Defense Business Transformation: A Comprehensive Plan, Integrated
Efforts, and Sustained Leadership Are Needed to Assure Success	 
(16-NOV-06, GAO-07-229T).					 
                                                                 
Of the 26 areas on GAO's high-risk list of federal programs or	 
activities that are at risk for waste, fraud, abuse, or 	 
mismanagement, 8 are Department of Defense (DOD) programs or	 
operations and another 6 are governmentwide high-risk areas that 
also apply to DOD. These high-risk areas relate to most of DOD's 
major business operations. DOD's failure to effectively resolve  
these high-risk areas has resulted in billions of dollars of	 
waste each year, ineffective performance, and inadequate	 
accountability. At a time when DOD is competing for resources in 
an increasingly fiscally constrained environment, it is 	 
critically important that DOD get the most from every defense	 
dollar. DOD has taken several positive steps and devoted	 
substantial resources toward establishing key management	 
structures and processes to successfully transform its business  
operations and address its high-risk areas, but overall progress 
by area varies widely and huge challenges remain. This testimony 
addresses DOD's efforts to (1) develop a comprehensive, 	 
integrated, enterprisewide business transformation plan and its  
related leadership approach and (2) comply with legislation that 
addresses business systems modernization and improving financial 
management accountability. The testimony also addresses two	 
sections included in recent legislation and other DOD high-risk  
areas.								 
-------------------------Indexing Terms------------------------- 
REPORTNUM:   GAO-07-229T					        
    ACCNO:   A63448						        
  TITLE:     Defense Business Transformation: A Comprehensive Plan,   
Integrated Efforts, and Sustained Leadership Are Needed to Assure
Success 							 
     DATE:   11/16/2006 
  SUBJECT:   Accountability					 
	     Defense cost control				 
	     Defense procurement				 
	     Enterprise architecture				 
	     Financial management				 
	     Financial management systems			 
	     Financial statement audits 			 
	     Internal controls					 
	     Policy evaluation					 
	     Strategic planning 				 
	     Policies and procedures				 
	     Waste, fraud, and abuse				 

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GAO-07-229T

   

     * [1]Summary
     * [2]Background
     * [3]DOD Lacks a Fully Developed, Comprehensive, Integrated, and

          * [4]Comprehensive, Integrated, and Enterprisewide Business Trans
          * [5]Sustained Leadership Is Needed

     * [6]DOD Has Made Progress in Complying with Business Systems Mod

          * [7]DOD Continues to Evolve Its Business Enterprise Architecture
          * [8]DOD Plans to Federate Its Business Enterprise Architecture t
          * [9]DOD Continues to Improve Its Enterprise Transition Plan, but
          * [10]DOD Has Established Business Systems Investment Decision-Mak
          * [11]Key DOD Systems Still Face Challenges

               * [12]DIMHRS
               * [13]DTS
               * [14]LMP
               * [15]NTCSS
               * [16]TC-AIMS II

          * [17]DOD Issues Its Financial Improvement and Audit Readiness Pla

     * [18]Legislation Enacted to Address DOD's Financial Management We

          * [19]Legislation Reiterates Need for Consistency between DOD's Fi
          * [20]Legislative Language Establishing Reporting Requirements for

     * [21]Specific High-risk Program Areas Highlight the Need for Cont

          * [22]DOD Weapon Systems Acquisitions and Contract Management
          * [23]DOD Supply Chain Management
          * [24]DOD Personnel Security Clearance Program
          * [25]DOD Support Infrastructure Management
          * [26]Order by Mail or Phone

Testimony

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

United States Government Accountability Office

GAO

For Release on Delivery Expected at 9:30 a.m. EST

Thursday, November 16, 2006

DEFENSE BUSINESS TRANSFORMATION

A Comprehensive Plan, Integrated Efforts, and Sustained Leadership Are
Needed to Assure Success

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

GAO-07-229T

Mr. Chairman and Members of the Subcommittee:

It is a pleasure to be back before this Subcommittee to discuss the
progress and challenges associated with the Department of Defense's (DOD)
efforts to transform its business operations. Since the first financial
statement audit of a major DOD component was attempted almost 20 years
ago, we have reported that weaknesses in business operations not only
adversely affect the reliability of reported financial data, but also the
economy, efficiency, and effectiveness of DOD's operations. In fact, DOD
currently bears responsibility, in whole or in part, for 14 of our 26
high-risk areas. Eight of these are specific to DOD and include DOD's
overall approach to business transformation, business systems
modernization, financial management, the personnel security clearance
process, supply chain management, support infrastructure management,
weapon systems acquisition, and contract management. In addition, DOD
shares responsibility for six governmentwide high-risk areas.^1
Collectively, these high-risk areas relate to most of DOD's major business
operations which directly support the warfighter, including how they get
paid, the benefits provided to their families, and the availability and
condition of the equipment they use both on and off the battlefield.

DOD's business area weaknesses result in reduced efficiencies, ineffective
performance, and inadequate accountability to Congress and the American
people, wasting billions of dollars each year at a time when DOD is
competing for resources in an increasingly fiscally constrained
environment. As a result, it is important that DOD get the most from every
dollar it invests. Our nation is not only threatened by external security
threats, but also from within by growing fiscal imbalances due primarily
to our aging population and rising health care costs. These trends are
compounded by the near-term deficits arising from new discretionary and
mandatory spending as well as lower revenues as a share of the economy. 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 affect our ability to address key national and homeland
security needs. These factors create the need to make choices that will
only become more difficult and potentially disruptive the longer they are
postponed. Among these difficult choices will be decisions about the
affordability and sustainability of the continued growth in defense
spending. Furthermore, irrespective of the size of the defense budget, the
taxpayers and warfighters deserve more effective management of DOD's
overall resources.

^1GAO, GAO's High-Risk Program, [27]GAO-06-497T (Washington, D.C.: Mar.
15, 2006). DOD shares responsibility for the following six governmentwide
high-risk areas: (1) disability programs, (2) interagency contracting, (3)
information systems and critical infrastructure, (4) information-sharing
for homeland security, (5) human capital, and (6) real property.

I continue to believe that DOD's senior leadership is committed to
transforming the department and DOD has taken a number of positive steps
to begin this effort. In fact, because of the impact of the department's
business operations on its warfighters, DOD recognizes now, more than
ever, the need to transform its business operations and provide
transparency in this process. Indeed, Secretary Rumsfeld was very clear in
his speech on September 10, 2001, when he identified business
transformation as a top priority. However, DOD's ability to focus on this
priority was overshadowed by the events of September 11, 2001, and the
ensuing Global War on Terrorism, including military operations in Iraq and
Afghanistan. Clearly, these events have required considerable emphasis and
have become the department's primary focus. As a result, progress on the
full range of DOD's business transformation challenges has been
inconsistent, focusing thus far on enterprisewide transformation, with
many challenges remaining concerning the transformation of the various
military services and defense agencies.

Congress, in part through the leadership of this Subcommittee, passed
legislation that codified many of our prior recommendations related to DOD
business systems modernization.^2 Since then, DOD has devoted substantial
resources and made important progress toward establishing key management
structures and processes to guide business systems investment activities,
particularly at the enterprise, or departmentwide, level. DOD's current
approach is clearly superior to its prior approach; however, a number of
formidable challenges remain.

Last year when we testified before this Subcommittee, we highlighted
several of these formidable challenges.^3 Today, I would like to provide
my perspectives on actions DOD has taken to address these challenges and
achieve business transformation through all levels of the department over
the past year. Specifically, I will discuss DOD's efforts to (1) develop a
comprehensive, integrated, enterprisewide business transformation plan and
its related leadership approach and (2) comply with legislation that
addresses business systems modernization and improving financial
management accountability. I will also discuss two sections of the
recently enacted John Warner National Defense Authorization Act for Fiscal
Year 2007^4 that address financial improvement and acquisition of all
major automated information systems, and selected additional DOD high-risk
areas that highlight the need for continued attention.

^2Ronald W. Reagan National Defense Authorization Act for Fiscal Year
2005, Pub. L. No. 108-375, S 332 (2004) (codified in part at 10 U.S.C. SS
186 and 2222).

^3GAO, Defense Management: Foundational Steps Being Taken to Manage DOD
Business Systems Modernization but Much Remains to be Accomplished to
Effect True Business Transformation, [28]GAO-06-234T (Washington, D.C.:
Nov. 9, 2005).

My statement is based in large part on our previous reports and some of
our current, ongoing efforts. Our work was performed in accordance with
generally accepted government auditing standards.

Summary

I have stated on many occasions that transforming DOD's business
operations is an absolute necessity given our nation's current deficits
and long-term fiscal outlook. In the past year, DOD has made progress in
transforming its business operations, but continues to lack a
comprehensive, enterprisewide approach to planning and decision making
needed to ensure successful transformation and address systemic business
challenges. Within DOD, business transformation is broad, encompassing
people, planning, management, structures, technology, and processes in
several key business areas. While DOD's planning and management continues
to evolve, it has yet to develop a comprehensive, integrated,
enterprisewide plan that covers all key business functions, and contains
results-oriented goals, measures and expectations that link organizational
and individual performance goals, while also being clearly linked to DOD's
overall investment plans. Because of the complexity and long-term nature
of business transformation, DOD also continues to need a chief management
official (CMO) with significant authority, experience, and tenure to
provide sustained leadership and integrate DOD's overall business
transformation efforts. Without formally designating responsibility and
accountability for results, reconciling competing priorities and
prioritizing investments will be difficult and could impede DOD's progress
in its transformation efforts.

^4John Warner National Defense Authorization Act for Fiscal Year 2007,
Pub. L. No. 109-364 (2006).

DOD continues to take steps to comply with legislative requirements aimed
at improving its business systems modernization and financial management;
however, much remains to be accomplished before the full intent of this
legislation is achieved. In particular, DOD recently issued updates to
both the business enterprise architecture and the transition plan, which
while addressing several issues previously reported by us, are still not
sufficiently complete to effectively and efficiently guide and constrain
business system investments across all levels of the department. Most
notably, the architecture does not include DOD component architectures,
and the plan does not include most component business system investments.
To address these shortfalls, DOD recently issued a strategy for
"federating" or extending its architecture to the military services and
defense agencies. In our view, much remains to be accomplished before a
well-defined federated architecture is in place, particularly given that
we recently reported that the respective military service architecture
programs are not mature. Nevertheless, DOD components are continuing to
invest billions of dollars in thousands of new and existing business
system programs. As we previously stated, the risks associated with
investing in systems ahead of having a well-defined architecture and
accompanying transition plan are profound and must be managed carefully,
as must the wide assortment of other risks that our work has shown to
exist on specific DOD business system investments. While not a guarantee,
our work and research has shown that establishing effective system
modernization management controls, such as an architecture-centric
approach to investment decision making, can increase the chances of
delivering cost-effective business capabilities on time and within budget.
Further, with regard to legislation pertaining to its financial management
improvement, DOD issued its Financial Improvement and Audit Readiness Plan
and two updates in fiscal year 2006 to provide components with a construct
for resolving problems affecting the accuracy and timeliness of financial
information and an improved audit strategy for obtaining financial
statement audit opinions.

In addition, you asked for my comments on two sections of the recently
enacted John Warner National Defense Authorization Act for Fiscal Year
2007.^5 The first provision, section 321, seeks to ensure that the
department pursues financial management improvement activities only in
accordance with a comprehensive financial management improvement plan that
coordinates these activities with improvements in its systems and
controls. I fully support the intent of this legislation, which is aimed
at directing DOD's corrective actions toward achieving sustained
improvements in its ability to provide timely, reliable, complete, and
useful information. This is important not only for financial reporting
purposes, but also, more importantly, for informed decision making and
oversight. Section 321 is consistent with existing legislation, as well as
recent actions taken by the department. The second provision, section 816,
establishes certain reporting and oversight requirements for the
acquisition of all major automated information systems (MAIS),^6 which if
properly implemented could strengthen oversight of and accountability for
business system acquisitions that fail to meet cost, schedule, or
performance criteria. Therefore, I also support the purpose of this
legislation.

^5John Warner National Defense Authorization Act for Fiscal Year 2007,
Pub. L. No. 109-364 (2006).

Ensuring effective transformation of other areas within DOD that we have
identified as high risk will require continued attention and sustained
leadership over a number of years to be successful. These other high-risk
areas include DOD's weapon systems acquisition, contract management,
supply chain management, personnel security clearance program, and support
infrastructure management. In the area of weapon systems acquisition,
recurring problems with cost overruns and schedule delays have resulted in
a reduction of buying power of the defense dollar at a time when the
nation is struggling with a large and growing structural deficit. While
DOD has made some progress in addressing its supply chain management
problems, the department faces challenges in successfully implementing its
changes and measuring progress. While positive steps have been taken to
address the financial costs, delays, and other risks associated with DOD's
personnel security clearance program, problems with this program continue.
Finally, much work remains for DOD to transform its support infrastructure
to adequately fund and improve operations and achieve efficiencies while
ensuring that infrastructure costs no longer consume a larger than
necessary portion of DOD's budget.

Background

DOD is one of the largest and most complex organizations in the world.
Overhauling its business operations will take many years to accomplish and
represents a huge management challenge. Execution of DOD's operations
spans a wide range of defense organizations, including the military
services and their respective major commands and functional activities,
numerous large defense agencies and field activities, and various
combatant and joint operational commands that are responsible for military
operations for specific geographic regions or theaters of operation. To
support DOD's operations, the department performs an assortment of
interrelated and interdependent business functions--using more than 3,700
business systems--related to major business areas such as weapon systems
management, supply chain management, procurement, health care management,
and financial management. The ability of these systems to operate as
intended affects the lives of our warfighters both on and off the
battlefield. For fiscal year 2006, Congress appropriated approximately
$15.5 billion to DOD, and for fiscal year 2007, DOD has requested another
$16 billion in appropriated funds to operate, maintain, and modernize
these business systems and associated infrastructure.

^6The Committee originally asked GAO to comment on sec. 804 of the Senate
bill, S. 2766, which, with some changes, has now been enacted as sec. 816.

Until DOD can successfully transform its operations, it will continue to
confront the pervasive, decades-old management problems that cut across
all of DOD's major business areas. Since our report on the financial
statement audit of a major DOD component over 16 years ago,^7 we have
repeatedly reported that weaknesses in business management systems,
processes, and internal controls not only adversely affect the reliability
of reported financial data, but also the management of DOD operations. In
March 2006,^8 I testified that DOD's financial management deficiencies,
taken together, continue to represent the single largest obstacle to
achieving an unqualified opinion on the U.S. government's consolidated
financial statements. These issues were also discussed in the latest
consolidated financial audit report.^9 To date, none of the military
services or major DOD components has passed the test of an independent
financial audit because of pervasive weaknesses in internal control and
processes and fundamentally flawed business systems.^10

7GAO, Financial Audit: Air Force Does Not Effectively Account for Billions
of Dollars of Resources, [29]GAO/AFMD-90-23 (Washington, D.C.: Feb. 23,
1990).

^8GAO, Fiscal Year 2005 U.S. Government Financial Statements: Sustained
Improvement in Federal Financial Management Is Crucial to Addressing Our
Nation's Financial Condition and Long-term Fiscal Imbalance,
[30]GAO-06-406T (Washington, D.C.: Mar. 1, 2006).

^9Department of the Treasury, 2005 Financial Report of the United States
Government (Washington, D.C.: Dec. 15, 2005).

DOD's financial management problems are pervasive, complex, long-standing,
deeply rooted in virtually all of its business operations, and challenging
to resolve. The nature and severity of DOD's financial management business
operations and system deficiencies not only affect financial reporting,
but also impede the ability of DOD managers to receive the full range of
information needed to effectively manage day-to-day operations. Such
weaknesses have adversely affected the ability of DOD 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, including supporting warfighters and
their families.

Transformation of DOD's business systems and operations is key to
improving the department's ability to provide DOD management and Congress
with accurate, timely, reliable, and useful information for analysis,
oversight, and decision making. This effort is an essential part of the
Secretary of Defense's broad initiative to "transform the way the
department works and what it works on." The savings resulting from an
effective business transformation effort could be significant.

DOD Lacks a Fully Developed, Comprehensive, Integrated, and Enterprisewide
Approach to Decision Making and Sustained Leadership

I would like to take a few minutes to briefly discuss two critical
elements that are still needed at DOD to ensure successful and sustainable
business transformation before turning to DOD's business modernization and
financial management accountability improvement efforts. First, DOD needs
a comprehensive, integrated, and enterprisewide plan to guide its overall
business transformation efforts. Second, a chief management official with
the right skills and at the right level of the department is essential for
providing the leadership continuity needed to sustain the momentum for
business transformation efforts across administrations and ensure
successful implementation.

^10Although not major DOD components, the Military Retirement Fund
received an unqualified audit opinion on its fiscal year 2005 financial
statements, and the DOD Medicare Eligible Retiree Health Care Fund
received a qualified audit opinion on its fiscal year 2005 financial
statements.

Comprehensive, Integrated, and Enterprisewide Business Transformation Plan Not
Fully Developed

DOD has not fully developed a comprehensive, integrated, and
enterprisewide strategy or action plan for managing its overall business
transformation effort. The lack of a comprehensive, integrated, and
enterprisewide action plan linked with performance goals, objectives, and
rewards has been a continuing weakness in DOD's overall business
transformation efforts that I have been testifying on for years.^11 I
recognize that DOD's efforts to plan and organize itself to achieve
business transformation are continuing to evolve. However, I cannot
emphasize enough how critical to the success of these efforts are top
management attention and structures that focus on transformation from a
broad perspective and a clear, comprehensive, integrated, and
enterprisewide plan that, at a summary level, addresses all of the
department's major business operations. This plan should cover all of
DOD's key business functions; contain results-oriented goals, measures,
and expectations that link institutional, unit, and individual performance
goals and expectations to promote accountability; identify people with
needed skills, knowledge, experience, responsibility, and authority to
implement the plan; and establish an effective process and related tools
for implementation and oversight. Such an integrated business
transformation plan would be instrumental in establishing investment
priorities and guiding the department's key resource decisions.

While DOD has developed plans that address aspects of business
transformation at different organizational levels, these plans have not
been clearly aligned into a comprehensive, integrated, and enterprisewide
approach to business transformation. As I will shortly discuss in more
detail, DOD recently issued an enterprise transition plan (ETP) that is to
serve as a road map and management tool for sequencing business system
investments in the areas of personnel, logistics, real property,
acquisition, purchasing, and financial management. As Business
Transformation Agency (BTA) officials acknowledge, the ETP does not
contain all of the components of a comprehensive and integrated
enterprisewide transformation plan as we envision. BTA officials stated
that, while the ETP is integrated with the Financial Improvement and Audit
Readiness Plan,^12 the ETP is not as integrated with other enterprisewide,
high-risk area improvement plans, such as the Supply Chain Plan.^13
However, BTA officials consider the ETP to be an evolving plan and are
currently analyzing other enterprisewide plans aimed at improving and
transforming DOD's business operations in order to improve the degree of
alignment between those plans and the ETP. Finally, BTA officials indicate
that the department is moving toward a family of linked plans that could
be used to guide and monitor business transformation, rather than one
comprehensive plan that addresses all aspects of DOD's business
operations.

^11See for example, GAO, Department of Defense: Sustained Leadership is
Critical to Effective Financial and Business Management Transformation,
[31]GAO-06-1006T (Washington, D.C.: Aug. 3, 2006); DOD's High-Risk Areas:
Successful Business Transformation Requires Sound Strategic Planning and
Sustained Leadership, [32]GAO-05-520T (Washington, D.C.: Apr. 13, 2005);
and DOD Financial Management: Integrated Approach, Accountability,
Transparency, and Incentives Are Keys to Effective Reform, [33]GAO-02-497T
(Washington, D.C.: Mar. 6, 2002).

To develop a family of linked plans, the enterprise transition plan would
also need to be aligned with the high-level Quadrennial Defense Review
(QDR) strategic plan and its initiatives, which so far is not the case.
For example, the QDR highlights the need for transforming the way the
department works and what it works on, but it does not contain supporting
details such as key metrics, milestones, and mechanisms to guide and
direct the business transformation effort. Moreover, the QDR's business
transformation initiative, the Institutional Reform and Governance
project, is not clearly aligned with the ETP. This initiative is intended
to (1) establish a common and authoritative analytical framework to link
strategic decisions to execution, (2) integrate core decision processes,
(3) and align and focus the department's governance and management
functions under an integrated enterprise model. Finally, the QDR and other
DOD planning documents do not address the ongoing gap between wants,
needs, affordability, and sustainability in what is likely to be a
resource-constrained environment.

Sustained Leadership Is Needed

While DOD has established leadership and oversight mechanisms to address
transformation, DOD lacks the sustained leadership at the right level
needed to achieve successful and lasting transformation. Due to the
complexity and long-term nature of DOD's business transformation efforts,
we continue to believe DOD needs a chief management officer (CMO) to
provide sustained leadership and maintain momentum. Without formally
designating responsibility and accountability for results, choosing among
competing demands for scarce resources and resolving differences in
priorities among various DOD organizations will be difficult and could
impede DOD's ability to transform in an efficient, effective, and
reasonably timely manner. In addition, it may be particularly difficult
for DOD to sustain transformation progress when key personnel changes
occur. 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 effort within DOD.

^12U.S. Department of Defense, Defense Financial Improvement and Audit
Readiness Plan (Washington, D.C.: Sept. 30, 2006).

^13U.S Department of Defense, DOD Plan for Improvement in the GAO High
Risk Area of Supply Chain Management with a Focus on Inventory Management
and Distribution, (Washington, D.C.: September 2006).

I would also like to articulate what this position would not do. The CMO
would not be another layer in DOD's day-to-day management structure.
Specifically, 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 the department, nor would the
CMO supervise those officials in connection with their ongoing
responsibilities. Instead, the CMO would be responsible and accountable
for planning, integrating, and executing the overall business
transformation effort. The CMO also would develop and implement a
strategic plan for the overall business transformation effort. As required
by Congress, DOD is studying the feasibility and advisability of
establishing a CMO to oversee the department's business transformation
process. As part of this effort, the Defense Business Board, an advisory
panel, examined various options and, in May 2006, endorsed this concept.
The Institute for Defense Analysis is scheduled to issue a report on this
issue before the end of this year. In addition, McKinsey and Company
recently endorsed the CMO concept.

The Secretary of Defense, Deputy Secretary of Defense, and other senior
leaders have clearly shown a commitment to business transformation and
addressing deficiencies in the department's business operations. During
the past year, DOD has taken additional steps to address certain
provisions and requirements of the Ronald W. Reagan National Defense
Authorization Act for Fiscal Year 2005, including establishing the Defense
Business Systems Management Committee (DBSMC), which is intended to be
DOD's primary transformation leadership and oversight mechanism, and
creating the BTA to support the DBSMC, a decision-making body. However,
these organizations do not provide the sustained leadership needed to
successfully achieve the needed overall business transformation. The
DBSMC's representatives consist of political appointees whose terms expire
when administrations change. Furthermore, it is important to remember that
committees do not lead, people do. Thus, DOD still needs to designate a
person to provide sustained leadership and have overall responsibility and
accountability for this effort.

In addition, we testified in November 2005^14 that DOD's BTA offers
potential benefits relative to the department's business systems
modernization efforts if the agency can be properly organized, given
resources, and empowered to effectively execute its roles and
responsibilities and is held accountable for doing so. However, the
department has faced challenges in making the BTA operational. For
example, we previously testified that there are numerous key acquisition
functions that would need to be established and made operational for the
BTA to effectively assume responsibility for 21 DOD-wide projects,
programs, systems, and initiatives, and our experience across the
government shows that these functions can take considerable time to
establish.^15

To assist the department, the Fiscal Year 2004 National Defense
Authorization Act gives DOD the authority to hire up to 2,500 highly
qualified experts from outside the civil service and uniformed services
without going through the normal civil service hiring system.^16 Earlier
this year, the BTA had yet to take advantage of this authority because of
certain departmental obstacles concerning, for example, the roles that
these experts could perform. However, it is our understanding that this is
no longer the case, and to date the BTA has hired 9 of these individuals.
Moreover, we were told that the BTA has also obtained direct hiring
authority from the Office of Personnel Management. The BTA's total
projected end strength is 235 personnel. As of November 2006, the BTA had
hired 128 personnel; agency officials anticipate hiring the remaining 107
personnel, including 16 additional highly qualified subject experts by
September 30, 2007.

^14GAO, Defense Management: Foundational Steps Being Taken to Manage DOD
Business Systems Modernization, but Much Remains to be Accomplished to
Effect True Business Transformation, [34]GAO-06-234T (Washington, D.C.:
Nov. 9, 2005).

^15According to DOD, 21 systems and initiatives have been transferred
under the BTA as of Oct. 31, 2006.

^16National Defense Authorization Act for Fiscal Year 2004, Pub. L. No.
108-136, S 1101 (2003) (codified in part at 10 U.S.C. S 9903).

While achieving the BTA's initial staffing goals would represent a major
accomplishment and is extremely important to its ability to perform its
business transformation and business systems modernization roles and
responsibilities, BTA human capital management is not a one-time event but
rather an essential BTA function that needs to be managed strategically.
Our research shows that to be successful, organizations need to treat
human capital as strategic assets--continuously working to understand gaps
between future needs and on-board capabilities and establish plans for
filling gaps through a combination of, for example, training, retention
incentives, hiring, and performance-related rewards. By employing such an
approach, the BTA can be better positioned to make sure that it has the
right people, with the right skills, when it needs them not only today but
in the future. The Deputy Undersecretary of Defense for Financial
Management stated that the BTA is currently developing a human capital
strategy that is expected to be completed by January 2007. It will to (1)
provide for rotating staff between BTA and the DOD components to infuse
talent into the BTA and to develop a change-oriented culture, (2) align
individual and team performance to already established organizational
mission outcomes, and (3) employ OPM's Human Capital Assessment and
Accountability Framework and the DOD Human Capital Strategy.

DOD Has Made Progress in Complying with Business Systems Modernization and
Financial Management Accountability Legislation, but Much Work Remains

The department has made important progress in complying with legislation
pertaining to its financial management improvement and business systems
modernization efforts. However, formidable challenges remain relative to
extending the architecture and implementing its tiered accountability
investment approach across the military services and defense agencies, and
ensuring that the department's thousands of business system investments
are implemented on time and within budget and provide promised
capabilities and benefits. The Fiscal Year 2005 National Defense
Authorization Act contained provisions aimed at establishing some of the
tools needed to accomplish this. As our evaluations of federal information
technology (IT) management and our research of successful organizations
show, other tools necessary for successfully modernizing systems will also
be needed.

As we reported earlier this year,^17 DOD also made important progress in
complying with the Fiscal Year 2005 National Defense Authorization Act
pertaining to its business systems modernization. For example, on March
15, 2006, DOD released updates to its business enterprise architecture
(Version 3.1) and its ETP. These updates added previously missing content
to the architecture and transition plan, such as identifying an
enterprisewide data standard to support financial management and reporting
requirements. Other business system modernization management improvements
were also apparent, such as increased budgetary reporting of business
system investments and additional investment review controls.

More recently, DOD issued Version 4.0 of its business enterprise
architecture and ETP. These latest versions provide additional content and
clarity. For example, the transition plan now includes the results of
ongoing analyses of gaps between existing business capabilities and needed
capabilities. However, enormous challenges, such as extending the
architecture across the military services and defense agencies, remain. To
this end, the department defined a conceptual strategy in September 2006,
for federating the architecture^18 and adopting a shared services
orientation.^19 While we believe that the concepts have merit and are
applicable to DOD, much remains to be decided and accomplished before they
can be implemented in a way to produce architectures and transition plans
for each DOD component that are aligned with the department's corporate
view and that can guide and constrain component-specific investments.

^17 [35]GAO-06-406T and GAO, Business Systems Modernization: DOD Continues
to Improve Institutional Approach, but Further Steps Needed,
[36]GAO-06-658 (Washington, D.C.: May 15, 2006).

^18A federated architecture is an architecture that is composed of a set
of coherent, but distinct, entity architectures. The entities or members
of the federation collaborate to develop an integrated enterprise
architecture that conforms to the enterprise view and to the overarching
rules of the federation.

At the same time, DOD components continue to invest billions of dollars in
new and existing business systems each year. This means that the risks of
investing in these programs ahead of the federated architecture need to be
part of investment approval decisions. As we have previously reported,^20
investment decision making based on architecture alignment is but one of
many keys to success of any business system modernization. Other keys to
the success in delivering promised system capabilities and benefits on
time and within budget include having the right human capital team in
place and following a range of essential program management and system and
software acquisition disciplines. As I will discuss later, our experience
in reviewing several DOD business system programs shows that these keys to
success are not consistently practiced. While not a guarantee, our
research of leading program management and system acquisition practices
and evaluations of federal agencies shows that institutionalization of a
family of well-defined management controls can go a long way in minimizing
business system modernization risks.

^19A service-oriented architecture is an approach for sharing functions
and applications across an organization by designing them as discrete,
reusable, business-oriented services. These services need to be, among
other things, (1) self-contained, meaning that they do not depend on any
other functions or applications to execute a discrete unit of work; (2)
published and exposed as self-describing business capabilities that can be
accessed and used; and (3) subscribed to via well-defined and standardized
interfaces instead of unique, tightly coupled connections. Such a service
orientation is thus not only intended to promote the reduced redundancy
and increased integration that any architectural approach is designed to
achieve, but to also provide the kind of flexibility needed to support a
quicker response to changing and evolving business requirements and
emerging conditions.

^20GAO, DOD Systems Modernization: Planned Investment in the Navy Tactical
Command Support System Needs to be Reassessed, [37]GAO-06-215 (Washington,
D.C.: Dec. 5, 2005) and DOD Systems Modernization: Uncertain Joint Use and
Marginal Expected Value of Military Asset Deployment System Warrant
Reassessment of Planned Investment, [38]GAO-06-171 (Washington, D.C.: Dec.
15, 2005).

DOD Continues to Evolve Its Business Enterprise Architecture, but Much Remains
to Be Accomplished

In May 2006,^21 we reported on DOD's efforts to address a number of
provisions in the Fiscal Year 2005 National Defense Authorization Act.^22
Among other things, we stated that the department had adopted an
incremental strategy for developing and implementing its architecture,
which was consistent with our prior recommendation and a best practice. We
further stated that DOD had addressed a number of the limitations in prior
versions of its architecture. For example, we reported that Version 3.1 of
the architecture had much of the information needed, if properly
implemented, to achieve compliance with the Department of the Treasury's
United States Standard General Ledger,^23 such as the data elements or
attributes that are needed to facilitate information sharing and
reconciliation with the Treasury. In addition, we stated that the
architecture continued to specify DOD's Standard Financial Information
Structure (SFIS)^24 as an enterprisewide data standard for categorizing
financial information to support financial management and reporting
functions.

Despite this progress, we also reported^25 that this version of the
architecture did not comply with all of the legislative requirements^26
and related best practices. For example, while program officials stated
that analyses of the current architectural environment for several of the
enterprise-level systems had occurred, the architecture did not contain a
description of, or a reference to, the results of these analyses. The
architecture also did not include a systems standards profile to support
implementation of data sharing among departmentwide business systems and
interoperability with departmentwide IT infrastructure. Program officials
acknowledged that the architecture did not include this profile and stated
that they were working with the Assistant Secretary of Defense (Networks
and Information Integration) and Chief Information Officer to address this
in future versions. We also reported that the architecture was not, for
example, adequately linked to the military service and defense agency
component architectures and transition plans, which we said was
particularly important given the department's stated intention to adopt a
federated approach to developing and implementing the architecture.

^21 [39]GAO-06-658 .

^22Ronald W. Reagan National Defense Authorization Act for Fiscal Year
2005, Pub. L. No. 108-375, S 332 (2004) (codified in part at 10 U.S.C. S
2222).

^23The United States Standard General Ledger provides a uniform chart of
accounts and technical guidance used in standardizing federal agency
accounting.

^24SFIS is the department's common financial business language.

^25 [40]GAO-06-658 .

^2610 U.S.C. S2222(d).

In September 2006, DOD released Version 4.0 of its architecture, which
according to the department, resolves several of the architecture gaps
that were identified with the prior version. One example of a gap that DOD
reports Version 4.0 is beginning to fill is the definition of a key
business process area missing from prior versions--the planning,
programming, and budgeting process area. In this regard, according to DOD,
the architecture now includes departmental and other federal planning,
programming, and budgeting guidance (e.g., OMB Circular A-11) and some
high-level activities associated with this process area. In addition, DOD
reports that Version 4.0 has restructured the business process models to
reduce data redundancy and ensure adherence to process modeling standards
(e.g., eliminated numerous process modeling standards violations and
stand-alone process steps with no linkages). Despite these improvements,
this version is still missing, for example, a depiction of the current
environment (i.e., baseline of its current assets and current
capabilities) that was analyzed against its target environment to identify
capability gaps that the ETP is to address. Further, it does not include
DOD component architectures (e.g., services and various DOD agencies) as
distinct yet coherent members of a federated DOD business enterprise
architecture.

DOD Plans to Federate Its Business Enterprise Architecture to the Components

Recognizing the need to address component architectures, DOD released its
business mission area federation strategy and road map in September 2006,
which is intended to define how DOD will extend its business enterprise
architecture across the military services and defense agencies. According
to DOD, the strategy will provide for standardization across the
federation of architectures by, for example, introducing a consistent set
of standards for determining the status and quality of the member
(component and program) architectures, a standard methodology for linking
member architectures to the overarching corporate architecture, the
capability to search member architectures, and a common method to reuse
capabilities described by these architectures.

In the end, the strategy is intended to link related business mission area
services or capabilities in the various architectures by establishing a
set of configuration standards for architecture repositories. Further, the
strategy is also intended to support the development of the interoperable
execution of enterprise and component systems by defining and disclosing
common services that can be shared and reused by these systems. (See fig.
1 for a simplified and illustrative conceptual depiction of DOD's
federated business enterprise architecture.)

Figure 1: Simplified and Illustrative Diagram of DOD's Federated Business
Enterprise Architecture

The importance of extending the DOD business enterprise architecture to
the military services is underscored by our recent findings about the
military services' management of their respective enterprise architecture
programs.^27 Specifically, in August 2006, we released an assessment of
federal agency enterprise architecture programs' satisfaction of the
elements in our Enterprise Architecture Management Maturity Framework
(EAMMF).^28 Our EAMMF is a five-stage architecture framework for managing
the development, maintenance, and implementation of an architecture and
understanding the extent to which effective architecture management
practices are being performed and where an organization is in its
progression toward having a well-managed architecture program. In short,
the framework consists of 31 core elements that relate to architecture
governance, content, use, and measurement.^29 These elements reflect
research by us and others showing that architecture programs should be
founded upon institutional architecture commitment and capabilities, and
measured and verified products and results.

^27GAO, Enterprise Architecture: Leadership Remains Key to Establishing
and Leveraging Architectures for Organizational Transformation,
[41]GAO-06-831 (Washington, D.C.: August 2006).

^28 [42]GAO-06-831 .

With respect to the maturity of the military services' respective
enterprise architecture programs, we found that the departments of the Air
Force, the Army, and the Navy had not satisfied about 29, 55, and 29
percent of the core elements in our framework, respectively. In addition,
the Army had only fully satisfied 1 of the 31 core elements (3 percent).
(See table 1 for the number and percentage of elements fully, partially,
and not satisfied by each of the military services).

Table 1: Number and Percentage of Framework Elements Fully, Partially, and
Not Satisfied by the Military Services

Military services Fully satisfied Partially satisfied Not satisfied 
Air Force                14 (45%)             8 (26%)       9 (29%) 
Army                      1 (03%)            13 (42%)      17 (55%) 
Navy                     10 (32%)            12 (39%)       9 (29%) 

Source: GAO.

By comparison, the other major federal departments and agencies that we
reviewed had as a whole fully satisfied about 67 percent of the
framework's core elements. Among the key elements that all three services
had not fully satisfied were developing architecture products that
describe their respective target architectural environments and developing
transition plans for migrating to a target environment, in addition to the
following.

           o The Air Force, for example, had not yet placed its architecture
           products under configuration management to ensure the integrity
           and consistency of these products and was not measuring and
           reporting on the quality of these products.
           o The Army, for example, had yet to develop effective architecture
           development plans and had not developed architecture products that
           fully described its current architectural environment.

           o The Navy, for example, had yet to describe its current
           architectural environment in terms of performance and had not
           explicitly addressed security in its architecture descriptions.

           Further, while the services had partially satisfied between 8 and
           13 core elements in our framework, it is important to note that
           even though certain core elements are partially satisfied, fully
           satisfying some of them will not be accomplished quickly and
           easily. It is also important to note the importance of fully,
           rather than partially, satisfying certain elements, such as those
           that address architecture content, which can have important
           implications for the quality of an architecture and thus its
           usability and results.

           To assist the military services in addressing enterprise
           architecture challenges and managing their architecture programs,
           we recommended that the services develop and implement plans for
           fully satisfying each of the conditions in our framework. The
           department generally agreed with our findings and recommendations
           and stated that it plans to use our framework as one of the
           benchmark best practices as DOD components continuously work to
           improve enterprise architecture management maturity.

           Clearly, much remains to be accomplished to implement the
           federated strategy and create DOD's federated business enterprise
           architecture. One key to making this happen, which we have
           previously recommended,^30 is having a business enterprise
           architecture development management plan that defines what will be
           done, when, by whom, and how it will done to fully develop the
           architecture. Having and using such a plan is provided for in our
           EAMMF. Without one, the department is less likely to effectively
           accomplish its intended architecture evolution, extension, and
           improvement efforts. According to BTA officials, they are in the
           process of addressing this recommendation. We currently have
           ongoing work for this committee and others looking at, among other
           things, how the department plans to implement the federated
           strategy and the challenges that it faces in doing so.
			  
			  DOD Continues to Improve Its Enterprise Transition Plan, but
			  Needed Improvements Remain

           DOD has taken a number of steps to improve its ETP and address
           some of the missing elements that we previously identified^31
           relative to the Fiscal Year 2005 National Defense Authorization
           Act's requirements and related transition planning guidance. For
           example, in May 2006, we reported that the transition plan
           included an initiative aimed at identifying capability gaps
           between the current and target architectural environments, and
           provided information on progress on major investments--including
           key accomplishments and milestones attained, and more information
           about the termination of legacy systems. However, we reported that
           it still did not identify, among other things, all legacy systems
           that will not be part of the target architecture, and it did not
           include system investment information for all the military
           services, defense agencies, and combatant commands.

           In September 2006, DOD released an updated revision to its ETP,
           which continues to include major investments--such as key
           accomplishments and milestones attained, as well as new
           information on near-term activities (i.e., within the next 6
           months) at both the enterprise and component levels. For example,
           in an effort to improve visibility into personnel activities, DOD
           reported that, for the Defense Civilian Personnel Data System, it
           met the September 2006 milestone to implement enterprisewide tools
           for use in advanced reporting and data warehousing, and that it
           has set a September 2008 milestone for developing an
           implementation strategy for integrating modules supporting
           functionality that is currently provided by stand-alone
           applications. In addition, the updated plan provides information
           on business priorities supported by systems and initiatives and
           aligns these priorities with a set of business value measures
           (e.g., on-time customer request, payroll accuracy). Specifically,
           for each business enterprise priority, the plan now identifies the
           business capability improvements (e.g., manage personnel and pay)
           necessary to achieve the business enterprise priority (e.g.,
           personnel visibility) objectives and the metrics for measuring
           progress towards achieving these objectives. In addition, the plan
           now identifies the relationship between target systems, business
           capabilities, operational activities, and the system functions
           they provide and specific organizations that will or plan to use
           the system. Further, the transition plan now includes the initial
           results of ongoing analyses of gaps between its current and target
           environments for most of the business enterprise priorities, in
           which capability and performance shortfalls and their root causes
           are described and the architecture solution component (such as
           business rules and transformation initiatives and systems) that
           are to address these shortfalls are identified.

           However, the current transition plan is still missing important
           elements. Specifically, the plan does not yet include system
           investment information for all the defense agencies and combatant
           commands. In addition, the planned investments in the transition
           plan are not sequenced based on a range of activities that are
           critical to developing an effective transition plan. As we have
           previously reported,^32 a transition or sequencing plan should
           provide a temporal investment road map for moving between the
           current and target environments, based on such considerations as
           technology opportunities, marketplace trends, institutional system
           development and acquisition capabilities, legacy and new system
           dependencies and life expectancies, and the projected value of
           competing investments. According to a BTA official responsible for
           the ETP, the transition plan investments have not been sequenced
           based on these considerations. Rather, the ETP is based on fiscal
           year budgetary constraints.

           Program officials stated that the next version of the plan will
           enhance performance metric tracking, improve the quality of system
           functional scope and organizational span information, better
           integrate component plans with enterprise plans, enhance
           federating plans for each business capability, and possibly add
           other components to the enterprise transition plan. As the
           transition plan evolves and all system investments are validated
           against the architecture via capability gap analyses, the
           department should be better positioned to sequentially define and
           manage the migration and disposition of existing business
           processes and systems--and the introduction of new ones.
			  
			  DOD Has Established Business Systems Investment Decision-Making
			  Controls, but Full Implementation Remains Unclear

           To help improve the department's control and accountability over
           its business systems investments, provisions in the Fiscal Year
           2005 National Defense Authorization Act directed DOD to put in
           place a specifically defined structure that is responsible and
           accountable for controlling business systems investments to ensure
           compliance and consistency with the business enterprise
           architecture. More specifically, the act directs the Secretary of
           Defense to delegate responsibility for review, approval, and
           oversight of the planning, design, acquisition, deployment,
           operation, maintenance, and modernization of defense business
           systems to designated approval authorities or "owners" of certain
           business missions.^33 DOD has satisfied this requirement under the
           act. On March 19, 2005, the Deputy Secretary of Defense issued a
           memorandum that delegated the authority in accordance with the
           criteria specified in the act, as described above. Our research
           and evaluation of agencies' investment management practices have
           shown that clear assignment of senior executive investment
           management responsibility and accountability is crucial to having
           an effective institutional approach to IT investment
           management.^34

           The Fiscal Year 2005 National Defense National Authorization Act
           also required DOD to establish investment review structures and
           processes, including a hierarchy of investment review boards
           (IRB), each with representation from across the department, and a
           standard set of investment review and decision-making criteria for
           these boards to use to ensure compliance and consistency with
           DOD's business enterprise architecture. In this regard, the act
           required the establishment of the DBSMC--which serves as the
           highest ranking governance body for business system modernization
           activities within the department. As of April 2006, DOD identified
           3,717 business systems and assigned responsibility for these
           systems to IRBs. Table 2 shows the systems and the responsible IRB
           and component.

^29GAO, Information Technology: A Framework for Assessing and Improving
Enterprise Architecture Management (Version 1.1), [43]GAO-03-584G
(Washington, D.C.: April 2003).

^30 [44]GAO-06-658 .


^31 [45]GAO-06-219 .

^32 [46]GAO-06-658 .

^33Approval authorities, including 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;
the Assistant Secretary of Defense for Networks and Information
Integration and Chief Information Officer of the Department of Defense;
and the Deputy Secretary of Defense or an Under Secretary of Defense, as
designated by the Secretary of Defense, are responsible for the review,
approval, and oversight of business systems and must establish investment
review processes for systems under their cognizance.

^34GAO, Information Technology Investment Management: A Framework for
Assessing and Improving Process Maturity, [47]GAO-04-394G (Washington,
D.C.: March 2004).

Table 2: DOD Systems and Investment Review Board and Component

                                                       Defense                
                                                   Finance and    Other       
                                    Air             Accounting  defense       
Investment review board        Force  Army Navy     Service agencies Total 
Financial Management              67   161  148          72       35   483 
Human Resources Management       164   320  174          20      114   792 
Weapon System Life-Cycle                                                   
Management and Materiel Supply                                             
and Service Management           780   730  406           1      168 2,085 
Real Property and                                                          
Installations Life-Cycle                                                   
Management                        71   122   44           0       17   254 
Other                             65     0   26           0       12   103 
Total                          1,147 1,333  798          93      346 3,717 

Source: GAO analysis of DOD data.

A key element of the department's approach to reviewing and approving
business systems investments is the use of what it refers to as tiered
accountability. DOD's tiered accountability approach involves an
investment control process that begins at the component level and works
its way through a hierarchy of review and approval authorities, depending
on the size and significance of the investment. Military service officials
emphasized that the success of the process depends on them performing a
thorough analysis of each business system before it is submitted for
higher-level review and approval. Through this process, the department
reported in March 2006 that 226 business systems, representing about $3.6
billion in modernization investment funding, had been approved by the
DBSMC--the department's highest-ranking approval body for business
systems. According to the department's March 2006 report, this process
also identified more than 290 systems for phase out or elimination and
approximately 40 business systems for which the requested funding was
reduced and the funding availability periods were shortened to fewer than
the number of years requested. For example, one business system investment
that has been eliminated is the Forward Compatible Payroll (FCP) system.
In reviewing the program status, the IRB determined that FCP would
duplicate the functionality contained in the Defense Integrated Military
Human Resources System, and it was unnecessary to continue investing in
both systems.^35 A major reason the department has thousands of business
systems is that it has historically failed to consistently employ the
range of effective institutional investment management controls, such as
an architecture-centric approach to investment decision making, that our
work and research show are keys to successful system modernization
programs. Such controls help to identify and eliminate duplicative systems
and this helps to optimize mission performance, accountability, and
transformation. They also help to ensure that promised system capabilities
and benefits are delivered on time and within budget.

^35According to the department's fiscal year 2007 IT budget request,
approximately $33 million was sought for fiscal year 2007 and about $31
million was estimated for fiscal year 2008 for FCP.

Furthermore, the BTA reports that the tiered accountability approach has
reduced the level of funding and the number of years that funding will be
available for 14 Army business systems, 8 Air Force business systems, and
8 Navy business systems. For example, the Army's Future Combat Systems
Advanced Collaborative Environment program requested funding of $100
million for fiscal years 2006 through 2011, but the amount approved was
reduced to approximately $51 million for fiscal years 2006 through 2008.
Similarly, Navy's Military Sealift Command Human Resources Management
System requested funding of about $19 million for fiscal years 2006
through 2011, but the amount approved was approximately $2 million for the
first 6 months of fiscal year 2006. According to Navy officials, this
system initiative will be reviewed to ascertain whether it has some of the
same functionality as the Defense Civilian Personnel Data System. Funding
system initiatives for shorter time periods can help reduce the financial
risk by providing additional opportunities for monitoring a project's
progress against established milestones and help ensure that the
investment is properly aligned with the architecture and the department's
overall goals and objectives.

Besides limiting funding, the investment review and approval process has
resulted in conditions being placed on system investments. These
conditions identify specific actions to be taken and when the actions must
be completed. For example, in the case of the Army's Logistics
Modernization Program (LMP) initiative, one of the noted conditions was
that the Army had to address the issues discussed in our previous
reports.^36 In our May 2004 report, we recommended that the department
establish a mechanism that provides for tracking all business systems
modernization conditional approvals to provide reasonable assurance that
all specific actions are completed on time.^37 In response, the department
has begun to track conditional approvals.

^36GAO, DOD Business Systems Modernization: Billions Continue to Be
Invested with Inadequate Management Oversight and Accountability,
[48]GAO-04-615 (Washington, D.C.: May 27, 2004 and Army Depot Maintenance:
Ineffective Oversight of Depot Maintenance Operations and System
Implementation Efforts, [49]GAO-05-441 (Washington, D.C.: June 30, 2005).

Despite the department's efforts to control its investments to acquire new
business systems or to enhance existing business systems, formidable
challenges remain. In particular, the reviews of those business systems
that have modernization funding of less than $1 million, which represent
the majority of the department's reported 3,717 business systems, are only
now being started on an annual basis, and thus the extent to which the
review structures and processes will be applied to the department's 3,717
business systems is not clear. Given the large number of systems involved,
it is important that an efficient system review and approval process be
effectively implemented for all systems. As indicated in table 2, there
are numerous systems across the department in the same functional area.
Such large numbers of systems indicate a real possibility for eliminating
unnecessary duplication and avoiding unnecessary spending on the
department's multiple business systems. In support of this Subcommittee,
we have work planned to address the extent to which these management
controls are actually being implemented for both the enterprise-level
investments and the thousands of other system investments that are being
managed at the component level.

Key DOD Systems Still Face Challenges

As we have previously testified and reported,^38 DOD has not effectively
managed a number of business system programs. Among other things, our
reviews of individual system investments have identified weaknesses in
such things as architectural alignment and informed investment decision
making, which are focus areas of the Fiscal Year 2005 National Defense
Authorization Act provisions. Our reviews have also identified weaknesses
in other system acquisition and investment management areas--such as
requirements management, testing, and performance management--where good
management is crucial for the successful implementation of any given DOD
business system. I will describe examples of the weaknesses that we have
recently reported on for five system investments. The system investments
are the Defense Integrated Military Human Resources System (DIMHRS),
Defense Travel System (DTS), the Army Logistics Modernization Program
(LMP), the Navy Tactical Command Support System (NTCSS), and the
Transportation Coordinators' Automated Information for Movements System II
(TC-AIMS II). The weaknesses that we have found raise questions as to the
extent to which the structures, processes, and controls that DOD has
established in response to the Fiscal Year 2005 National Defense
Authorization Act are actually being implemented, and illustrate the range
of system acquisition and investment management controls (beyond those
provided for in the act) that need to be effectively implemented in order
for a given investment to be successfully acquired and deployed.

^37 [50]GAO-04-615 .

^38See, for example, [51]GAO-06-234T .

  DIMHRS

In 2005 we reported that DIMHRS--a planned DOD-wide military pay and
personnel system---was not being managed as a DOD-wide investment, to
include alignment with a DOD-wide architecture and governance by a
DOD-wide body.^39 In addition, we reported that DIMHRS requirements had
not been adequately defined, and not all acquisition best practices
associated with commercial component-based systems were being followed.
Accordingly, we made a number of recommendations. In response, DOD has
elevated the system to an enterprise investment under the BTA, and
established a DIMHRS steering committee that is chartered to include
representation from the services. The BTA has also hired a DIMHRS program
manager, and the Army and the Air Force, while continuing to evaluate
their respective requirements, have determined that the commercial
software product selected for DIMHRS can be used under certain conditions.
The Army expects to deploy DIMHRS in April 2008 and the Air Force plans to
begin deployment in May 2008. The Navy, on the other hand, assessed both
DIMHRS and the Marine Corps Total Force System (MCTFS)^40 and determined
that MCTFS would better meet its requirements. According to a Navy
official, the DBSMC has directed the Navy to research MCTFS and to fully
evaluate the cost implications of the MCTFS option, but has not granted
the Navy permission to deploy MCTFS. We plan to evaluate DOD's
implementation of our prior recommendations and the Navy's analysis of the
merits of pursuing the MCTFS option.

  DTS

In September 2006, we reported^41 on limitations in the economic
justification underlying DOD's decision to invest in DTS, which is
intended to be the standard departmentwide travel system. Specifically, we
found that two key assumptions used to estimate cost savings in the
September 2003 DTS economic analysis were not based on reliable
information. Additionally, we reported that DOD did not have quantitative
metrics to measure the extent to which DTS is actually being used.
Moreover, we found that DOD had not adequately defined and tested the
system's requirements, an area of concern that was also discussed in our
January 2006 report.^42 These system acquisition management weaknesses
introduce considerable risk to DOD's ability to deliver promised DTS
capabilities and benefits on time and within budget. Although the
September 2003 economic analysis was not based on supportable data, the
department's criteria do not require that a new economic analysis be
prepared. DTS has already completed all of the major milestones related to
a major automated system which require that an economic analysis be
prepared or at least updated to reflect the current assumptions and the
related costs and benefits. However, the Fiscal Year 2005 National Defense
Authorization Act^43 requires the periodic review, but not less than
annually, of every defense business system investment. Further, the
department's April 2006 guidance^44 notes that the annual review process
"provides follow-up assurance that information technology investments,
which have been previously approved and certified, are managed properly,
and that promised capabilities are delivered on time and within budget."
If effectively implemented, this annual review process provides an
excellent opportunity for DOD management to assess whether DTS is meeting
its planned cost, schedule, and functionality goals. Going forward, such a
review could serve as a useful management tool in making funding and other
management decisions related to DTS. We made recommendations to DOD aimed
at improving the management oversight of DTS, including periodic reports
on DTS utilization and resolution of inconsistencies in DTS's
requirements. DOD generally agreed with the recommendations and described
its efforts to address them.

^39GAO, DOD Systems Modernization: Management of Integrated Military Human
Capital Program Needs Additional Improvements, [52]GAO-05-189 (Washington,
D.C.: Feb 11, 2005).

^40MCTFS is the Marine Corps' integrated personnel and pay system.

^41GAO, Defense Travel System: Reported Savings Questionable and
Implementation Challenges Remain, [53]GAO-06-980 (Washington, D.C.: Sept.
26, 2006).

^42GAO DOD Business Transformation: Defense Travel System Continues to
Face Implementation Challenges, [54]GAO-06-18 (Washington, D.C.: Jan. 18,
2006).

^43Ronald W. Reagan National Defense Authorization Act for Fiscal Year
2005, Pub. L. No. 108-375, S 332 (2004) (codified, in part at 10 U.S.C. SS
186 and 2222).

^44DOD, DOD IT Business Systems Investment Review Process: Investment
Certification and Annual Review Process User Guidance (Apr. 10, 2006).

  LMP

In 2004 and 2005,^45 we reported that the Army faced considerable
challenges in developing and implementing LMP which is intended to
transform the Army Materiel Command's logistics operations. In particular,
we reported that LMP will not provide intended capabilities and benefits
because of inadequate requirements management and system testing. These
problems prevented the Tobyhanna Army Depot from accurately reporting on
its financial operations, which, in turn, adversely impacts the depot's
ability to accurately set prices. We found that the Army has not put into
place an effective management process to help ensure that the problems
with the system are resolved. While the Army developed a process that
identified the specific steps that should be followed in addressing the
problems identified, the process was not followed. We recommended
improvements in the implementation of LMP as well as delaying
implementation at the remaining four depots until problems encountered
have been resolved. DOD concurred with all the recommendations. The
Subcommittee has requested that we undertake a series of audits directed
at DOD's efforts to resolve long-standing financial management problems
over the visibility of its assets. Our first such audit is evaluating the
Army's efforts in the area and will include follow-up work on LMP.

  NTCSS

In December 2005, ^46 we reported that DOD needed to reassess its planned
investment in the NTCSS--a system intended to help Navy personnel
effectively manage ships, submarines, and aircraft support activities.
Among other things, we reported that the Navy had not economically
justified its ongoing and planned investment in the NTCSS and had not
invested in the NTCSS within the context of a well-defined DOD or Navy
enterprise architecture. In addition, we reported that the Navy had not
effectively performed key measurement, reporting, budgeting, and oversight
activities, and had not adequately conducted requirements management and
testing activities. We conclude that without this information, the Navy
could not determine whether the NTCSS as defined, and as being developed,
is the right solution to meet its strategic business and technological
needs. Accordingly, we recommended that DOD develop the analytical basis
to determine if continued investment in the NTCSS represents prudent use
of limited resources and we also made recommendations to strengthen
management of the program, conditional upon a decision to proceed with
further investment in the program. In response, DOD generally concurred
with the recommendations.

^45GAO, DOD Business Systems Modernization: Billions Continue to Be
Invested with Inadequate Management Oversight and Accountability,
[55]GAO-04-615 (Washington, D.C.: May. 27, 2004) and Army Depot
Maintenance: Ineffective Oversight of Depot Maintenance Operations and
System Implementation Efforts, [56]GAO-05-441 (Washington, D.C.: June 30,
2005).

^46GAO, DOD Systems Modernization: Planned Investment in the Navy Tactical
Command Support System Needs to be Reassessed, [57]GAO-06-215 (Washington,
D.C.: Dec. 5, 2005).

  TC-AIMS II

In December 2005,^47 we reported that TC-AIMS II--a joint services system
with the goal of helping to manage the movement of forces and equipment
within the United States and abroad--had not been defined and developed in
the context of a DOD enterprise architecture. Similar to DIMHRS and DTS,
TC-AIMS II was intended to be an enterprise-level system. However, the
Army--DOD's acquisition agent for TC-AIMS II--had pursued the system on
the basis of an Army logistics-focused architecture. This means that
TC-AIMS II, which was intended to produce a departmentwide military
deployment management system, was based on a service-specific
architecture, thus increasing the risk that this program, as defined, will
not properly fit within the context of future DOD enterprisewide business
operations and IT environments. In addition, the Army had not economically
justified the program on the basis of reliable estimates of life-cycle
costs and benefits, and as a result, the Army does not know if investment
in TC-AIMS II, as planned, is warranted or represents a prudent use of
limited DOD resources. Accordingly, we recommended that DOD, among other
things, develop the analytical basis needed to determine if continued
investment in TC-AIMS II, as planned, represents prudent use of limited
defense resources. In response, DOD generally concurred with our
recommendations and described efforts initiated or planned to bring the
program into compliance with applicable guidance.

DOD Issues Its Financial Improvement and Audit Readiness Plan

A major component of DOD's business transformation effort is the defense
Financial Improvement and Audit Readiness Plan (FIAR), initially issued in
December 2005 and updated in June 2006 and September 2006, pursuant to
section 376 of the National Defense Authorization Act for Fiscal Year
2006.^48 Section 376 limited DOD's ability to obligate or expend funds for
fiscal year 2006 on financial improvement activities until the department
submitted a comprehensive and integrated financial management improvement
plan to the congressional defense committees. Section 376 required the
plan to (1) describe specific actions to be taken to correct deficiencies
that impair the department's ability to prepare timely, reliable, and
complete financial management information and (2) systematically tie these
actions to process and control improvements and business systems
modernization efforts described in the business enterprise architecture
and transition plan. Further, section 376 required a written determination
that each financial management improvement activity undertaken is
consistent with the financial management improvement plan and likely to
improve internal controls or otherwise result in sustained improvement in
DOD's ability to produce timely, reliable, and complete financial
management information. DOD had to submit each written determination to
the congressional defense committees. Section 321 of the National Defense
Authorization Act for Fiscal Year 2007 extended the written determination
provision beyond fiscal year 2006.^49

47GAO, DOD Systems Modernization: Uncertain Joint Use and Marginal
Expected Value of Military Asset Deployment System Warrant Reassessment of
Planned Investment, [58]GAO-06-171 (Washington, D.C.: Dec. 15, 2005).

^48Pub. L. No. 109-163, S 376, 119 Stat. 3136, 3213 (2006).

DOD intends the FIAR Plan to provide DOD components with a framework for
resolving problems affecting the accuracy, reliability, and timeliness of
financial information, and obtaining clean financial statement audit
opinions. The FIAR Plan states that it prioritizes DOD's improvement
efforts based on the following criteria: (1) impact on DOD financial
statements, (2) ability to resolve long-standing problems, (3) need for
focused DOD leadership attention to resolve the problem, (4) dependency on
business transformation initiatives and system solutions, and (5)
availability of resources. The FIAR Plan outlines the business rules and
oversight structure DOD has established to guide financial improvement
activities and audit preparation efforts. According to DOD, its June and
September 2006 FIAR Plan updates were intended to (1) begin identifying
milestones that must be met for assertions about the reliability of
reported financial statement information to occur on time, (2) develop
greater consistency among components regarding their corrective actions
and milestones, and (3) further describe how the FIAR Plan will be
integrated with the enterprise transition plan. In addition, the September
2006 update outlines three key elements for achieving financial management
transformation: accountability, integration, and prioritization. Although
the FIAR Plan states that it is integrated with DOD component-level
financial improvement plans and the ETP, DOD officials have acknowledged
that the level of integration between the two efforts is not complete and
is still evolving.

^49Pub. L. No. 109-364, S 321, 120 Stat. 2083 (2006).

The FIAR Plan is a high-level summary of DOD's plans and reported actions
to comply with financial management legislation and achieve clean
financial statement audit opinions. We have reviewed the FIAR Plan and its
updates and discussed the FIAR Plan with DOD and OMB. We cannot comment on
specific focus areas or milestones because we have not seen any of the
underlying component or other subordinate plans on which the FIAR Plan is
based. However, we believe the incremental line item approach, integration
plans, and oversight structure outlined in the FIAR Plan for examining
DOD's operations, diagnosing problems, planning corrective actions, and
preparing for audit represents a vast improvement over prior financial
improvement initiatives.

We continue to stress that the effectiveness of DOD's FIAR Plan will
ultimately be measured by the department's ability to provide timely,
reliable, and useful information for day-to-day management and decision
making. Nonetheless, I would like to see DOD place greater emphasis on
achieving auditability by 2012. If DOD is able to achieve this date, and
other impediments to an opinion on the consolidated financial statements
of the U.S. government are also addressed, an opinion for the federal
government may also be possible by 2012. We look forward to working with
DOD and the new DOD inspector general, when appointed, in further
developing DOD's audit strategy.

Legislation Enacted to Address DOD's Financial Management Weaknesses and
Strengthen Business Systems Accountability

Lastly, you asked for my comments on two sections of the recently enacted
John Warner National Defense Authorization Act for Fiscal Year 2007.^50
The first provision, section 321, seeks to ensure that the department
pursues financial management improvement activities only in accordance
with a comprehensive financial management improvement plan that
coordinates these activities with improvements in its systems and
controls. The second provision, section 816, establishes certain reporting
and oversight requirements for the acquisition of all major automated
information systems (MAIS).^51

Legislation Reiterates Need for Consistency between DOD's Financial and Business
Transformation Plans

Section 321 of the John Warner National Defense Authorization Act for
Fiscal Year 2007 extends beyond fiscal year 2006 certain limitations and
requirements placed on DOD's financial management improvement and audit
initiatives in section 376 of the National Defense Authorization Act for
Fiscal Year 2006. Specifically, section 321 of the act limits DOD's
ability to obligate or expend any funds for the purpose of any financial
management improvement activity relating to the preparation, processing,
or auditing of financial statements until it has submitted to the
congressional defense committees a written determination that each
activity proposed to be funded is (1) consistent with the DOD financial
management improvement plan required by section 376 of the National
Defense Authorization Act for Fiscal Year 2006 and (2) is likely to
improve internal controls or otherwise result in sustained improvements in
the ability of the department to produce timely, reliable, and complete
financial management information.

I fully support the intent of legislation, such as section 321, which is
aimed at directing DOD's corrective actions towards the implementation of
sustained improvements in its ability to provide timely, reliable,
complete, and useful information. This is imperative not only for
financial reporting purposes, but more importantly for daily decision
making and oversight. Section 321 is consistent with and builds on
existing legislation, in addition to section 376 of the National Defense
Authorization Act for Fiscal Year 2006. For example, section 1008 of the
National Defense Authorization Act for Fiscal Year 2002^52 currently
requires DOD to limit resources used to prepare and audit unreliable
financial information, thereby saving the taxpayers millions of dollars
annually. In addition, the fiscal year 2002 act requires DOD to report to
congressional committees and others annually on the reliability of DOD's
financial information and to provide a summary of improvement activities,
including priorities, milestones, measures of success, and estimates of
when each financial statement will convey reliable information. In my
opinion, Congress has clearly articulated its expectation that DOD
exercise prudence in its use of taxpayer money and focus only on those
activities that will result in sustained improvements in its ability to
produce timely and reliable financial management information.

^50John Warner National Defense Authorization Act for Fiscal Year 2007,
Pub. L. No. 109-364 (2006).

^51The Committee originally asked GAO to comment on sec. 804 of the Senate
bill, S. 2766, which, with some changes, has now been enacted as sec. 816.

It is evident that DOD intends to use its FIAR Plan, which it plans to
update semiannually, as a tool for complying with legislative requirements
regarding its financial improvement efforts. However, as is true with most
large initiatives, a comprehensive and integrated plan, sustained
leadership, results-oriented performance measures, and effective
implementation will be key to successful reform.

Legislative Language Establishing Reporting Requirements for Major Automated
Information Systems Increases Oversight and Accountability

The provisions in section 816 of the John Warner National Defense
Authorization Act for Fiscal Year 2007 provide for greater disclosure and
accountability of business system investment performance, and thus
facilitate greater oversight. More specifically, the legislation
establishes certain reporting and oversight requirements for the
acquisition of MAIS that fail to meet cost, schedule, or performance
criteria. In general, a MAIS is a major DOD IT program that is not
embedded in a weapon system (e.g., a business system investment). As such,
we believe that the provisions can increase oversight and accountability.
Therefore, I also support this legislation.

^52Pub. L. No. 107-107, S1008, 115 Stat. 1012, 1204 (Dec. 28, 2001).

Specific High-risk Program Areas Highlight the Need for Continued Attention to
Ensure Effective Transformation

I would like to discuss the five remaining high-risk areas within DOD.
These include weapon systems acquisitions and contract management; supply
chain management; personnel security clearance program; and support
infrastructure management.

DOD Weapon Systems Acquisitions and Contract Management

Two interrelated areas are the management of DOD's major weapon systems
acquisitions and its contracts. While DOD eventually fields the best
weapon systems in the world, we have consistently reported that typically
the programs take significantly longer, cost significantly more money, and
deliver fewer capabilities than originally promised. DOD's new weapon
system programs are expected to be the most expensive and complex ever and
will consume an increasingly large share of DOD's budget. These costly
current and planned acquisitions are running head-on into the nation's
unsustainable fiscal path. In the past 5 years, DOD has doubled its
commitment to weapon systems from $700 billion to $1.4 trillion, but this
huge increase has not been accompanied by more stability, better outcomes,
or increased buying power for the acquisition dollar. Rather than showing
appreciable improvement, programs are experiencing recurring problems with
cost overruns, missed deadlines, and performance shortfalls. A large
number of the programs included in our annual assessment of weapon systems
are costing more and taking longer to develop than estimated.^53 It is not
unusual to see development cost increases between 30 percent and 40
percent and attendant schedule delays. These cost increases mean DOD
cannot produce as many weapons as intended nor can it be relied on to
deliver to the warfighter when promised. This causes DOD to either cut
back on planned quantities or capabilities, or to even scrap multibillion
dollar programs, after years of effort. If these systems are managed with
the traditional margins of error, the financial consequences can be dire,
especially in light of a constrained discretionary budget.

^53GAO, Defense Acquisitions: Assessments of Selected Major Weapon
Programs, [59]GAO-06-391 (Washington, D.C.: Mar. 31, 2006).

It is within this context that we must engage in a comprehensive and
fundamental reexamination of new and ongoing investments in our nation's
weapon systems. Success for acquisitions means making sound decisions to
ensure that program investments are based on needs versus wants and
getting promised results. In the commercial world, successful companies
have no choice but to adopt processes and cultures that emphasize basing
decisions on knowledge, reducing risks prior to undertaking new efforts,
producing realistic cost and schedule estimates, and building in quality
to deliver products to customers at the right price, time, and cost.
However, this is not happening within DOD. The department has tried to
embrace best practices in its policies and instill more discipline in
setting requirements, among numerous other actions, but it still has
trouble distinguishing wants from true needs. While DOD's acquisition
policy supports a knowledge-based, evolutionary approach to acquiring new
weapons, its practice of making decisions on individual programs often
sacrifices knowledge and executability in favor of revolutionary
solutions. In an important sense, success has come to mean starting and
continuing programs even when cost, schedule, and quantities must be
sacrificed.

Our reviews have identified a number of causes behind the acquisition
problems just described, but I would like to focus on three. The first I
refer to as "big A," or acquisition with a capital "A." What I mean by
this is that DOD's funding, requirements, and acquisition processes are
not working synergistically. DOD does not clearly define and stabilize
requirements before programs are started. Our work has shown that DOD's
requirements process generates more demand for new programs than fiscal
resources can support. DOD compounds the problem by approving many highly
complex and interdependent programs. Moreover, once a program is approved,
requirements can be added along the way--significantly stretching
technology, creating design challenges, exacerbating budget overruns, and
enhancing accountability challenges. For example, in the F-22A program,
after the program was started, the Air Force added a requirement for
air-to-ground attack capability. In its Global Hawk program, after the
start of the program, the Air Force added both signals intelligence and
imagery intelligence requirements. Both programs have experienced serious
schedule delays and significant unit cost increases. Customers often
demand additional requirements fearing there may not be another chance to
get new capabilities because programs can take a decade or longer to
complete. Yet, perversely, these strategies delay delivery to the
warfighter, often by years.

The second cause I would refer to as "little a" or the acquisition process
itself. DOD commits to individual programs before it obtains assurance
that the capabilities it is pursuing can be achieved within available
resources and time constraints. In particular, DOD routinely accepts high
levels of technology risk at the start of major acquisition programs.
Funding processes encourage this approach, since acquisition programs
attract more dollars than efforts concentrating solely on proving out
technologies. However, without mature technologies at the outset, a
program will almost certainly incur cost and schedule problems. Only 10
percent of the programs in our latest annual assessment of weapon systems
had demonstrated critical technologies to best practice standards at the
start of development; and only 23 percent demonstrated them to DOD's
standards.^54 The cost effect of proceeding without completing technology
development before starting an acquisition can be dramatic. For example,
research, development, test and evaluation costs for the programs included
in our review that met best practice standards at program start increased
by a modest average of 4.8 percent more than the first full estimate,
whereas the costs for the programs that did not meet these standards
increased by a much higher average of 34.9 percent more than the first
full estimate. The bottom line is that these consequences are predictable
and, thus, preventable.

The third cause has to do with the lack of accountability. DOD officials
are not always held accountable when programs go astray. Likewise,
contractors are not always held accountable when they fail to achieve
desired acquisition outcomes. In December 2005, we reported that DOD gives
its contractors the opportunity to collectively earn billions of dollars
through monetary incentives.^55 Unfortunately, we found DOD programs
routinely engaged in practices that failed to hold contractors accountable
for achieving desired outcomes and undermined efforts to motivate
contractor performance, such as

^54DOD's policy states technologies should be demonstrated in at least a
relevant environment before a program enters system development; whereas,
GAO utilizes the best practice standard that calls for technologies to be
demonstrated one step higher--demonstration in an operational environment.

^55GAO, Defense Acquisitions: DOD Has Paid Billions in Award and Incentive
Fees Regardless of Acquisition Outcomes, [60]GAO-06-66 (Washington, D.C.:
Dec. 19, 2005); and Defense Acquisitions: DOD Wastes Billions of Dollars
through Poorly Structured Incentives, [61]GAO-06-409T (Washington, D.C.:
Apr. 5, 2006).

           o evaluating contractor performance on award-fee criteria that are
           not directly related to key acquisition outcomes (e.g., meeting
           cost and schedule goals and delivering desired capabilities to the
           warfighter);
           o paying contractors a significant portion of the available fee
           for what award-fee plans describe as "acceptable, average,
           expected, good, or satisfactory" performance, which sometimes did
           not require meeting the basic requirements of the contract; and
           o giving contractors at least a second opportunity to earn
           initially unearned or deferred fees.

           As a result, DOD has paid out an estimated $8 billion in award
           fees on contracts in our study population, regardless of whether
           acquisition outcomes fell short of, met, or exceeded DOD's
           expectations. For example, we found that DOD paid its contractor
           for a satellite program--the Space-Based Infrared System High--74
           percent of the award fee available, $160 million, even though
           research and development costs increased by more than 99 percent,
           and the program was delayed for many years and was rebaselined
           three times. In another instance, DOD paid its contractor for the
           F-22A aircraft more than $848 million, 91 percent of the available
           award fee, even though research and development costs increased by
           more than 47 percent, and the program had been delayed by more
           than 2 years and rebaselined 14 times. Despite paying billions of
           dollars in award and incentive fees, DOD has not compiled data or
           developed performance measures to validate its belief that award
           and incentive fees improve contractor performance and acquisition
           outcomes.

           Similarly, DOD officials are rarely held accountable when programs
           go astray. There are several reasons for this, but the primary
           ones include the fact that DOD has never clearly specified who is
           accountable for what, invested responsibility for execution in any
           single individual, or even required program leaders to stay until
           the job is done. Moreover, program managers are not empowered to
           make go or no-go decisions, they have little control over funding,
           they cannot veto new requirements, and they have little authority
           over staffing. Because there is frequent turnover in their
           positions, program managers also sometimes find themselves in the
           position of having to take on efforts that are already
           significantly flawed.

           There are many other factors that play a role in causing weapons
           programs to go astray. They include workforce challenges, poor
           contractor oversight, frequent turnover in key leadership, and a
           lack of systems engineering, among others. Moreover, many of the
           business processes that support weapons development--strategic
           planning and budgeting, human capital management, infrastructure,
           financial management, information technology, and contracting--are
           beset with pervasive, decades-old management problems, including
           outdated organizational structures, systems, and processes. In
           fact, all of these areas--along with weapon systems
           acquisition--are on our high-risk list of major government
           programs and operations.

           Our work shows that acquisition problems will likely persist until
           DOD provides a better foundation for buying the right things, the
           right way. This involves making tough trade-off decisions as to
           which programs should be pursued and, more importantly, not
           pursued, making sure programs are executable, locking in
           requirements before programs are started, and making it clear who
           is responsible for what and holding people accountable when these
           responsibilities are not fulfilled. These changes will not be easy
           to make. They require DOD to reexamine the entirety of its
           acquisition process and to make deep-seated changes to the
           setting, funding, and execution of program requirements. In other
           words, DOD would need to revisit who sets requirements and
           strategy, and who monitors performance, and what factors to
           consider in selecting and rewarding contractors. It also involves
           changing how DOD views success, and what is necessary to achieve
           success. I am encouraged by DOD's recent efforts to improve the
           collaboration and consultation between the requirements and
           acquisition communities. The test of these efforts will be whether
           they produce better decisions. If they do, it is important that
           they are sustained by more than the force of personality.

           Buying major systems is not the only area where DOD needs to
           improve its acquisition practices. For example, DOD's management
           of its contracts has been on our high-risk list since 1992. Our
           work has found that DOD is unable to ensure that it is using sound
           business practices to acquire the goods and services needed to
           meet the warfighter's needs, creating unnecessary risks and paying
           higher prices than justified. In this regard, in a March 2005
           report, we concluded that deficiencies in DOD's oversight of
           service contractors could place DOD at risk of paying the
           contractors more than the value of the services they performed.^56
           In June 2006, we reported that personnel at the Defense Logistics
           Agency were not consistently reviewing prices for commodities
           acquired under its Prime Vendor Program.^57 We noted that until
           DOD provides sufficient management oversight, the program will
           remain vulnerable to the systemic pricing problems that have
           plagued it in the past. Earlier this year, we reported that the
           Army acquired security guard services under an authorized
           sole-source basis, despite recognizing that it was paying about 25
           percent more than it had under contracts that had been previously
           awarded competitively.^58 We recommended that the Army reassess
           its acquisition strategy to help make the best use of taxpayer
           dollars and achieve its desired outcomes. In other reports, we
           identified numerous issues in DOD's use of interagency contracting
           vehicles that contributed to poor acquisition outcomes.

           Until the department devotes sufficient management attention to
           address these long-standing issues, DOD remains at risk of wasting
           billions of dollars and failing to get the goods and services it
           needs to accomplish its missions.
			  
			  DOD Supply Chain Management

           Since the January 2005 update of the high-risk series, DOD has
           made some progress toward addressing supply chain management
           problems. With the encouragement of OMB, DOD has developed a plan
           to show progress toward the long-term goal of resolving problems
           and removing supply chain management from our list of high-risk
           areas within the department. DOD issued the first iteration of the
           plan in July 2005 and, since then, has regularly updated it. Based
           on our initial review of the plan, we believe it is a solid first
           step toward improving supply chain management in support of the
           warfighter. For example, DOD's plan identifies three key
           areas--requirements forecasting, asset visibility, and materiel
           distribution--that we believe are critical to DOD's efforts to
           improve supply chain management. The plan highlights selected DOD
           supply chain initiatives, including key milestones in their
           development. Within the last year, for example, DOD has made some
           progress in streamlining the storage and distribution of defense
           inventory items on a regional basis as part of its Joint Regional
           Inventory Materiel Management initiative. DOD has completed a
           pilot for this initiative in the San Diego region and, in January
           2006, began a similar transition for inventory items in Oahu,
           Hawaii. Notwithstanding this positive first step, the department
           faces challenges and risks in successfully implementing its
           proposed changes across the department and measuring progress in
           resolving supply chain management problems. It will be important
           for DOD to sustain top leadership commitment and long-term
           institutional support for the plan; obtain necessary resource
           commitments from the military services, the Defense Logistics
           Agency, and other organizations; implement its proposed
           initiatives across the department; identify performance metrics
           and valid data to use in monitoring the initiatives; and
           demonstrate progress toward meeting performance targets. We have
           been holding monthly meetings with DOD and OMB officials to
           receive updates on the plan and gain a greater understanding of
           the ongoing initiatives. In addition, we are continuing to review
           the performance measures DOD is using to track the plan's progress
           in resolving supply chain problems and DOD's efforts to develop a
           comprehensive, integrated, and enterprisewide strategy to guide
           logistics programs and initiatives. DOD is working on a logistics
           road map, referred to as the "To Be" road map, which provides a
           vision for future logistics programs and initiatives, including
           supply chain management; identifies capability gaps; and links
           programs with investments. However, the schedule for completing
           the initial road map has recently slipped. Until the road map is
           completed, we will not be able to assess how it addresses the
           challenges and risks DOD faces in its supply chain management
           efforts.
			  
			  DOD Personnel Security Clearance Program

           DOD's personnel security clearance program is another area that we
           continue to assess because of the risks it poses. For over two
           decades, we have reported on problems with DOD's personnel
           security clearance program as well as the financial costs and
           risks to national security resulting from these problems. For
           example, at the turn of the century, we documented problems such
           as incomplete investigations, inconsistency in determining
           eligibility for clearances, and a backlog of overdue clearance
           reinvestigations that exceeded 500,000 cases. More recently in
           2004, we identified continuing and new impediments hampering DOD's
           clearance program and made recommendations for increasing the
           effectiveness and efficiency of the program. These long-standing
           delays in completing hundreds of thousands of clearance requests
           for servicemembers, federal employees, and industry personnel as
           well as numerous impediments that hinder DOD's ability to
           accurately estimate and eliminate its clearance backlog led us to
           declare DOD's personnel security clearance program a high-risk
           area in January 2005. Since then, we have issued a report and
           participated in four hearings that addressed issues related to
           DOD's program.^59 Among other things, our September 2006 report
           showed that the 2,259 industry personnel granted eligibility for a
           top secret clearance in January and February 2006 had waited an
           average of 471 days. Also, our reviews of 50 of the cases for
           completeness revealed that required information was not included
           in almost all of the cases. While positive steps--such as (1) the
           development of an initial version of a plan to improve security
           clearance processes governmentwide and (2) high-level involvement
           from OMB--have been taken toward addressing the problems, other
           recent events such as DOD halting the processing of all new
           clearance requests for industry personnel on April 28, 2006,
           reveal continuing problems with DOD's personnel security clearance
           program.

			  DOD Support Infrastructure Management
			  
           Since 1997, GAO has identified DOD's management of its support
           infrastructure as a high-risk area because infrastructure costs
           continue to consume a larger than necessary portion of its budget.
           DOD officials have been concerned for several years that much of
           the department's infrastructure is outdated, inadequately
           maintained, and that DOD has more infrastructure than needed,
           which impacts its ability to devote more funding to weapon systems
           modernization and other critical needs. Inefficient management
           practices and outdated business processes have also contributed to
           the problem.

           While DOD has made progress and expects to continue making
           improvements in its support infrastructure management, DOD
           officials recognize they must achieve greater efficiencies. To its
           credit, the department has given high-level emphasis to reforming
           its support operations and infrastructure since we last reported
           on this high-risk area, including efforts to reduce excess
           infrastructure, promote transformation, and foster jointness
           through the 2005 base realignment and closure (BRAC) process.
           Also, DOD is updating its Defense Installations Strategic Plan to
           better address infrastructure issues, and has revised its
           installations readiness reporting to better measure facility
           conditions, established core real property inventory data
           requirements to better support the needs of real property asset
           management, and continued to modify its suite of analytical tools
           to better forecast funding requirements for installation
           management services. It has also achieved efficiencies through
           privatizing military family housing and demolishing unneeded
           buildings at military installations.

           Our engagements examining DOD's management of its facilities
           infrastructure indicates that much work remains for DOD to fully
           rationalize and transform its support infrastructure to improve
           operations, achieve efficiencies, and allow it to concentrate its
           resources on the most critical needs, as the following
           illustrates.

           o In July 2005, we reported on clear limitations associated with
           achieving DOD's projected $50 billion in savings from this BRAC
           round. While DOD offered many proposed actions in the 2005 round,
           these actions were more related to business process reengineering
           and realignment of various functions and activities than base
           closures and actual facility reductions. Moreover, sizable savings
           were projected from efficiency measures and other actions, but
           many underlying assumptions had not been validated and could be
           difficult to track over time. We have ongoing work monitoring
           actions emanating from the 2005 BRAC process and assessing costs
           and savings from those actions, and will be able to comment
           further on the status of these initiatives over the next several
           years as implementation actions progress.
           o In June 2005, we reported that hundreds of millions of operation
           and maintenance dollars designated for facilities' sustainment,
           restoration, and modernization and other purposes were moved by
           the services to pay for base operations support (BOS) due in part
           to a lack of a common terminology across the services in defining
           BOS functions, as well as the lack of a mature analytic process
           for developing credible and consistent requirements.^60 While
           these funding movements are permissible, we found that they were
           disruptive to the orderly provision of BOS services and
           contributed to the overall degradation of facilities, which
           adversely affects the quality of life and morale of military
           personnel. In another report issued in June 2005, we reported that
           many of DOD's training ranges were in deteriorated condition and
           lacked modernization, which adversely affected training activities
           and jeopardized the safety of military personnel.^61 
           o In an April 2006 report, we identified several opportunities for
           DOD and the services to improve their oversight and monitoring of
           the execution and performance of awarded privatized housing
           projects.^62 We further reported that 36 percent of awarded
           privatization projects had occupancy rates below expectations even
           though the services had begun renting housing units to parties
           other than military families, including units rented to single or
           unaccompanied servicemembers, retired military personnel,
           civilians and contractors who work for DOD, and civilians from the
           general public. Factors contributing to occupancy challenges
           include increased housing allowances, which have made it possible
           for more military families to live off base thus reducing the need
           for privatized housing, and the questionable reliability of DOD's
           housing requirements determination process, which could result in
           overstating the need for privatized housing.
           o During recent visits to installations in the United States and
           overseas, service officials continue to report inadequate funding
           to provide both base operations support and maintain their
           facilities. They express concern that unless this is addressed,
           future upkeep and repair of many new facilities to be constructed
           as a result of BRAC, overseas rebasing, and the Army's move to the
           modular brigade structure will suffer and the condition of their
           facilities will continue to deteriorate.
           o We have also found that DOD's outline of its strategic plan for
           addressing this high-risk area had a number of weaknesses and
           warranted further clarification and specification. We have met
           with OMB and DOD officials periodically to discuss the
           department's efforts to address this high-risk area.

           Through our monitoring of DOD activities between now and the next
           several years for base closures and overseas basing, we will be
           able to determine what other work needs to be done on issues
           associated with DOD's management of its support infrastructure, as
           well as provide a more complete assessment of costs, savings, and
           overall benefits realized from the department's efforts to address
           these issues. Organizations throughout DOD will need to continue
           reengineering their business processes and striving for greater
           operational effectiveness and efficiency. DOD will also need to
           develop a comprehensive, long-range plan for its infrastructure
           that addresses facility requirements, recapitalization, and
           maintenance and repair, as well as to provide adequate resources
           to meet these requirements and halt the degradation of facilities
           and services.

           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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^56GAO, Contract Management: Opportunities to Improve Surveillance on
Department of Defense Service Contracts, [68]GAO-05-274 (Washington, D.C.:
Mar. 17, 2005).

^57GAO, Defense Management: Attention is Needed to Improve Oversight of
DLA Prime Vendor Program, [69]GAO-06-739R (Washington, D.C.: June 19,
2006).

^58 GAO, Contract Security Guards: Army's Guard Program Requires Greater
Oversight and Reassessment of Acquisition Approach, [70]GAO-06-284
(Washington, D.C.: Apr. 3, 2006).

^59GAO, DOD Personnel Clearances: Additional OMB Actions Are Needed to
Improve the Security Clearance Process , [71]GAO-06-1070 (Washington,
D.C.: Sept. 28, 2006); DOD Personnel Clearances: New Concerns Slow
Processing of Clearances for Industry Personnel, [72]GAO-06-748T
(Washington, D.C.: May 17, 2006); DOD Personnel Clearances: Funding
Challenges and Other Impediments Slow Clearances for Industry Personnel,
[73]GAO-06-747T (Washington, D.C.: May 17, 2006); DOD Personnel
Clearances: Government Plan Addresses Some Longstanding Problems with
DOD's Program, But Concerns Remain, [74]GAO-06-233T (Washington, D.C.:
Nov. 9, 2005); and DOD Personnel Clearances: Some Progress Has Been Made
but Hurdles Remain to Overcome the Challenges That Led to GAO's High-Risk
Designation, [75]GAO-05-842T (Washington, D.C.: June 28, 2005).

^60GAO, Defense Infrastructure: Issues Need to Be Addressed in Managing
and Funding Base Operations and Facilities Support, [76]GAO-05-556
(Washington, D.C.: June 15, 2005).

^61GAO, Military Training: Better Planning and Funding Priority Needed to
Improve Conditions of Military Training Ranges, [77]GAO-05-534
(Washington, D.C.: June 10, 2005).

^62GAO, Military Housing: Management Issues Require Attention as the
Privatization Program Matures, [78]GAO-06-438 (Washington, D.C.: Apr. 28,
2006).

(350937)

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www.gao.gov/cgi-bin/getrpt?GAO-07-229T .

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Highlights of [80]GAO-07-229T , a testimony to the Subcommittee on
Readiness and Management Support, Committee on Armed Services, U.S. Senate

November 16, 2006

DEFENSEBUSINESS TRANSFORMATION

A Comprehensive Plan, Integrated Efforts, and Sustained Leadership Are
Needed to Assure Success

Of the 26 areas on GAO's high-risk list of federal programs or activities
that are at risk for waste, fraud, abuse, or mismanagement, 8 are
Department of Defense (DOD) programs or operations and another 6 are
governmentwide high-risk areas that also apply to DOD. These high-risk
areas relate to most of DOD's major business operations. DOD's failure to
effectively resolve these high-risk areas has resulted in billions of
dollars of waste each year, ineffective performance, and inadequate
accountability. At a time when DOD is competing for resources in an
increasingly fiscally constrained environment, it is critically important
that DOD get the most from every defense dollar. DOD has taken several
positive steps and devoted substantial resources toward establishing key
management structures and processes to successfully transform its business
operations and address its high-risk areas, but overall progress by area
varies widely and huge challenges remain.

This testimony addresses DOD's efforts to (1) develop a comprehensive,
integrated, enterprisewide business transformation plan and its related
leadership approach and (2) comply with legislation that addresses
business systems modernization and improving financial management
accountability. The testimony also addresses two sections included in
recent legislation and other DOD high-risk areas.

In the past year, DOD has made progress in transforming its business
operations, but continues to lack a comprehensive, enterprisewide approach
to its overall business transformation effort. Within DOD, business
transformation is broad, encompassing people, planning, management,
structures, technology, and processes in many key business areas. While
DOD's planning and management continues to evolve, it has yet to develop a
comprehensive, integrated, and enterprisewide plan that covers all key
business functions, and contains results-oriented goals, measures and
expectations that link organizational, unit, and individual performance
goals, while also being clearly linked to DOD's overall investment plans.
Because of the complexity and long-term nature of business transformation,
DOD also continues to need a chief management official (CMO) with
significant authority, experience, and tenure to provide sustained
leadership and integrate DOD's overall business transformation effort.
Without formally designating responsibility and accountability for
results, reconciling competing priorities in investments will be difficult
and could impede DOD's progress in its transformation efforts.

DOD is taking steps to comply with legislative requirements aimed at
improving its business systems modernization and financial management;
however, much remains to be accomplished. In particular, DOD recently
issued updates to both the business enterprise architecture and the
transition plan, which are still not sufficiently complete to effectively
and efficiently guide and constrain business system investments across the
department. Most notably, the architecture is not adequately linked to DOD
component architectures, and the plan does not include business system
information for all major DOD components. To address these shortfalls, DOD
issued a strategy for "federating" or extending its architecture to the
defense components. But much remains to be accomplished before a
well-defined federated architecture is in place, given that GAO recently
reported that select components' architecture programs are not mature.
However, DOD components continue to invest billions of dollars in
thousands of new and existing business system programs. The risks
associated with investing in systems ahead of having a well-defined
architecture and transition plan are profound and must be managed
carefully, as must the wide assortment of other risks that GAO's work has
shown to exist on specific DOD business system investments. While not a
guarantee, GAO's work and research has shown that establishing effective
system modernization management controls, such as an architecture-centric
approach to investment decision making, can increase the chances of
delivering cost-effective business capabilities on time and within budget.
Further, with regard to legislation pertaining to financial management
improvement, DOD issued and updated its Financial Improvement and Audit
Readiness Plan in fiscal year 2006 to provide components with a construct
for resolving problems affecting the accuracy and timeliness of financial
information and an improved audit strategy for obtaining financial
statement audit opinions.

References

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*** End of document. ***