions about the affordability and sustainability of the recent
growth in defense spending. In fiscal year 2004, DOD spending represented
20 percent of federal spending and 51 percent of discretionary spending.
Therefore, it is increasingly important that DOD gets the most from every
defense dollar and helps to assure that its funds are targeted to
addressing specific needs versus a long list of unaffordable and
unsustainable wants. The Secretary of Defense has estimated that improving
business operations could save 5 percent of DOD's annual budget, which,
based on the fiscal year 2004 budget, represents a savings of about $22
billion. It is also critically important to ensure that DOD's unmatched
military capabilities

1Funds for discretionary programs are provided in appropriation acts,
while funds for mandatory programs are controlled by funds other than
appropriations acts.

are supported by a sound management structure and systems designed to
support the warfighter in an economic, efficient, and effective manner.

At a time when DOD is challenged to maintain a high level of military
operations while competing for resources in an increasingly fiscally
constrained environment, DOD's business management weaknesses continue to
result in reduced efficiencies and effectiveness that waste billions of
dollars every year. These business management weaknesses touch on all of
DOD's major business operations, ranging from the department's inadequate
management of overall business transformation to decades-old financial
management problems to various contracting and selected supply chain
challenges. In fact, all the business areas that I will discuss today are
on our 2005 "high-risk" list of programs and activities that need urgent
attention and fundamental transformation to ensure that our national
government functions in the most economical, efficient, and effective
manner possible.2 In addition to human capital management, DOD also shares
responsibility for five other governmentwide high-risk areas, such as
managing federal real property.

Senior administration leaders and advisors-including the Secretary of
Defense, the nominee for Deputy Secretary of Defense, the Deputy Director
of the Office of Management and Budget (OMB), and members of the Defense
Business Board-have demonstrated a commitment to addressing DOD's
management challenges. However, little sustainable progress has been made
to date, and, at present, no one individual at the right organizational
level with an adequate term in office is responsible for overall business
transformation efforts. Although OMB has worked closely with a number of
agencies that have high-risk issues, historically it has been much less
involved with DOD. To his credit, Clay Johnson, OMB's Deputy Director for
Management, recently 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 placing additional
emphasis on DOD's high-risk areas, including working to help ensure that
DOD has action plans for addressing all its "high-risk" areas. Given the
magnitude of DOD's problems and the stakes involved, it is critical that
OMB actively collaborate with the department to ensure it establishes
these action plans. It is also clear that, given the number and nature of
DOD's business challenges, it will take far longer than the balance of
this administration to address all of the department's high-risk areas.

2GAO, High-Risk Series: An Update, GAO-05-207 (Washington, D.C.: January
2005).

Today, I would like to provide our perspectives on (1) the fiscal trends
that prompt real questions about the affordability and sustainability of
the rate of growth in defense spending, (2) business management challenges
that DOD needs to address to successfully transform its business
operations, and (3) key elements to successfully achieve needed reforms.
In particular, I will emphasize the need for a strategic plan for business
transformation and offer suggestions that require legislative action-the
need for central control of systems investment funding and the need for a
chief management official (CMO) to be dedicated full-time to leading DOD's
business transformation effort. Implementation of these two suggestions
would provide the sustained top-level leadership and accountability needed
by DOD to better permit the development and successful implementation of
the various plans necessary to successfully achieve business
transformation.

I would like to further emphasize two points about the CMO. First, the
position divides and institutionalizes the current functions of the Deputy
Secretary of Defense into a Deputy Secretary who, as the alter ego of the
Secretary, would focus on policy-related issues such as military
transformation, and a Deputy Secretary of Defense for Management, the CMO,
who would be responsible and accountable for the overall business
transformation effort. Serving as the strategic integrator for DOD's
business transformation effort, the CMO would develop and implement a
strategic plan for business transformation. This new executive would have
sufficient clout to work with the Secretary of Defense, the Deputy
Secretary of Defense, the undersecretaries of defense, and the service
secretaries to make business transformation a reality. Second, I would
also like to emphasize what the CMO would not do. The CMO would not assume
the responsibilities of the undersecretaries of defense, the service
secretaries, or other DOD officials for the day-to-day management of
business activities. Therefore, in our view, creating a CMO would not be
adding another hierarchical layer to oversee the day-to-day management of
the department. Instead, the CMO would be responsible and accountable for
planning, integrating, and executing the overall business transformation
effort.

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

Summary	As I testified before the full committee in February,3 our nation
is on an unsustainable fiscal path. Long-term budget simulations by GAO,
the Congressional Budget Office (CBO), and others show that, over the long
term, we face a large and growing structural deficit due primarily to
known demographic trends and rising health care costs. Continuing on this
unsustainable fiscal path will gradually erode, if not suddenly damage,
our economy, our standard of living, and ultimately our national security.
All reasonable simulations indicate that the problem is too big to be
solved by economic growth alone or by making modest changes to existing
spending and tax policies. Rather, a fundamental reexamination of major
spending and tax policies and priorities will be important to recapture
our fiscal flexibility and ensure that our programs and priorities respond
to emerging social, economic, and security changes and challenges.
Traditional, incremental approaches to budgeting at DOD will need to give
way to much more fundamental and periodic reexaminations of defense
programs than we have seen in the past, to ensure that DOD gets the most
from every defense dollar.

Given its size and mission, DOD is one of the largest and most complex
organizations in the world to effectively manage. While DOD maintains
military forces with unparalleled capabilities, it continues to confront
pervasive, decades-old management problems related to its business
operations-which include outdated organizational structures, systems, and
processes-that support these forces. These management weaknesses cut
across all of DOD's major business areas, such as human capital
management, including the department's national security personnel system
initiative; the personnel security clearance program; support
infrastructure management; business systems modernization; financial
management; weapon systems acquisition; contract management; and selected
supply chain management issues. As I previously noted, all of these areas
are on GAO's high-risk list of major government programs and operations
that either need urgent attention and transformation to ensure that the
U.S. government functions in the most economical, efficient, and effective
manner possible, or that are at high risk because of their greater
vulnerability to fraud, waste, abuse, and mismanagement. We also added
DOD's overall approach to business transformation to our high-risk list
this year because of our concerns over DOD's lack of adequate management

3 21st Century Challenges: Reexamining the Base of the Federal Government,
GAO-05352T (Washington, D.C.: Feb. 16, 2005).

responsibility and accountability, along with the absence of a strategic
and integrated business transformation plan that is needed to achieve and
sustain business reform on a broad, strategic, departmentwide, and
integrated basis.

Regarding the way forward, in our view, 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 plan and a well-defined blueprint, referred to as
a business enterprise architecture, to guide and constrain implementation
of such a plan. The strategic plan should contain results-oriented
performance measures that link institutional, unit, and individual goals,
measures, and expectations. Second, we believe that additional central
control for the allocation and execution of funds associated with business
systems modernization is necessary. 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 CMO, who would serve as the Deputy
Secretary of Defense for Management. For this reason, we support the need
for this position to divide and institutionalize the functions of the
Deputy Secretary of Defense by creating a separate Deputy Secretary of
Defense for Management. I'd like to note that over 30 years ago, then
Secretary of Defense, Melvin Laird, asked Congress to establish an
additional Deputy Secretary of Defense for many of the same reasons we are
proposing that a CMO is needed. In a letter to Congress, Secretary Laird
stated that the most efficient management of DOD resources could not be
achieved with just the Secretary and Deputy Secretary, and that DOD
deficiencies were in large measure due to insufficient senior management
attention to the department's affairs. At that time, the legislation
establishing a second deputy secretary did not specifically distinguish
between the two deputies. As we envision it, the roles and
responsibilities of a CMO would be more clearly defined and have the added
feature of a term of office that spans administrations, which would serve
to underscore the importance of taking a professional, nonpartisan,
sustainable, and institutional approach to this business transformation
effort.

  Growing Fiscal Imbalance Raises Questions about the Affordability and
  Sustainability of Current Defense Spending

The federal government's financial condition and long-term fiscal outlook
present enormous challenges to the nation's ability to respond to emerging
forces reshaping American society, the place of the United States in the
world, and the future role of DOD as well as the rest of the federal
government. The near-term deficits are daunting-a $412 billion unified
budget deficit in fiscal year 2004 (including a $567 billion on-budget
deficit and a $155 billion off-budget surplus) and a $368 billion deficit
(not including any supplemental appropriations) forecast for fiscal year
2005 by the CBO. If these near-term deficits represented only a short-term
phenomenon-prompted by such factors as economic downturn or national
security crises-there would be less cause for concern. However, deficits
have grown notwithstanding the economy recovery from the recession in
2001, and the incremental costs of responding to homeland security and the
nation's global war against terrorism represent only a relatively small
fraction of current and projected deficits. Moreover, based on our
long-range fiscal simulations, the current fiscal condition is but a
prelude to a much more daunting long-term fiscal outlook. GAO's long-term
simulations illustrate the magnitude of the fiscal challenges associated
with an aging society and the significance of the related challenges the
government will be called upon to address. Absent significant policy
changes on the spending or revenue side of the budget, our simulations
show that growth in spending on federal retirement and health entitlements
will encumber an escalating share of the government's resources. Indeed,
when we assume that recent tax reductions are made permanent and
discretionary spending keeps pace with the economy, our long-term
simulations suggest that by 2040 federal revenues may be adequate to pay
little more than interest on the federal debt.4

In fact, the cost implications of the baby boom generation's retirement
have already become a factor in CBO's baseline projections and will only
intensify as the baby boomers age. According to CBO, total federal
spending for Social Security, Medicare, and Medicaid is projected to grow
by about 25 percent over the next 10 years-from 8.4 percent of Gross
Domestic Product in 2004 to 10.4 percent in 2015. In addition, CBO
reported that excluding supplemental funding appropriated in 2004 and
requested in 2005 (mostly for activities in Iraq and Afghanistan),
discretionary budget authority for defense programs is estimated to grow

4 Additional information on GAO's long-term budget simulations and the
nation's fiscal outlook can be found at
http://www.gao.gov/special.pubs/longterm/.

from $394 billion in 2004 to $421 billion in 2005, a 6.8 percent increase.
The expected growth combined with the fact that DOD accounted for more
than half of all discretionary spending in fiscal year 2004 raises
concerns about the sustainability and affordability of increased defense
spending.

Despite the need to make strategic investment decisions to address these
fiscal pressures, DOD's current approach to planning often supports the
status quo and results in a mismatch between programs and budgets. As we
have reported, DOD has difficulties overcoming cultural resistance to
change and the inertia of various organizations, policies, and procedures
rooted in the Cold War era.5 Long-standing organizational and budgetary
programs need to be addressed, such as the existence of stovepiped or
siloed organizations, the involvement of many layers and players in
decision making, and the allocation of budgets on a proportional rather
than a strategic basis across the military services. DOD's approach to
planning does not always provide reasonable visibility to decision makers,
including Congress, over the projected cost of defense programs. As we
have reported in the past, DOD uses overly optimistic estimations of
future program costs that often lead to costs being understated.6 For
example, in January 2003 we reported that the estimated cost of developing
eight major weapon systems had increased from about $47 billion in fiscal
year 1998 to about $72 billion by fiscal year 2003.7 As a result of these
inaccurate estimates, DOD has more programs than it can support with its
available dollars, which often leads to program instability, costly
program stretchouts, and program termination.

Increasingly limited fiscal resources across the federal government,
coupled with emerging requirements from the changing security environment,
emphasize the need for DOD to address its current inefficient approach to
planning and develop a risk-based strategic investment framework for
establishing 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

5 GAO-05-325SP.

6GAO, Future Years Defense Program: Actions Needed to Improve Transparency
of DOD's Projected Resource Needs, GAO-04-514 (Washington, D.C.: May 7,
2004).

7GAO, Major Management Challenges and Program Risks: Department of
Defense, GAO03-98 (Washington, D.C.: January 2003). These amounts are in
constant fiscal year 2003 dollars.

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. 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
the 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. We are currently monitoring DOD's
efforts to implement the risk management framework.

  Pervasive Business Management Weaknesses Place DOD's Overall Business
  Transformation at Risk

Numerous management problems, inefficiencies, and wasted resources
continue to trouble DOD's business operations, resulting in billions of
dollars of wasted resources annually at a time when our nation is facing
an increasing fiscal imbalance. Specific business management challenges
that DOD needs to address to successfully transform its business
operations include DOD's approach to business transformation, its
personnel security clearance program, support infrastructure management,
business systems modernization, financial management, weapons systems
acquisition, contract management, supply chain management, and strategic
human capital management. These management challenges are on our 2005
highrisk list of programs and activities that need urgent and fundamental
transformation if the federal government is to function in the most
economical, efficient, and effective manner possible. The 8 DOD specific
high-risk areas, along with 6 government-wide areas that apply to DOD,
mean that the department is responsible for 14 of 25 high-risk areas. As
shown in table 1, we added DOD's approach to business management
transformation to this list in 2005 because it represents an overarching
high-risk area that encompasses the other individual, DOD specific,
highrisk areas, but many of these other management challenges have been on
the list for a decade or more.

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

o  DOD weapon systems acquisition

o  DOD contract management

o  DOD supply chain managementa 1990a

Source: GAO.

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

DOD's Approach to Business Transformation

DOD's approach to business management transformation represents an
overarching high-risk area, encompassing several other key business
management challenges. 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,8 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 management 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 an investment strategy,
including a well-defined 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.

8Support infrastructure includes categories such as force installations,
central logistics, the defense health program, and central training.

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. We have previously
testified on inefficiencies in DOD's business operations, such as the lack
of sustained leadership, the lack of a strategic and integrated business
transformation plan, and inadequate incentives.9 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.

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 could facilitate the overall business transformation
effort within DOD by providing the momentum needed to overcome cultural
resistance to change, military service parochialism, and stovepiped
operations, all of which have contributed significantly to the failure of
previous attempts to implement broad-based management reform at DOD.
Without such leadership, it is also likely that DOD will continue to spend
billions of dollars on stovepiped, duplicative, and nonintegrated systems
that do not optimize mission performance or effectively support the
warfighter.

                      Personnel Security Clearance Program

Delays in completing hundreds of thousands of background investigations
and adjudications (reviews of investigative information to determine
eligibility for a security clearance) have led us to identify as a
business management challenge the DOD personnel security clearance
program, which we just added to our high-risk list in 2005. 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

9GAO, 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);
and GAO, DOD's High-Risk Areas: Successful Business Transformation
Requires Sound Strategic Planning and Sustained Leadership, GAO-05-520T
(Washington, D.C.: Apr. 13, 2005).

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.10 Since fiscal
year 2000, DOD has declared its personnel security clearance
investigations program to be a systemic weakness11-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 adjudicative process as a material
weakness.12 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.13

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

10GAO, DOD Personnel: Inadequate Personnel Security Investigations Pose
National Security Risks, GAO/NSIAD-00-12 (Washington, D.C.: Oct. 27,
1999).

11Department 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).

12Committee 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).

13GAO, DOD Personnel Clearances: DOD Needs to Overcome Impediments to
Eliminating Backlog and Determining Its Size, GAO-04-344 (Washington,
D.C.: Feb. 9, 2004).

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 200414 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. By the end
of fiscal year 2005, OPM projects that it will have 6,500 of the estimated
8,000 full-time equivalent federal and contract investigators it needs to
help eliminate the investigations backlog.

Support Infrastructure Management

DOD has made progress and expects to continue making improvements in its
support infrastructure management, but much work remains to be done. DOD's
support 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-thannecessary 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 has 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

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

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 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

We continue to categorize DOD's business systems modernization program as
a management challenge because of a lack of an enterprise architecture to
guide and constrain system investments and because of 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.15 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

15GAO, Information Technology: Architecture Needed to Guide Modernization
of DOD's Financial Operations, GAO-01-525 (Washington, D.C.: May 17,
2001).

solutions.16 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.17 One
reason for this limited progress is DOD's failure to adopt key
architecture management best practices that we recommended,18 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 2005,19 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 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

16GAO-04-615; Department of Defense: Further Actions Needed to Establish
and Implement a Framework for Successful Financial and Business Management
Transformation, GAO04-551T (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).

17GAO, 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).

18GAO-01-525.

19Ronald 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).

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.20 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 reported 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. 21

To address certain provisions and requirements of the Ronald W. Reagan
National Defense Authorization Act for Fiscal Year 2005,22 on March 24,
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,23 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.

20 GAO-04-731R.

21 GAO-04-731R.

22 10 U.S.C. S: 2222.

23 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.

While this committee may serve as a useful planning and coordination
forum, it is important to remember that committees do not lead, people do.
In addition, DOD still needs to designate a person to have overall
responsibility and accountability for this effort. This person must have
the background and authority needed to successfully achieve the related
objectives for business systems modernization efforts.

According to DOD's annual report to 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
2005 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.24 More
important, the obligation of these funds without the requisite approval by
the DBSMC is deemed a violation of the Anti-Deficiency Act.25 As DOD
develops a comprehensive, integrated business transformation plan, such a
plan must include an approach to resolve the business systems
modernization problems. To this end, it is critical that this plan provide
for the implementation of our many recommendations related to business
systems modernization.

Financial Management 	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. As I testified before the House Committee on Government
Reform in February 2005,26 and as discussed in our report on the U.S.
government's

24Pub. L. No. 108-875, S: 332, 118 Stat. 1811, 1854 (Oct. 28, 2004)
(codified at 10 U.S.C. S: 2222(a)(2)).

2531 U.S.C. S: 1341(a)(1)(A); see 10 U.S.C. S: 2222(b).

26GAO, 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).

consolidated financial statements for fiscal year 2004,27 DOD's financial
management deficiencies, taken together, represent a major impediment to
achieving an unqualified opinion on the U.S. government's consolidated
financial statements.

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
controls,28 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 have 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

27For 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.

28GAO, 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).

Army's nonintegrated systems, which require extensive error-prone manual
data entry, further delay access to pay and benefits.

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 2004 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.29 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

29GAO, 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).

possible if implemented as part of a comprehensive and integrated approach
to transforming all of DOD's business operations.

Weapon Systems Acquisition

Another business management challenge DOD faces is its weapon systems
acquisition program. 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	Another long-standing business management challenge is
DOD's contract management program. As the government's largest purchaser
at over $200 billion in fiscal year 2003, DOD is unable to assure that it
is using sound business practices to acquire the goods and services needed
to meet the warfighters' 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 yet to fully
implement 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.30

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

30GAO, Contract Management: Agencies Can Achieve Significant Savings on
Purchase Card Buys, GAO-04-430 (Washington, D.C.: Mar. 12, 2004).

current and future DOD acquisition/contract administration 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 encountered in Operation Iraqi Freedom
(OIF).31 Further, we have reported that DOD's extensive use of military
logistical support contracts in OIF and elsewhere required strengthened
oversight.32 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.33 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.34 In July 2004, we found that DOD
personnel waived competition requirements for nearly half of the task
orders reviewed.35 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.

31GAO, Rebuilding Iraq: Fiscal Year 2003 Contract Award Procedures and
Management Challenges, GAO-04-605 (Washington, D.C.: June 1, 2004).

32GAO, 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).

33GAO, Contract Management: Opportunities to Improve Surveillance on
Department of Defense Service Contracts, GAO-05-274 (Washington, D.C.:
Mar. 17, 2005).

34GAO-04-605.

35GAO, Contract Management: Guidance Needed to Promote Competition for
Defense Task Orders, GAO-04-874 (Washington, D.C.: July 30, 2004).

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;
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.36 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	In 1990, we identified DOD's inventory management
as a management challenge, or 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.

36GAO, 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).

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-
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.37

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.38 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

37GAO-05-207.

38GAO, 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).

eliminate choke points.39 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
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.

Strategic Human Capital Management

DOD is attempting to address the critically important governmentwide
high-risk challenge of strategic human capital management through its
proposed human resources management system, the National Security
Personnel System (NSPS). 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 resources 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 have
been granted the authority by Congress to design a new human capital
system as a way to address the governmentwide high-risk area of strategic
human capital management. This effort represents a huge undertaking for
DOD, given its massive size and geographically and culturally diverse
workforce.

39GAO, 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).

As I recently testified on DOD's proposed NSPS regulations,40 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 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
Office of Personnel Management (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

40GAO, Human Capital: Preliminary Observations on Proposed DOD National
Security Personnel System Regulations, GAO-05-432T (Washington, D.C.: Mar.
15, 2005).

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 would include 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.

  Key Elements for Successful Business Transformation

Although DOD has a number of initiatives to address its high-risk areas,
we believe that DOD must fundamentally change its approach to overall
business transformation effort before it is likely to succeed. We believe
there are three critical elements of successful transformation: (1)
developing and implementing an integrated and strategic business
transformation plan, along with an enterprise architecture to guide and
constrain implementation of such a plan; (2) establishing central control
over systems investment funds; and (3) providing sustained leadership for
business reform efforts. To ensure these three 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, the Chief Management Official
(CMO), would be a strategic integrator responsible for leading the
department's overall business transformation, including developing and
implementing a related strategic plan. The CMO would not assume the
responsibilities of the undersecretaries of defense, the services, and
other DOD entities for the day-to-day management of business activities.
However, the CMO would be

accountable for ensuring that all DOD business policies, procedures, and
reform initiatives are consistent with an approved strategic plan for
business transformation.

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.
The lack of a comprehensive and integrated strategic transformation plan
linked with performance goals, objectives, and rewards has been a
continuing weakness in DOD's business transformation. Since 1999, for
example, we have recommended that a comprehensive and integrated strategic
business transformation plan be developed for reforming DOD's major
business operations and support activities. In 2004, we suggested that DOD
clearly establish management accountability for business reform. 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 strategic and integrated
transformation 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 2004 that the lack of performance measures
for DOD's business 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. As of March 2004, DOD
formulated departmentwide performance goals and measures and continued to
refine and align them with outcomes described in its strategic plan-the
September 2001 Quadrennial Defense Review (QDR). As previously discussed,
DOD outlined a new risk management framework in the QDR that DOD was to
use in considering trade-offs among defense objectives and resource
constraints, but as of March 2005 DOD was still in the process of
implementing it.

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 a strategic and integrated business transformation 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, consistent with the suggestion I
have made in prior testimonies, 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.

This legislation also requires that the responsible approval authorities
establish a hierarchy of investment review boards, the highest level being
the Defense Business Systems Management Committee (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 lower
level 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 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 Is Essential for Sustained Leadership of
Business Management Reform

As DOD embarks on large-scale business transformation efforts, we believe
that the complexity and long-term nature of these efforts requires the
development of an executive position capable of providing strong and
sustained change management leadership across the department-and over a
number of years and various administrations. One way to ensure such
leadership would be to create by legislation 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 high-level attention essential for ensuring that a
strategic business transformation plan-as well as the business policies,
procedures, systems, and processes that are necessary for successfully
implementing and sustaining overall business transformation efforts within
DOD-are implemented and sustained. An executive-level II position for a
CMO would

provide this individual with the necessary institutional clout to overcome
service parochialism and entrenched organizational silos, which in our
opinion need to be streamlined below the service secretaries and other
levels.

The CMO would function as a change agent, while other DOD officials would
still be responsible for managing their daily business operations. The
position would divide and institutionalize the current functions of the
Deputy Secretary of Defense into a Deputy Secretary who, as the alter ego
of the Secretary, would focus on policy-related issues such as military
transformation, and a Deputy Secretary of Defense for Management, the CMO,
who would be responsible and accountable for the overall business
transformation effort and would serve full-time as the strategic
integrator of DOD's business transformation efforts by, for example,
developing and implementing a strategic and integrated plan for business
transformation efforts. The CMO would not conduct the day-to-day
management functions of the department; therefore, creating this position
would not add an additional hierarchical layer to the department.
Day-to-day management functions of the department would continue to be the
responsibility of the undersecretaries of defense, the service
secretaries, and others. Just as the CMO would need to focus full-time on
business transformation, we believe that the day-to-day management
functions are so demanding that it is difficult for these officials to
maintain the oversight, focus, and momentum needed to implement and
sustain needed reforms of 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.

If created, we believe that 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. As prior GAO
work examining the experiences of major change management initiatives in
large private and public sector organizations has shown, it can often take
at least 5 to 7 years until such initiatives are fully implemented and the
related cultures are transformed in a sustainable way. Articulating the
roles and responsibilities of the position in statute would also help to
create unambiguous expectations and underscore Congress's desire to follow
a professional, nonpartisan, sustainable, and institutional 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.

Furthermore, 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 2005 coordinate
their efforts with the CMO, who would chair the DBSMC that DOD recently
established to comply with the act. We also suggest that 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 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 should be a basis
for determining the level of compensation earned, including any related
bonus. In addition, the CMO's achievements and compensation should be
reported to Congress each year.

  Concluding Observations

The long-term fiscal pressures we face as a nation are daunting and
unprecedented. The size and trend of our projected longer-term deficits
mean that the nation cannot ignore the resulting fiscal pressures-it is
not a matter of whether the nation deals with the fiscal gap, but when and
how. Unless we take effective and timely action, our near-term and
longer-term deficits present the prospect of chronic and seemingly
perpetual budget shortfalls and constraints becoming a fact of life for
years to come. These pressures will intensify the need for DOD to make
disciplined and strategic investment decisions that identify and balance
risks across a wide range of programs, operations, and functions. To its
credit, DOD is in the process of implementing a risk management framework
to use in considering tradeoffs among defense objectives and resource
constraints and establishing department-level priorities, rather than
relying on incremental changes to existing budget levels. We recognize
what a large undertaking developing a departmentwide risk management
framework will be and, while we are still monitoring DOD's efforts to
implement the framework, we have preliminary concerns based on our work
reviewing other DOD reform efforts. Unless DOD is better able to balance
its resources, DOD will

continue to have a mismatch between programs and budgets, and will be less
likely to maximize the value of the defense dollars it spends.

DOD continues to face pervasive, decades-old management problems related
to its business operations and these problems affect all of DOD's major
business areas. While DOD has taken steps to address these problems, our
previous work has uncovered a persistent pattern among DOD's reform
initiatives that limits their overall impact on the department. These
initiatives have not been fully implemented in a timely fashion because of
the absence of comprehensive, integrated strategic planning, inadequate
transparency and accountability, and the lack of sustained leadership. As
previously mentioned, 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. In this time of growing fiscal constraints, every dollar
that DOD can save through improved economy and efficiency of its
operations is important to the well-being of our nation. Until DOD
resolves the numerous problems and inefficiencies in its business
operations, billions of dollars will continue to be wasted every year.

DOD's senior leaders have demonstrated a commitment to transforming the
department and have taken several positive steps to begin this effort. To
overcome the previous cycle of failure at DOD in implementing broadbased
management reform, however, we believe that three elements are key to
successfully achieve needed reforms. First, DOD needs to implement and
sustain a strategic and integrated business transformation plan. Second,
we believe that the implementation of two proposed legislative
initiatives-establishing central control of business system funds and
creating a CMO-is crucial. We believe that central control over business
system investment funds would better enable DOD to ensure that its
resources are being invested in an economical, efficient, and effective
manner. As long as funding is controlled by the components, it is likely
that the existing problems with stovepiped, duplicative, and nonintegrated
systems will continue. We support the need for legislation to create a
CMO, in part, because we doubt that there is a single individual-no matter
how talented and experienced-who could effectively address all that needs
to be addressed at DOD, including conducting a global war on terrorism,
transforming the military, and tackling long-standing, systemic business
transformation challenges. We believe that a CMO, serving a 7-year term
with the potential for reappointment, would have the institutional clout
and an adequate term in office to work with DOD's senior leadership across

administrations to make business transformation a reality. Since the CMO
would not have responsibility for day-to-day management, this position
would not superimpose another hierarchical layer over the department to
oversee daily business operations. Instead, the CMO would be responsible
and accountable for strategic planning, performance and financial
managment, and business system modernization, while facilitating overall
business transformation. Without the strong and sustained leadership
provided by a CMO, DOD will likely continue to have difficulties in
maintaining the oversight, focus, and momentum needed to implement and
sustain the reforms to its business operations.

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.

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