Defense Business Transformation: A Full-time Chief Management	 
Officer with a Term Appointment Is Needed at DOD to Maintain	 
Continuity of Effort and Achieve Sustainable Success (16-OCT-07, 
GAO-08-132T).							 
                                                                 
The Department of Defense (DOD) continues to face significant	 
challenges in resolving its many long-standing business 	 
challenges. DOD is solely responsible for eight high-risk areas  
and shares responsibility for another seven governmentwide areas 
on GAO's high-risk list. GAO designated DOD's approach to	 
business transformation as high risk in 2005 because (1) DOD's	 
improvement efforts were fragmented, (2) DOD lacked an		 
enterprisewide and integrated business transformation plan, and  
(3) DOD had not appointed a senior official at the right level	 
with an adequate amount of time and appropriate authority to be  
responsible for overall business transformation efforts. A recent
DOD directive designated the current Deputy Secretary of Defense 
as DOD's chief management officer (CMO). Successful overall	 
business transformation, however, will require full-time	 
leadership that is focused solely on the integration and	 
execution of these efforts, over the long term, to resolve	 
pervasive weaknesses that have left DOD vulnerable to waste,	 
fraud, and abuse at a time of increasing fiscal constraint. This 
testimony is based on previous and ongoing GAO work and discusses
(1) the impact of DOD's long-standing business challenges on DOD 
and the warfighter, and (2) the progress DOD has made and actions
needed to achieve sustainable success in its business		 
transformation efforts. This testimony also provides an update on
DOD-specific high-risk areas.					 
-------------------------Indexing Terms------------------------- 
REPORTNUM:   GAO-08-132T					        
    ACCNO:   A77348						        
  TITLE:     Defense Business Transformation: A Full-time Chief       
Management Officer with a Term Appointment Is Needed at DOD to	 
Maintain Continuity of Effort and Achieve Sustainable Success	 
     DATE:   10/16/2007 
  SUBJECT:   Accountability					 
	     Contract administration				 
	     Contract oversight 				 
	     Defense capabilities				 
	     Defense cost control				 
	     Federal agency reorganization			 
	     Financial management				 
	     Internal controls					 
	     Program evaluation 				 
	     Program management 				 
	     Risk assessment					 
	     Strategic planning 				 
	     Systems conversions				 
	     Business planning					 
	     Business transformation				 
	     Waste, fraud, and abuse				 
	     GAO High Risk Series				 

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GAO-08-132T

   

     * [1]Summary
     * [2]Background
     * [3]DOD's Pervasive and Long-standing Financial Management and B
     * [4]DOD Has Made Progress in Addressing Its Business Transformat

          * [5]DOD Has Made Progress in Addressing Its Business Transformat
          * [6]Critical Actions Are Needed to Provide Comprehensive, Integr

               * [7]DOD Lacks a Strategic Planning Process That Results in a
                 Com
               * [8]DOD Lacks a Full-time and Term-based Senior Management
                 Offic

     * [9]DOD-Specific High-Risk Areas Highlight the Need for Further

          * [10]DOD Financial Management
          * [11]DOD Business Systems Modernization
          * [12]DOD Personnel Security Clearance Program
          * [13]DOD Support Infrastructure Management
          * [14]DOD Supply Chain Management
          * [15]DOD Weapon Systems Acquisition
          * [16]DOD Contract Management

     * [17]GAO Contact
     * [18]GAO's Mission
     * [19]Obtaining Copies of GAO Reports and Testimony

          * [20]Order by Mail or Phone

     * [21]To Report Fraud, Waste, and Abuse in Federal Programs
     * [22]Congressional Relations
     * [23]Public Affairs

                 United States Government Accountability Office

Testimony

GAO

Before the Subcommittee on Federal Financial Management, Government Information,
Federal Services, and International Security, Committee on Homeland Security and
Governmental Affairs, U.S. Senate

For Release on Delivery      DEFENSE BUSINESS TRANSFORMATION               
Expected at 3:15 p.m. EDT                                                  
Tuesday, October 16, 2007                                                  
                                A Full-time Chief                             
                                Management Officer with a Term Appointment Is 
                                Needed at DOD to Maintain                     
                                Continuity of Effort and Achieve Sustainable  
                                Success    
										                                     
                                Statement of David M. Walker
										  Comptroller General of the United States                  

  GAO-08-132T

DEFENSE BUSINESS TRANSFORMATION

  A Full-time Chief Management Officer with a Term Appointment Is Needed at DOD
  to Maintain Continuity of Effort and Achieve Sustainable Success

    What GAO Found

The persistence and magnitude of DOD's business transformation challenges
highlight the fact that the status quo is unacceptable and that, without
focused and sustained leadership to guide the overall business
transformation effort, the department will continue to waste billions of
dollars annually. Within DOD, business transformation is broad,
encompassing people, planning, processes, organizational structures, and
technology. DOD's pervasive and long-standing business weaknesses
adversely affect the department's economy, efficiency, and effectiveness,
and have resulted in a lack of adequate accountability across all of its
major business areas. Ultimately, these weaknesses affect the department's
ability to support the warfighter, including the availability of equipment
and weapon systems, the cost and performance of contractors supporting the
warfighter, and the assessment of resource requirements.

              Illustrative Weaknesses in DOD's Business Operations

               Business area Impact on department and warfighter

Weapon Systems Acquisition Weapon development problems have delayed
deliveries to the warfighter by several years on average. It is a
predictable phenomenon that can be remedied with better knowledge at key
decision points. However, standing in the way is a range of longstanding
challenges Congress will have to address.

Contract Management While DOD relies heavily on contractors to undertake
major reconstruction projects and provide support to the military,
ineffective contract design, management, and oversight leads to increased
costs and poor outcomes.

Financial Management Unreliable cost information affects DOD's ability to
assess resource requirements, control costs, assess performance, evaluate
programs, and set appropriate fees to recover costs where required.

Source: GAO.

DOD's senior leadership has shown a commitment to transforming the
department's business operations. Two critical actions, among others,
however, are still needed to change the status quo. DOD has yet to
establish

(1) a strategic planning process that results in a comprehensive,
integrated, and enterprisewide plan or set of plans to help guide
transformation, and (2) a senior official who can provide full-time
attention and sustained leadership to transformation. Broad-based
consensus exists among GAO and others that DOD needs a full-time and
term-based senior management official to provide focused and sustained
leadership over its overall business transformation efforts, both within
and across administrations. Also, various legislative proposals call for
senior-level attention to these efforts. While DOD recently assigned CMO
duties to the current Deputy Secretary of Defense, this does not ensure
full-time attention or continuity of leadership. GAO continues to believe
a CMO position should be codified in statute as a separate position, at
the right level, and with the appropriate term in office. In the absence
of a CMO with these characteristics, and an enterprisewide plan to guide
business transformation efforts, it is highly unlikely that DOD will ever
get the most out of every taxpayer dollar it invests to better support the
warfighter in times of growing fiscal constraint.

                 United States Government Accountability Office

Mr. Chairman and Members of the Subcommittee:

I am pleased to be before this Subcommittee to discuss the status of the
Department of Defense's (DOD) efforts to transform its business operations
and why further action is needed to maintain continuity of effort, change
the status quo, and achieve sustainable success. 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
continues to dominate our list of high-risk programs designated as
vulnerable to waste, fraud, and abuse of funds, bearing responsibility, in
whole or in part, for 15 of 27 high-risk areas. ^[24]1 Eight of these
areas are specific to DOD and include DOD's overall approach to business
transformation, as well as business systems modernization, financial
management, the personnel security clearance process, supply chain
management, support infrastructure management, weapon systems acquisition,
and contract management. Collectively, these high-risk areas relate to
DOD's major business operations which directly support the warfighters,
including how they are paid, the benefits provided to their families, and
the availability and condition of equipment they use both on and off the
battlefield.

Given the current security environment and growing longer-range fiscal
imbalance facing our nation, DOD, like other federal agencies, will
increasingly compete for resources in a fiscally constrained environment
in the future. Commitments are clearly growing both abroad, with our
involvement in ongoing operations in Iraq and Afghanistan, as well as at
home, with efforts to provide homeland security. However, our nation is
threatened not only by external security threats, but also from within by
large and growing fiscal imbalances over time due primarily to our aging
population and rising health care costs. Absent policy changes to cope
with rising health care costs and known demographic trends, a growing
imbalance between expected federal spending and revenues will mean
escalating and ultimately unsustainable federal deficits and debt levels.
As I have stated previously, our nation is on an imprudent and
unsustainable fiscal path. Given this scenario, DOD cannot afford to
continue on the course of reduced efficiencies, ineffective performance,
and inadequate accountability in connection with its business operations.
With its annual
base budget approaching $500 billion, along with total reported
obligations of about $462 billion to support ongoing operations and
activities related to the global war on terrorism since the September 11th
attacks through July 2007, the department has clearly been given
stewardship over unprecedented amounts of taxpayer money. DOD must do more
to get the most from every dollar it is given.

^1GAO, High-Risk Series: An Update,  GAO-07-310 (Washington, D.C.: Jan.  31,
2007).

Transformation in any organization is a long-term process, especially in
an organization as large and as complex as DOD. I continue to believe that
DOD's senior leadership has shown a commitment to address longstanding
weaknesses and transform its business operations. Congress, under the
leadership of this Subcommittee and others, has conducted oversight,
passed legislation, and codified many of our prior recommendations,
particularly with respect to DOD's modernization of its business systems.
^[25]2 Since then, DOD has devoted substantial resources and made
important progress toward establishing key transformation entities and
processes to guide business activities. DOD's current approach is clearly
superior to its prior approach; however, progress has been inconsistent
and a number of challenges remain. Most importantly, DOD has not taken
what could be considered one of the single most critical steps, which is
to provide the full-time attention and sustained leadership needed to
guide business transformation efforts. To that end, DOD needs a chief
management officer (CMO), codified in statute as a separate position, at
the right level, and with the adequate amount of time and appropriate
authority to be responsible and accountable for its business
transformation efforts. ^[26]3 As I will discuss later, DOD recently
assigned chief management officer duties specifically to the current
Deputy Secretary of Defense, and therefore it appears these
responsibilities will expire when that individual leaves the department.
In my view, subsuming the duties within the other responsibilities of the
current Deputy Secretary essentially represents the status quo and will
not provide the continuity of effort and full-time focus that is necessary
to effectively further achieve and sustain success in connection with
DOD's overall business transformation effort.

^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 Business Transformation: Achieving Success Requires a Chief
Management Officer to Provide Focus and Sustained Leadership, GAO-07-1072
(Washington, D.C.: Sept. 5, 2007).

Our work shows that DOD will continue to face difficulty in achieving
better outcomes in its business operations and ultimately optimizing
support to the warfighter until it adopts a better leadership approach to
guide its business transformation efforts. My testimony today will touch
on the various high-risk areas for which DOD is responsible, paying
special attention to the department's overall approach to business
transformation. I will provide perspectives on (1) the impact DOD's
pervasive and long-standing business challenges have on the department and
the warfighter, and (2) the progress DOD has made and the actions needed
to achieve sustainable success in its business transformation efforts. I
will also provide an update on remaining DOD-specific high-risk areas that
highlight the need for continued attention.

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

Summary

DOD spends billions of dollars to sustain key business operations intended
to support the warfighter, including systems and processes related to
financial management, weapon systems acquisition, the supply chain,
support infrastructure, and contract management. We have reported for
years on pervasive and long-standing weaknesses in these areas that
adversely affect the economy, efficiency, and effectiveness of the
department, result in the lack of accountability and substantial waste,
and impede efforts to effectively support the warfighter. Specific
illustrative examples of these problems include the following:

     o Financial management. Continuing weaknesses in DOD's ability to
       properly record transactions and reconcile its disbursement activities
       have adversely impacted the reliability of DOD's reported cost data.
       Unreliable cost information affects DOD's ability to assess resource
       requirements, control and reduce costs, assess performance, evaluate
       programs, and set appropriate fees to recover costs where required.
     o Weapon systems acquisition. DOD's planned investment in new weapons
       has doubled from $750 billion in 2001 to $1.5 trillion today. Yet, the
       problems remain the same: development time typically grows by 20
       percent and development costs typically grow by 30 percent reducing
       qualities and delaying delivery to the warfighter. It is a fixable
       problem that will, among other things, require a commitment to
       following a knowledge-based approach to major systems design,
       development, and production.
     o Supply chain management. U.S. ground forces experienced shortages of
       critical supply items, such as tires and body armor, while the Air
       Force simultaneously invested billions of dollars on inventory that
       was not needed for requirements.
     o Contract management. While DOD relies extensively on contractors to
       undertake major reconstruction projects and provide logistical support
       to the military, ineffective contract design, management, and
       oversight leads to increased costs and poor contract outcomes.

Overall, these long-standing weaknesses in DOD's business areas have

(1) resulted in a lack of reliable information needed to make sound
decisions and report accurately on its operations; (2) hindered
operational efficiency; (3) adversely affected mission performance; and
(4) left the department vulnerable to significant amounts of fraud, waste,
abuse, and mismanagement.

Transforming DOD's business operations is an absolute necessity in the
context of an increasingly demanding security environment and the
pressures of our nation's long-term fiscal outlook. Further, the current
deployment of tens of thousands of servicemembers, civilians, and
contractor personnel to support ongoing operations overseas provides an
even greater sense of urgency for the department to aggressively address
weaknesses in its business operations and achieve transformation goals in
the near and long term. DOD's senior leadership has demonstrated a
commitment to transforming the department's business operations, and has
taken many steps in the last few years to further this effort. For
example, DOD has made progress in creating transformational entities to
guide its efforts, such as the Defense Business Systems Management
Committee and the Business Transformation Agency, as well as the
development of plans and other tools. However, two critical actions, among
others, are still needed to put DOD on a sustainable path to success. DOD
has yet to establish (1) a strategic planning process that results in a
comprehensive, integrated, and enterprisewide plan or set of plans to help
guide transformation and (2) a senior official who can provide full-time
attention and sustained leadership to the overall business transformation
effort. Broad-based consensus exists among GAO and others that DOD needs a
full-time and term-based senior management official to provide focused and
sustained leadership over business transformation efforts, although
differing views exist concerning specific characteristics of the position.
Various legislative proposals before the Congress call for senior-level
attention to business transformation, and we continue to believe a CMO at
DOD should be codified in statute as a separate position, at the right
level, and with the appropriate term in office to provide full-time focus
and sustained leadership over the long term, both within and across
administrations. While DOD has recently designated the current Deputy
Secretary of Defense as the department's CMO and assigned related duties
to this individual, this step essentially perpetuates the status quo and
does not ensure full-time attention and continuity of leadership. In the
absence of a CMO with an appropriate term who can provide focused
attention and a comprehensive, integrated, and enterprisewide plan to
guide its transformation efforts, it is highly unlikely that DOD will ever
get the most out of every dollar it invests to better support the
warfighter in times of growing fiscal constraints.

In addition to DOD's overall approach to business transformation, 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. For example, DOD continues to be
challenged in its efforts to transform its financial management systems
which are nonintegrated, stovepiped, and not capable of providing decision
makers with accurate and reliable information, thus adversely affecting
the department's ability to control costs, ensure basic accountability,
anticipate future costs, and measure performance. Further, while progress
has been made in DOD's business systems modernization efforts, DOD has not
fully defined and consistently implemented the full range of management
controls needed to effectively and efficiently ensure that its business
systems investments are the right solutions for addressing its business
needs. While DOD has made some progress in addressing its supply chain
management problems, the department faces many significant challenges in
successfully implementing its changes and measuring performance. In the
area of weapon systems acquisition, recurring problems with cost overruns
and scheduled delays have resulted in a reduction on return on investment
at a time when the nation's fiscal imbalance is growing. Furthermore, 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
warfighters' needs, creating unnecessary risks and paying higher prices
than justified, and its long-standing problems with contract design,
management, and oversight have become more prominent as DOD's reliance on
contractors to provide services continues to grow.

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 and possibly unprecedented 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 thousands of 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.

To address long-standing management problems, we began our high-risk
series in 1990 to identify and help resolve serious weaknesses in areas
that involve substantial resources and provide critical services to the
public. Historically, high-risk areas have been designated because of
traditional vulnerabilities related to their greater susceptibility to
fraud, waste, abuse, and mismanagement. As our high-risk program has
evolved, we have increasingly used the high-risk designation to draw
attention to areas associated with broad-based transformation needed to
achieve greater economy, efficiency, effectiveness, accountability, and
sustainability of selected key government programs and operations. DOD has
continued to dominate the high-risk list, bearing responsibility, in whole
or in part, for 15 of our 27 high-risk areas. Of the 15 high-risk areas,
the 8 DOD-specific high-risk areas cut across all of DOD's major business
areas. Table 1 lists the 8 DOD-specific high-risk areas and the year in
which each area was designated as high risk. In addition, DOD shares
responsibility for 7 governmentwide high-risk areas. ^[27]4

4See GAO-07-1072. DOD shares responsibility for the following seven
governmentwide high-risk areas: (1) disability programs, (2) ensuring the
effective protection of technologies critical to U.S. national security
interests, (3) interagency contracting,
(4) information systems and critical infrastructure, (5)
information-sharing for homeland security, (6) human capital management,
and (7) real property management.

Table 1: Years When Specific DOD  Areas on GAO's 2007 High-Risk List  Were
First Designated as High Risk

                     DOD Area Year designated as high risk

DOD approach to business transformation

DOD personnel security clearance program

DOD support infrastructure management

DOD business systems modernization

DOD financial management

DOD contract management

DOD supply chain management

DOD weapon systems acquisition

Source: GAO.

GAO designated DOD's approach to business transformation as high risk in
2005 because (1) DOD's improvement efforts were fragmented, (2) DOD lacked
an enterprisewide and integrated business transformation plan, and

(3) DOD had not appointed a senior official at the right level with an
adequate amount of time and appropriate authority to be responsible for
overall business transformation efforts. Collectively, these high-risk
areas relate to DOD's major business operations, which directly support
the warfighter, including how servicemembers get paid, the benefits
provided to their families, and the availability of and condition of the
equipment they use both on and off the battlefield.

DOD's Pervasive and Long-standing Financial Management and Business Weaknesses
Affect the Department's Efficiency and Effectiveness and Ultimately Impact DOD's
Ability to Support the Warfighter

The persistence and magnitude of DOD's business transformation challenges
underscore the fact that the status quo is unacceptable, and without
focused and sustained leadership to guide business transformation, the
department will continue to waste billions of dollars every year. Within
DOD, business transformation is broad, encompassing people, planning,
processes, organizational structures, and technology in all of DOD's major
business areas. DOD spends billions of dollars to sustain key business
operations intended to support the warfighter. DOD's pervasive and
long-standing weaknesses in its financial management and business
operations adversely affect the economy, efficiency, and effectiveness of
DOD's operations, and have resulted in a lack of adequate accountability
across all the department's major business areas. Every dollar that DOD
could save through improved economy and efficiency of its operations is
important to the fiscal well-being of our nation, and ultimately can be
used to support the needs of the warfighter. DOD's highrisk areas have
real world implications for our men and women in uniform, including how
the future needs of ongoing operations are estimated, the availability and
condition of the equipment they use both on and off the battlefield, and
the performance of contractors paid to provide logistical support to
servicemembers in theater, as the following examples illustrate:

oFinancial management. Continuing material weaknesses in DOD's business
processes, systems, and controls have adversely affected the reliability
of the department's reported financial information and the department's
ability to manage its operations. To its credit, the department initiated
the "Check It" Campaign in July 2006 to raise awareness throughout the
department on the importance of effective internal management controls.
However, until the impact of this campaign and other efforts, including
its financial improvement and audit readiness (FIAR) effort, begin to
significantly transform and improve DOD's business operations, the
department will continue to suffer weaknesses in the reliability and
usefulness of its management information as illustrated by the examples
below.

     o The lack of reliable asset information, including cost, location, and
       condition, necessary to effectively (1) safeguard assets from physical
       deterioration, theft, or loss; (2) account for the acquisition and
       disposal of these assets; (3) ensure that the assets are available for
       use when needed; (4) prevent unnecessary storage and maintenance
       costs, or purchase of assets already on hand; and (5) determine the
       full costs of programs that use these assets.
     o DOD's inability to estimate with assurance key components of its
       environmental and disposal liabilities and support a significant
       amount of its estimated military postretirement health benefits
       liabilities included in federal employee and veteran benefits payable.
       Problems in accounting for liabilities affect the determination of the
       full cost of DOD's current operations and the extent of its
       liabilities. Also, improperly stated environmental and disposal
       liabilities and weak internal control supporting the process for their
       estimation affect the department's ability to determine priorities for
       cleanup and disposal activities and to appropriately consider future
       budgetary resources needed to carry out these activities.
     o Continuing weaknesses in DOD's ability to properly record transactions
       and reconcile its disbursement activities have adversely impacted the
       reliability of DOD's reported cost data. Unreliable cost information
       affects DOD's ability to control and reduce costs, assess performance,
       evaluate programs, and set appropriate fees to recover costs where
       required. Improperly recorded disbursements could result in
       misstatements in the financial statements and in certain data provided
       by DOD for inclusion in The Budget of the United States Government
       concerning obligations and outlays. Further, inadequacies in DOD's
       systems and processes for recording and reporting obligation data
       related to ongoing operations in support of the global war on
       terrorism have contributed to uncertainty regarding the reliability of
       reported costs. Our reviews found a number of problems, including
       long-standing deficiencies in DOD's financial management and business
       systems, incorrectly categorized or omitted obligations, and the
       reporting of large amounts of obligations in miscellaneous "other"
       categories. ^[28]5 Without transparent and accurate cost reporting,
       neither DOD nor Congress can reliably know how much the war is
       costing, examine details on how funds are spent, or have historical
       data useful in considering future needs. DOD has taken positive steps
       in response to our recommendations intended to improve the reliability
       and accuracy of its cost reports, and therefore cost reporting
       continues to evolve.

^5GAO, Global War on Terrorism: DOD Needs to Improve the Reliability of Cost
Data and Provide Additional Guidance to Control Costs, GAO-05-882
(Washington, D.C.: Sept. 21, 2005) and Global War on Terrorism: Fiscal
Year 2006 Obligation Rates Are Within Funding Levels and Significant
Multiyear Procurement Funds Will Likely Remain Available for Use in Fiscal
Year 2007, GAO-07-76 (Washington, D.C.: Nov. 13, 2006).

Page 9 GAO-08-132T

o These financial management problems continue to be exacerbated by the
department's inability to implement business systems with the desired
capability. For example, the Army's Logistics Modernization Program has
been beset with problems virtually since its initial implementation in
July 2003. For instance, as we reported in July 2007, the program cannot
accurately recognize revenue and bill customers, and its inability to
implement effective business processes has adversely affected the
reliability of its financial reports. ^[29]6

     o Weapon systems acquisition. DOD weapon system programs typically take
       longer to field and cost more to buy than planned, placing additional
       demands on available funding. For example, we reviewed 27 weapon
       programs that were in the research, development, test and evaluation
       phase and noted that since development began the costs had increased
       by almost $35 billion, or 33.5 percent, over the first full estimate.
       The same programs have also experienced an increase in the time needed
       to develop capabilities. The consequence of cost and acquisition cycle
       time growth is often manifested in a reduction of the buying power of
       the defense dollar. As costs rise and key schedule milestones are
       delayed, programs are sometimes forced to reduce quantities, resulting
       in a reduction in buying power and a reduction in capability delivered
       to the warfighter. It is a predictable and recurring phenomenon that
       can be remedied with more attention to separating wants from needs and
       better knowledge at key decision points. With a weapon investment
       portfolio of $1.5 trillion, DOD cannot settle for the same kind of
       outcomes it has gotten in the past.
     o Supply chain management. Systemic deficiencies in DOD's supply support
       for U.S. ground forces have led to critical supply shortages during
       war operations. At the outset of Operation Iraqi Freedom and
       periodically throughout the campaign, DOD has experienced difficulties
       in providing U.S. ground forces with critical items such as tires, body armor, and
Meals-Ready-to-Eat. ^[30]7 In addition, our review of the Air Force's
inventory management practices found problems that hindered its ability to
efficiently and effectively maintain its spare parts inventory for
military equipment. ^[31]8 For example, we found that from fiscal years
2002 through 2005, an average of 52 percent ($1.3 billion) of the Air Force's
secondary on-order inventory was not needed to support on-order requirements.
Furthermore, we also reported that the Army plans to invest about $5
billion over the next several years to develop and implement business
systems to better track inventory items without a clear, integrated
strategy, Armywide enterprise architecture, or concept of operations to
guide this investment. Challenges remain in coordinating and consolidating
distribution and supply support in theater, which could lead to similar
types of supply problems experienced in Operation Iraqi Freedom in future
military operations.

^6GAO, DOD Business Transformation: Lack of an Integrated Strategy Puts
the Army's Asset Visibility System Investments at Risk, GAO-07-860
(Washington, D.C.: July 27, 2007).

^7GAO, Securing, Stabilizing, and Rebuilding Iraq: Key Issues for
Congressional Oversight, GAO-07-308SP (Washington, D.C.: Jan. 9, 2007).

^8GAO, Defense Inventory: Opportunities Exist to Save Billions by Reducing
Air Force's Unneeded Spare Parts Inventory, GAO-07-232 (Washington, D.C.:
Apr. 27, 2007).

o Contract management. DOD has relied extensively on contractors to
undertake major reconstruction and logistical support to its troops in
Iraq. Service contracts have grown by nearly 80 percent in a decade, both
at home and abroad. In some cases, contractors have begun work without the
key terms and conditions of contracts, including projected costs, being
defined within required time frames. Problems with poor planning,
insufficient leadership and guidance, inadequate numbers of trained
contracting personnel, and limited oversight contribute to ineffective
contract management controls. ^[32]9 For example, a program official for
the Logistics Civil Augmentation Program (LOGCAP)--DOD's largest support
contract--noted that if adequate staffing had been in place, the Army
could have realized substantial savings through more effective reviews of
new requirements. ^[33]10 Furthermore, we recently found that sole-source
contracts for security contractors on installations were found to be 25
percent higher than past contracts awarded competitively. ^[34]11 In
addition, DOD does not have a sufficient number of oversight personnel, in
deployed locations and elsewhere, which precludes its ability to obtain
reasonable assurance that contractors are meeting contract requirements
efficiently and effectively at each location where work is being
performed. For example, officials responsible for contracting with the
Multi-National Force--Iraq (MNF-I) stated that they did not have enough
contract oversight personnel and quality assurance representatives to
allow MNF-I to reduce the Army's use of the LOGCAP contract by awarding
more sustainment contracts for base operations support in Iraq. ^[35]12
Further, a lack
of training for military commanders hinders their ability to adequately
plan for the use of contractor support and inhibits the ability of
contract oversight personnel to manage and oversee contracts and
contractors who support deployed forces.

^9GAO-07-308SP.

^10GAO, Defense Acquisitions: Improved Management and Oversight Needed to
Better Control DOD's Acquisition of Services, GAO-07-832T (Washington,
D.C.: May 10, 2007).

^11GAO-07-832T.

As these examples point out, weaknesses in DOD's business operations span
most of the department's major business areas and negatively impact the
department's efficiency and effectiveness and affect its ability to
support the warfighter. Overall, these long-standing weaknesses in DOD's
business areas have (1) resulted in a lack of reliable information needed
to make sound decisions and report accurately on its operations;
(2) hindered its operational efficiency; (3) adversely affected mission
performance; and (4) left the department vulnerable to fraud, waste,
abuse, and mismanagement.

DOD Has Made Progress in Addressing Its Business Transformation Efforts, but
Critical Actions are Needed to Provide Comprehensive, Integrated, and Strategic
Planning and Focused and Sustained Leadership

Due to the impact of the department's business weaknesses on both the
department and the warfighter, DOD's leaders have demonstrated a
commitment to making the department's business transformation a priority
and have made progress in establishing a management framework for these
efforts. For example, the Deputy Secretary of Defense has overseen the
establishment of various management entities and the creation of plans and
tools to help guide business transformation at DOD. However, our analysis
has shown that these efforts are largely focused on business systems
modernization and that ongoing efforts across the department's business
areas are not adequately integrated. Furthermore, key characteristics of
the management framework have yet to be institutionalized or defined in
directives. In addition, DOD lacks two crucial features that are integral
to successful organizational transformation--(1) a strategic planning
process that results in a comprehensive, integrated, and enterprisewide
plan or interconnected plans, and (2) a senior leader who is responsible
and accountable for business transformation and who can provide full-time
focus and sustained leadership.

^12 GAO, Military Operations: High-Level DOD Action Needed to Address
Long-standing Problems with Management and Oversight of Contractors
Supporting Deployed Forces, GAO-07-145 (Washington, D.C.: Dec. 18, 2006).

DOD Has Made Progress in Addressing Its Business Transformation Challenges

DOD's senior leadership has shown commitment to transforming the
department's business operations, 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 the
need to continue working toward transformation of its business operations
and provide transparency in this process. The department has devoted
substantial resources and made important progress toward establishing key
management structures and processes to guide business systems investment
activities, particularly at the departmentwide level, in response to
congressional legislation that codified many of our prior recommendations
related to DOD business systems modernization and financial management.
^[36]13

Specifically, DOD has made progress in establishing a management framework
for business transformation by creating various governance and management
entities and developing plans and tools to help guide transformation. In
the past few years, DOD has established the Defense Business Systems
Management Committee, investment review boards, and the Business
Transformation Agency to manage and guide business systems modernization.
The Defense Business Systems Management Committee and investment review
boards were statutorily required by the Ronald W. Reagan National Defense
Authorization Act for Fiscal Year 2005 to review and approve the
obligation of funds for defense business systems modernization, depending
on the cost and scope of the system in review. The Business Transformation
Agency was created to support the top-level management body, the Defense
Business Systems Management Committee, and to advance DOD-wide business
transformation efforts.

Additionally, DOD has developed a number of tools and plans to enable
these management entities to help guide business systems modernization
efforts. The tools and plans include the business enterprise architecture
and the enterprise transition plan. The business enterprise architecture
is a tool or blueprint intended to guide and constrain investments in DOD
organizations and systems as they relate to business operations. It
provides a thin layer of corporate policies, capabilities, standards, and
rules and focuses on providing tangible outcomes for a limited set of
enterprise-level (DOD-wide) priorities. The enterprise transition plan is
currently considered the highest level plan for DOD business
transformation. According to DOD, the enterprise transition plan is
intended to summarize all levels of transition planning information
(milestones, metrics, resource needs, and system migrations) as an
integrated product for communicating and monitoring progress, resulting in
a consistent framework for setting priorities and evaluating plans,
programs, and investments.

^13Ronald 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).

Our analysis of these tools, plans, and meeting minutes of the various
transformational management entities shows that these efforts are largely
focused on business systems modernization, and that this framework has yet
to be expanded to encompass all of the elements of the overall business
transformation. Furthermore, DOD has not clearly defined or
institutionalized in directives the interrelationships, roles and
responsibilities, or accountability for the various entities that comprise
its management framework for overall business transformation. For example,
opinions differ within DOD as to which senior governance body will serve
as the primary body responsible for overall business transformation. Some
officials stated that the Defense Business Systems Management Committee
would serve as the senior-most governance entity, while others stated that
the Deputy's Advisory Working Group, a group that provides departmentwide
strategic direction on various issues, should function as the primary
decision-making body for business transformation. Additionally, opinions
differ between the two entities regarding the definition of DOD's key
business areas, with the Defense Business Systems Management Committee and
the Business Transformation Agency using a broader definition of business
processes than that of the Deputy Advisory Working Group and its
supporting organizations. Until such differences are resolved and the
department institutionalizes a management framework that spans all aspects
of business transformation, DOD will not be able to integrate related
initiatives into a sustainable, enterprisewide approach and to resolve
weaknesses in business operations.

Critical Actions Are Needed to Provide Comprehensive, Integrated, and Strategic
Planning and Focused and Sustained Leadership for DOD's Overall Business
Transformation Efforts

As we have testified and reported for years, a successful, integrated,
departmentwide approach to addressing DOD's overall business
transformation requires two critical elements: a comprehensive,
integrated, and enterprisewide plan and an individual capable of providing
full-time focus and sustained leadership both within and across
administrations, dedicated solely to the integration and execution of the
overall business transformation effort.

DOD Lacks a Strategic Planning Process That Results in a Comprehensive,
Integrated, and Enterprisewide Plan or Set of Plans

DOD continues to lack a comprehensive, integrated, and enterprisewide plan
or set of linked plans for business transformation that is supported by a
comprehensive planning process, and guides and unifies its business
transformation efforts. Our prior work has shown that this type of plan
should help set strategic direction for overall business transformation
efforts and all key business functions; prioritize initiatives and
resources; and monitor progress through the establishment of performance
goals, objectives, and rewards. ^[37]14 Furthermore, an integrated
business transformation plan would be instrumental in establishing
investment priorities and guiding the department's key resource decisions.

While various plans exist for different business areas, DOD's various
business-related plans are not yet integrated to include consistent
reporting of goals, measures, and expectations across institutional, unit,
and individual program levels. Our analysis shows that plan alignment and
integration currently focuses on data consistency among plans, meaning
that plans are reviewed for errors and inconsistencies in reported
information, but there is a lack of consistency in goals and measurements
among plans. For example, our analysis of the March 2007 enterprise
transition plan showed that the goals and objectives in that plan were not
clearly linked to the goals and objectives in the most recent Quadrennial
Defense Review, which is DOD's highest-level strategic plan. Additionally,
the enterprise transition plan is not based on a strategic planning
process. For example, it does not provide a complete assessment of DOD's
progress in overall transformation efforts aside from business systems
modernization. The plan also does not contain results-oriented goals and
measures that assess overall business transformation. Other entities such
as the Institute for Defense Analyses, the Defense Science Board, and the
Defense Business Board have similarly reported the need for DOD to develop
an enterprisewide plan to link strategies across the department for
transforming all business areas and thus report similar findings as our
analysis. DOD officials recognize that the department does not have an
integrated plan in place, although they have stated that their intention
is to expand the scope of the enterprise transition plan to become a more
robust enterprisewide planning document and to evolve this plan into the
centerpiece strategic document. DOD updates the enterprise transition plan
twice a year, once in March as part of DOD's annual report to Congress and
once in September, and DOD has stated the department's goal is to evolve
the plan to that of a comprehensive, top-level planning document for all
business functions. DOD released the most recent enterprise transition
plan update on September 28, 2007, and we will continue to monitor
developments in this effort.

^14See for example, GAO-07-1072; GAO, Defense Business Transformation: A
Comprehensive Plan, Integrated Efforts, and Sustained Leadership Are
Needed to Assure Success, GAO-07-229T (Washington, D.C.: Nov. 16, 2006);
Department of Defense: Sustained Leadership Is Critical to Effective
Financial and Business Management Transformation, GAO-06-1006T
(Washington, D.C.: Aug. 3, 2006); and DOD's High-Risk Areas: Successful
Business Transformation Requires Sound Strategic Planning and Sustained
Leadership, GAO-05-520T (Washington, D.C.: Apr. 13, 2005).

DOD Lacks a Full-time and Term-based Senior Management Official to Provide
Focus and Sustained Leadership for the Overall Business Transformation
Effort

DOD has not established a full-time and term-based leadership position
dedicated solely to the business transformation effort. We have long
advocated the importance of establishing CMO positions in government
agencies, including DOD, and have previously reported and testified on the
key characteristics of the position necessary for success. ^[38]15 In our
view, transforming DOD's business operations is necessary for DOD to
resolve its weaknesses in the designated high-risk areas, and to ensure
the department has sustained leadership to guide its business
transformation efforts. Specifically, because of the complexity and
long-term nature of business transformation, DOD needs a CMO with
significant authority, experience, and a term that would provide sustained
leadership and the time to integrate its overall business transformation
efforts. Without formally designating responsibility and accountability
for results, reconciling competing priorities among various organizations
and prioritizing investments will be difficult and could impede the
department's progress in addressing deficiencies in key business areas.

Furthermore, a broad-based consensus exists among GAO and others that the
status quo is unacceptable and that DOD needs a full-time and termbased
senior management official to provide focused and sustained
leadership for its overall business transformation efforts, although
differing views exist concerning the specifics of the position, such as
term limit and the level of the position within the department. Congress
directed DOD to commission studies of the feasibility and advisability of
establishing a deputy secretary of defense for management to oversee the
department's business transformation process. As part of this effort, the
Defense Business Board and the Institute for Defense Analyses both
supported the need for a senior executive to be responsible for DOD's
overall business transformation efforts. ^[39]16 Additionally, this matter
is now before Congress as it prepares to deliberate on pending legislation
that calls for statutorily establishing a CMO at DOD. Both the current
House and Senate versions of the Fiscal Year 2008 Defense Authorization
legislation contain provisions for assigning responsibility for DOD's
business transformation efforts to a senior-level position within the
department, although the versions differ in certain details. The Senate
version calls for the Deputy Secretary of Defense to take on the
additional duties of the CMO position while also establishing a Deputy CMO
position at the Executive Level III; the House version would require the
Secretary of Defense to assign CMO duties to a senior official at or above
the under secretary level.

^15See for example GAO-07-1072, GAO-07-310, GAO-07-229T, and GAO-06-1006T.

DOD has recently taken action on the issue of establishing a CMO position
at DOD; however, we believe this action does not go far enough to change
the status quo and ensure sustainable success. We recognize the commitment
and elevated attention that the Deputy Secretary of Defense and other
senior leaders have clearly shown in addressing deficiencies in the
department's business operations. For example, the Deputy Secretary has
overseen the creation of various business-related entities, such as the
Defense Business Systems Management Committee and the Business
Transformation Agency, and has been closely involved in monthly meetings
of both the Defense Business Systems Management Committee and the Deputy's
Advisory Working Group, a group that provides departmentwide strategic
direction on various issues. Most recently, DOD issued a directive on
September 18, 2007, that assigned CMO responsibilities to the current
Deputy Secretary of Defense. ^[40]17 In our view, subsuming the duties
within the responsibilities of the individual currently
serving as the Deputy Secretary represents the status quo and will not
provide full-time attention or continuity as administrations change. While
the Deputy Secretary may be at the right level, the substantial demands of
the position make it exceedingly difficult for the incumbent to maintain
the focus, oversight, and momentum needed to resolve business operational
weaknesses, including the high-risk areas. Furthermore, the assignment of
CMO duties to an individual with a limited term in the position does not
ensure continuity of effort or that sustained success will be ensured both
within and across administrations.

^16Defense Business Board, Governance-Alignment and Configuration of Business
Activities Task Group Report (Washington, D.C.: May 31, 2006) and
Institute for Defense Analyses, Does DOD Need a Chief Management Officer?
(Alexandria, Va.: Dec. 2006).

^17 DOD Directive 5105.02, Deputy Secretary of Defense (Sept. 18, 2007).

In the interest of the department and the American taxpayers, we maintain
that the department needs a separate, full-time CMO position over the long
term in order to devote the needed focus and continuity of effort to
transform its key business operations and avoid billions more in waste
each year. Therefore, we continue to believe that the CMO position at DOD
should be:

     o Codified in statute as a separate and full-time position. The CMO
       should be a separate position from the Deputy Secretary of Defense in
       order to provide full-time attention to business transformation. The
       CMO would be responsible and accountable for planning, integrating,
       and executing DOD's overall business transformation effort. The CMO
       also would develop and implement a strategic plan for overall business
       transformation. It should become a permanent position to ensure
       continuity of business transformation efforts, with the specific
       duties authorized in statute.
     o Designated as an Executive Level II appointment. The CMO should be at
       Executive Level II and report directly to the Secretary of Defense so
       that the individual in this position has the stature needed to
       successfully address integration challenges, adjudicate disputes, and
       monitor progress on overall business transformation across defense
       organizations.
     o Subject to an extended term appointment. The CMO's appointment could
       span administrations to ensure transformation efforts are sustained
       across administrations. Because business transformation is a long-term
       and complex process, a term of at least 5 to 7 years is recommended to
       provide sustained leadership and accountability.

In the absence of a CMO with these characteristics to focus solely on the
integration and execution of business transformation efforts, and an
enterprisewide plan to guide these efforts, it is highly unlikely that DOD
will ever resolve its pervasive weaknesses and get the most out of every
dollar it invests in these times of growing fiscal constraint to better
support the warfighter. Transforming DOD's business operations is an
absolute necessity in the context of an increasingly demanding security
environment and the pressures of our nation's long-term fiscal outlook.
Further, the current deployment of tens of thousands of servicemembers,
civilians, and contractor personnel to support ongoing operations provides
an even greater sense of urgency for the department to aggressively
address weaknesses in its business operations and achieve transformation
goals in the near and long term.

DOD-Specific High-Risk Areas Highlight the Need for Further Change and
Transformation in the Department

I would like to discuss the remaining seven programs and activities within
DOD that have been designated as high risk. Some of these areas have
remained on the high-risk list for nearly 20 years and have continued to
be a challenge for DOD, while others have newly emerged as a challenge for
the department in more recent years. The remaining high-risk areas include
DOD's financial management, business systems modernization, personnel
security clearance program, support infrastructure management, supply
chain management, weapon systems acquisition, and contract management.
Each area was added to our high-risk list due to weaknesses that make DOD
more vulnerable to waste, fraud, and abuse. DOD has made progress in
addressing each of these areas, but serious challenges remain that will
require continued attention and sustained leadership over a number of
years to achieve success.

DOD Financial Management

DOD's pervasive financial and related business management and system
deficiencies adversely affect its ability to assess resource requirements;
control costs; ensure basic accountability; anticipate future costs and
claims on the budget; measure performance; maintain funds control; prevent
and detect fraud, waste, and abuse; and address pressing management
issues. Therefore, we first designated DOD financial management as high
risk in 1995.

A major component of DOD's business transformation effort is the defense
Financial Improvement and Audit Readiness (FIAR) Plan, initially issued in
December 2005 and updated periodically pursuant to section 376 of the
National Defense Authorization Act for Fiscal Year 2006. ^[41]18 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. The John Warner National Defense Authorization Act for Fiscal Year
2007 continued to limit DOD's ability to obligate or expend funds for
financial management improvement activities until the Secretary of Defense
submits a determination to the committees that the activities are
consistent with the plans required by section 376. ^[42]19

^18Pub. 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. In its June 2007 FIAR Plan update, DOD introduced a change in
its audit strategy in which it moved from a line item approach to a
segment approach for addressing its financial management weaknesses and
achieving auditability. According to the limited information provided in
the June update, DOD has loosely defined a segment as a business process
(Civilian Pay), financial statement line item (Cash and Other Monetary
Assets), group of related financial statement line items (Fund Balance
with Treasury, Accounts Payable, and Accounts Receivable), or a sub-line
(Military Equipment). According to DOD officials, the FIAR Plan and the
enterprise transition plan are key efforts in improving financial
information for decision makers and obtaining unqualified (clean) audit
opinions on their annual financial statements. According to the DOD FIAR
Director, the September 2007 FIAR Plan update, which the department
intends to release by mid-October 2007, and the March 2008 update of the
FIAR Plan, are expected to provide more details on DOD's new audit
strategy and respective changes in its business rules and oversight
process for ensuring that its goals are achieved. We cannot comment on
specific changes in DOD's audit strategy until we have had an opportunity
to review these more substantive updates of the FIAR Plan.

We will continue to monitor DOD's efforts to transform its business
operations and address its financial management deficiencies as part of
our continuing DOD business enterprise architecture work and our oversight
of DOD's financial statement audit.

^19Pub. L. No. 109-364, S 321, 120 Stat. 2083 (2006).

Furthermore, the department invests billions of dollars annually to
operate, maintain, and modernize its over 2,900 business systems,
including financial management systems. Despite this significant
investment, the department is severely challenged in implementing business
systems on time, within budget, and with the promised capability. As
previously reported, ^[43]20 many of the department's business systems are
nonintegrated, stovepiped, and not capable of providing department
management and Congress with accurate and reliable information on DOD's
day-to-day operations. Effective process improvement and information
technology investment management and oversight will be critical to the
department's success in transforming its business management systems and
operations. Many of the problems related to DOD's inability to effectively
implement its business systems on time, within budget, and with the
promised capability can be attributed to its failure to implement the
disciplined processes necessary to reduce the risks associated with these
projects to acceptable levels. ^[44]21 Disciplined processes have been
shown to reduce the risks associated with software development and
acquisition efforts and are fundamental to successful systems acquisition.

DOD Business Systems Modernization

DOD is still not where it needs to be in managing its departmentwide
business systems modernization. Until DOD fully defines and consistently
implements the full range of business systems modernization management
controls (institutional and program-specific), it will be not be
positioned to effectively and efficiently ensure that its business systems
and information technology services investments are the right solutions
for addressing its business needs, that they are being managed to produce
expected capabilities efficiently and cost effectively, and that business
stakeholders are satisfied.

For decades, DOD has been challenged in modernizing the thousands of
timeworn business systems. We designated DOD's business systems
modernization program as high risk in 1995. Since then, we have made
scores of recommendations aimed at strengthening DOD's institutional
approach to modernizing its business systems, and reducing the risks
associated with key business system investments. In addition, in recent
legislation, Congress included provisions that are consistent with our
recommendations, such as in the Ronald W. Reagan National Defense
Authorization Act for Fiscal Year 2005. In response, the department has
taken, or is taking, actions to implement both our recommendations and the
legislative requirements, and as a result has made progress in
establishing corporate management controls, such as its evolving business
enterprise architecture (BEA), corporate investment management structures
and processes, increased business system life-cycle management discipline
on its largest business system investments, and leveraging highly skilled
staff on its largest business system investments.

^20GAO-06-1006T and GAO-07-229T.

^21Disciplined processes  include  a  wide  range  of  activities,  including
project planning and oversight, requirements management, risk  management,
and testing.

However, much more remains to be accomplished to address this high-risk
area, particularly with respect to ensuring that effective corporate
approaches and controls are extended to and employed within each of DOD's
component organizations (military departments and defense agencies). To
this end, our recent work has highlighted challenges that the department
still faces in "federating" (i.e., extending) its corporate BEA to its
component organizations' architectures, as well as in establishing
institutional structures and processes for selecting, controlling, and
evaluating business systems investments within each component
organization. Beyond this, making sure that effective system acquisition
management controls are actually implemented on each and every business
system investment also remains a formidable challenge, as our recent
reports on management weaknesses associated with individual programs have
disclosed. ^[45]22 Among other things, these reports have identified
program-level weaknesses relative to architecture alignment, economic
justification, and performance management.

^22See for example, GAO-07-860; DOD Needs to Ensure That Navy Marine Corps
Intranet Program Is Meeting Goals and Satisfying Customers, GAO-07-51
(Washington, D.C.: Dec. 8, 2006); Defense Travel System: Reported Savings
Questionable and Implementation Challenges Remain, GAO-06-980 (Washington,
D.C.: Sept. 26, 2006); DOD Systems Modernization: Uncertain Joint Use and
Marginal Expected Value of Military Asset Deployment System Warrant
Reassessment of Planned Investment, GAO-06-171 (Washington, D.C.: Dec. 15,
2005); and DOD Systems Modernization: Planned Investment in the Navy
Tactical Command Support System Needs to be Reassessed, GAO-06-215
(Washington, D.C.: Dec. 5, 2005).

More specifically, we recently reported ^[46]23 that DOD has continued to
take steps to comply with legislative requirements and related guidance
pertaining to its business systems modernization high-risk area, and that
these steps addressed several of the missing elements that we previously
identified relative to, for example, its BEA, enterprise transition plan,
business system investment management, and business systems budgetary
disclosure. However, we reported that additional steps were still needed
to fully comply with legislative requirements and relevant guidance.

     o The latest version of the BEA does a good job of defining DOD-wide
       corporate policies, capabilities, rules, and standards, which are
       essential to meeting the act's requirements. However, this version had
       yet to be augmented by the DOD component organizations' subsidiary
       architectures, which are also necessary to meeting statutory
       requirements and the department's goal of having a federated family of
       architectures. Compounding this are our reports showing the military
       departments' architecture programs were not mature and the strategy
       that the department had developed for federating its BEA needed more
       definition to be executable. ^[47]24 To address these limitations, we
       made recommendations aimed at ensuring that DOD's federated BEA
       provides a more sufficient frame of reference to optimally guide and
       constrain DODwide system investments. DOD agreed with these
       recommendations and has since taken some actions, such as developing
       an updated draft of its federation strategy, which according to DOD
       officials, addresses our recommendations but has yet to be released.
     o The March 2007 enterprise transition plan continued to identify more
       systems and initiatives that are to fill business capability gaps and
       address DOD-wide and component business priorities, and it continues
       to provide a range of information for each system and initiative in
       the plan (e.g., budget information, performance metrics, and
       milestones). However, this version still does not include system
       investment information for all the defense agencies and combatant
       commands. Moreover, the plan does not sequence the planned investments
       based on a range of relevant factors,
such 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 DOD officials, they intend to address such
limitations in future versions of the transition plan as part of their
plans for addressing our prior recommendations. ^[48]25 DOD recently
released its September 2007 version of the plan which, according to DOD,
continues to provide time-phased milestones, performance metrics, and
statement of resource needs for new and existing systems that are part of
the BEA and component architectures, and includes a schedule for
terminating old systems and replacing them with newer, improved enterprise
solutions. We have yet to review the updated transition plan.

^23GAO, DOD Business Systems Modernization: Progress Continues to Be Made
in Establishing Corporate Management Controls, but Further Steps Are
Needed, GAO-07-733 (Washington, D.C.: May 14, 2007).

^24GAO, Business Systems Modernization: Strategy for Evolving DOD's Business
Enterprise Architecture Offers a Conceptual Approach, but Execution
Details Are Needed, GAO-07-451 (Washington, D.C.: Apr. 16, 2007); and
Enterprise Architecture: Leadership Remains Key to Establishing and
Leveraging Architectures for Organizational Transformation, GAO-06-831
(Washington, D.C.: Aug. 14, 2006).

o The department has established and has begun to implement legislatively
directed investment review structures and processes. ^[49]26 However, it
has yet to do so in a manner that is fully consistent with relevant
guidance. ^[50]27 Specifically, the department has yet to fully define a
range of policies and procedures needed to effectively execute both
project-level and portfoliobased information technology investment
management practices. For example, while DOD has established an
enterprisewide information technology investment board that is responsible
for defining and implementing its business systems investment governance
process, it has not fully defined the policies and procedures needed for
oversight of and visibility into operations and maintenance-focused
investments. Accordingly, we made recommendations aimed at improving the
department's ability to better manage the billions of dollars it invests
annually in its business systems. DOD largely agreed with these
recommendations and has since undertaken several initiatives to strengthen
business system investment management. For example, it has drafted and
intends to shortly begin implementing a new Business Capability Lifecycle
approach that is intended to consolidate management of business system
requirements, acquisition, and compliance with architecture disciplines
into a single governance process. Further, it has established an
Enterprise Integration directorate in the Business Transformation Agency
to support the implementation of Enterprise
Resource Planning systems by ensuring that best practices are leveraged
and BEA-related business rules and standards are adopted.

^25See GAO-07-733.

^26Ronald 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).

^27GAO, Business Systems Modernization: DOD Needs to Fully Define Policies
and Procedures for Institutionally Managing Investments, GAO-07-538
(Washington, D.C.: May 11, 2007).

o The department has continued to review and approve business systems as
directed in legislation. As of March 2007, the department reported that
its senior investment review body had approved 285 such systems. However,
the military departments reported that their review and approval processes
were still evolving and that additional work was needed for them to
mature. Because of the importance of the military departments' investment
management structures and processes, we have ongoing work to determine
their maturity. Beyond having a well-defined federated architecture for
the business mission area and business systems investment management
policies and procedures across the department, the more formidable
challenge facing DOD is how well it can implement these and other
acquisition management controls for each and every business system
investment and information technology services outsourcing program. In
this regard, we have continued to identify program-specific weaknesses.

Most recently, for example, we reported that the Army's approach for
investing about $5 billion over the next several years in its General Fund
Enterprise Business System, Global Combat Support System-Army
Field/Tactical, ^[51]28 and Logistics Modernization Program did not
include alignment with Army enterprise architecture or use of a
portfolio-based business system investment review process. ^[52]29
Moreover, we reported that the Army did not have reliable processes, such
as an independent verification and validation function, or analyses, such
as economic analyses, to support its management of these programs. We
concluded that until the Army adopts a business system investment
management approach that provides for reviewing groups of systems and
making enterprise decisions on how these groups will collectively
interoperate to provide a desired capability, it runs the risk of
investing significant resources in business systems that do not provide
the desired functionality and efficiency.

We also reported that the Navy's approach for investing in both system and
information technology services, such as the Naval Tactical Command
Support System (NTCSS) ^[53]30 and Navy Marine Corps Intranet (NMCI),
^[54]31 did not include effective program performance management. For
NTCSS, we reported that, for example, earned value management, which is a
means for determining and disclosing actual performance against budget and
schedule estimates, and revising estimates based on performance to date,
had not been implemented effectively. We also reported that complete and
current reporting of NTCSS progress and problems in meeting cost,
schedule, and performance goals had not occurred, leaving oversight
entities without the information needed to mitigate risks, address
problems, and take corrective action. We concluded that without this
information, the Navy cannot determine whether NTCSS, as it was defined
and was being developed, was the right solution to meet its strategic
business and technological needs. For NMCI, we reported that performance
management practices, to include measurement of progress against strategic
program goals and reporting to key decision makers on performance against
strategic goals and other important program aspects, such as examining
service-level agreement satisfaction from multiple vantage points and
ensuring customer satisfaction, had not been adequate. We concluded that
without a full and accurate picture of program performance, the risk of
inadequately informing important NMCI investment management decisions was
increased.

^28Field/tactical refers  to  Army units  that  are deployable  to  locations
around the world, such as Iraq or Afghanistan.

^29GAO-07-860.

DOD Personnel Security Clearance Program

We first designated DOD's personnel security clearance program as a
highrisk area in January 2005. The designation followed about 20 years of
our reports documenting delays in determining clearance eligibility and
other clearance-related challenges. The type of information accessed by
individuals with clearances and the scope of DOD's clearance program are
two factors to consider in understanding the risk present in this area.
For example, personnel with clearances can gain access to classified
information that could cause damage to U.S. national defense and foreign
relations through unauthorized disclosure. In our 1999 report, we noted
that the damage had included intelligence personnel being killed, critical
information being compromised, and U.S. military forces being put at risk.
^[55]32 Furthermore, problems with DOD's program have effects outside of
the department. DOD is responsible for about 2.5 million security
clearances issued to servicemembers, DOD civilians, and industry personnel
who work on contracts for DOD and 23 other federal agencies.

^30GAO-06-215.

^31GAO-07-51.

^32GAO, DOD  Personnel:  Inadequate Personnel  Security  Investigations  Pose
National Security  Risks,  GAO/NSIAD-00-12  (Washington,  D.C.:  Oct.  27,
1999).

Our reports have documented a wide variety of problems present in DOD's
clearance program. Some of the problems that we noted in our 2007 highrisk
report included (1) DOD's consistently inaccurate projections of clearance
requests and their negative effects on workload planning and funding, (2)
incomplete and delayed investigative reports from the Office of Personnel
Management (OPM)--DOD's primary provider of clearance investigations, and
(3) DOD personnel (namely, adjudicators) granting clearance eligibility
despite data missing from the investigative reports used to make such
determinations. While some of those findings were reported on data which
are now over 1  1/2 years old, our May 2007 testimony noted that problems
continue to exist such as OPM not fully counting all of days required for
investigations and limited information being provided to Congress on
reinvestigations for clearance updating. Delays in determining initial
clearance eligibility can increase the cost of performing classified work,
and delays in updating clearances may increase the risk to national
security. Additionally, incomplete investigative or adjudicative reports
could undermine governmentwide efforts to achieve clearance reciprocity
(e.g., an agency accepting a clearance awarded by another agency).

High-level attention has been focused on improving the personnel security
clearance processes in DOD and governmentwide. Since June 2005, the Office
of Management and Budget's (OMB) Deputy Director of Management has been
responsible for improving the governmentwide processes. During that time,
OMB has overseen, among other things, the issuance of reciprocity
standards, the growth of OPM's investigative workforce, and greater use of
OPM's automated clearance-application system. An August 9, 2007,
memorandum from the Deputy Secretary of Defense indicates that DOD's
clearance program is drawing attention at the highest levels of the
department. Specifically, streamlining security clearance processes is one
of the 25 DOD transformation priorities identified in the memorandum.
Another indication of high-level involvement in addressing clearance
problems is a memorandum of agreement that seeks to develop, in phases, a
reformed DOD and intelligence community security clearance process that
allows granting high-assurance security clearances in the least time at
the lowest reasonable cost. While the Office of Director of National
Intelligence and the Office of the Under Secretary of Defense posted a
request for information on the Federal Business Opportunities' website for
August 7
through September 4, 2007, the request indicated that they plan to deliver
"a transformed, modernized, and reciprocal security clearance process that
is universally applicable" to DOD, the intelligence community, and other
U.S. government agencies no later than December 31, 2008.

DOD Support Infrastructure Management

Since 1997, we have 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. We have
frequently reported in recent years on the long-term challenges DOD faces
in managing its portfolio of facilities, halting the degradation of
facilities, and reducing unneeded infrastructure to free up funds to
better maintain enduring facilities and meet other needs. DOD officials
have likewise 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 affects its ability to
devote more funds to weapon systems modernization and other needs the
department deems critical. Inefficient management practices and outdated
business processes also have 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 continued
to give high-level emphasis to reforming its support operations and
infrastructure, including continued efforts to reduce excess
infrastructure, promote transformation, and foster jointness through the
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 the sustainment and restoration
of facilities. It also has achieved efficiencies through demolishing
unneeded buildings at military installations and privatizing military
family housing.

Our work examining DOD's management of its facilities infrastructure shows
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. For
example, we have reported that the cleanup of environmental contamination
on unneeded property resulting from prior BRAC rounds has been a key
impediment to the transfer of these properties and could be an issue in
the transfer and reuse of unneeded property resulting from the 2005 BRAC
round. ^[56]33 Impediments to transfer continue to be related primarily to
a variety of interrelated environmental cleanup issues, including limited
technology to address unexploded ordnance and protracted negotiations on
compliance with environmental regulations. We have also recently reported
that projected savings from past BRAC rounds have been significantly
overstated. ^[57]34 During recent visits to installations in the United
States and overseas, service officials continue to report inadequate
funding to provide 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 facilities' condition and base services will
deteriorate. 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. For example, DOD's
outline does not identify DOD's short- and long-term goals or the desired
end state for its facilities infrastructure--information critical for a
meaningful plan. Instead, the outline focuses on completing administrative
actions and producing paper products, and it does not describe how the
completion of these actions and products will directly affect DOD
infrastructure, including major support functions, and ultimately meet
DOD's short- and long-term goals. We will continue to meet with OMB and
DOD officials to discuss the department's efforts in addressing this
high-risk area.

Through future work examining DOD's strategic plan for this area and
through our monitoring of DOD base realignment and closures, overseas
rebasing, and the sustainment and operations of military installations and
facilities, we will be able to determine what other work needs to be done
to assist DOD in its efforts to improve the management of its support
infrastructure. As demands on the military continue to change and
increase, organizations throughout DOD will need to continue
reengineering their business processes and striving for greater
operational effectiveness and efficiency. Having a comprehensive,
long-range plan for its infrastructure that addresses facility
requirements, recapitalization, and maintenance and repair will help DOD
provide adequate resources to meet these requirements and improve facility
conditions and base services.

^33GAO, Military Base Closures: Opportunities Exist to Improve Environmental
Cleanup Cost Reporting and to Expedite Transfer of Unneeded Property,
GAO-07-166 (Washington, D.C.: Jan. 30, 2007).

^34GAO, Military Base Closures: Projected Savings from Fleet Readiness
Centers Likely Overstated and Actions Needed to Track Actual Savings and
Overcome Certain Challenges, GAO-07-304 (Washington, D.C.: June 29, 2007).

DOD Supply Chain Management

The availability of spare parts and other critical supply items that are
procured and delivered through DOD's supply chain network affects the
readiness and capabilities of U.S. military forces, and can affect the
success of a mission. Moreover, the investment of resources in the supply
chain is substantial, amounting to more than $150 billion a year according
to DOD, and supply inventory levels have grown by 35 percent from $63.3
billion in fiscal year 2001 to $85.6 billion in fiscal year 2006. While
DOD has taken a number of positive steps toward improving its supply chain
management, it has continued to experience weaknesses in its ability to
provide efficient and effective supply support to the warfighter.
Consequently, the department has been unable to consistently meet its goal
of delivering the "right items to the right place at the right time" to
support the deployment and sustainment of military forces. As a result of
weaknesses in DOD's management of supply inventories and responsiveness to
warfighter requirements, supply chain management has been on our high-risk
list since 1990. Our prior work over the last several years has identified
three focus areas that are critical to resolving supply chain management
problems: requirements forecasting, asset visibility, and materiel
distribution.

Beginning in 2005, DOD developed a plan to address long-term systemic
weaknesses in supply chain management. Since the January 2007 update of
the high-risk series, DOD has made progress in developing and implementing
supply chain management improvement initiatives in its supply chain
management plan. However, the long-term time frames for many of these
initiatives present challenges to the department in sustaining progress
toward substantially completing their implementation. The plan also lacks
outcome-focused performance measures for many individual initiatives as
well as its three focus areas: requirements forecasting, asset visibility,
and materiel distribution. Together, these weaknesses limit DOD's ability
to fully demonstrate the results it hopes to achieve through its plan.

Our recent work has also identified problems related to the three focus
areas in DOD's plan. In the requirements area, for example, the military
services are experiencing difficulties estimating acquisition lead times
to
acquire spare parts for equipment and weapon systems, hindering their
ability to efficiently and effectively maintain spare parts inventories
for military equipment. In March 2007, we reported that 44 percent of the
services' lead time estimates varied either earlier or later than the
actual lead times by at least 90 days. Overestimates and underestimates of
acquisition lead time contribute to inefficient use of funds and potential
shortages or excesses of spare parts. Challenges in the asset visibility
area include the lack of interoperability among information technology
systems, problems with container management, and inconsistent application
of radio frequency identification technology, all of which make it
difficult to obtain timely and accurate information on assets in theater.
In the materiel distribution area, challenges remain in coordinating and
consolidating distribution and supply support within a theater.
Furthermore, we recently reviewed DOD's joint theater logistics
initiative, which is aimed at improving the ability of a joint force
commander to direct various logistics functions, including distribution
and supply support activities. Our work raises concerns as to whether DOD
can effectively implement this initiative without reexamining fundamental
aspects of its logistics governance and strategy. In this respect, joint
theater logistics may serve as a microcosm of some of the challenges DOD
faces in resolving supply chain management problems.

DOD Weapon Systems Acquisition

For more than a decade, we have identified DOD's acquisition of major
weapon systems as high risk. The weapon acquisitions process continues to
produce systems that are the best in the world but cost more than first
promised, take longer to field than first promised, and do less than first
promised. Weapon acquisitions are demanding a larger share of the DOD
budget at a time when the nation's fiscal imbalance is growing. DOD has
doubled its planned investment in new weapon systems from approximately
$750 billion in 2001 to almost $1.5 trillion in 2007. During the same
period, the government's total liabilities and unfunded commitments have
increased from about $20 trillion to about $50 trillion. In this context,
DOD simply must maximize its return on investment to provide needed
capabilities to the warfighter and to provide the best value to the
taxpayer. We have found that knowledge at key decision points is critical
in the development of new weapon systems if they are to meet their
promised costs, schedules, and capabilities--in other words, using a
knowledge-based approach to acquisitions. The link between knowledge and
cost is real and predictable. It provides three choices for decision
makers: (1) accept the status quo, (2) require demonstrations of high
knowledge levels before approving individual programs, or (3) increase
cost estimates to accurately reflect consequences of insufficient
knowledge. With over $880 billion remaining to invest in the current
portfolio of major systems, the status quo is both unacceptable and
unsustainable.

The inability to deliver new weapon systems at promised times and costs
has significant consequences for both the taxpayer and the warfighter.
When time and costs increase, quantities often decrease to compensate. The
result is the warfighter gets less capability than planned and the
taxpayer's dollar does not go as far. For example, table 2 depicts the
following programs that experienced both cost increases and quantity
decreases:

       Table 2: Examples of Reduced Buying Power (constant 2007 dollars)

      Percentage Initial Initial Latest Latest of unit cost Programs estimate
                                          quantity estimate quantity increase

Future Combat $85.5 billion 15 $131.7 billion 15 systems Systems systems

V-22 Osprey $36.9 billion  913 $50.0 billion  458 aircraft 170.2  Aircraft
aircraft

Evolved $16.0 billion 181 $28.6 billion 138 vehicles 134.7 Expendable
vehicles Launch Vehicle

Expeditionary $8.4  billion  1,025  $13.2 billion  593  vehicles  Fighting
Vehicle vehicles

Source: GAO.

DOD knows what to do to achieve more successful outcomes but finds it
difficult to apply the necessary discipline and controls or assign
muchneeded accountability. DOD has written into policy an approach that
emphasizes attaining a certain level of knowledge at critical junctures
before managers agree to invest more money in the next phase of weapon
system development. This knowledge-based approach should result in
evolutionary--that is incremental, manageable, and predictable--
development and inserts several controls to help managers gauge progress
in meeting cost, schedule, and performance goals. However, as we reported
in our March 2007 report on selected DOD weapon systems, DOD has not been
employing the knowledge-based approach, proceeds with lower levels of
knowledge at critical junctures, and attains key elements of product
knowledge later in development than specified in DOD policy. In
particular, the department accepts high levels of technology risk at the
start of major acquisition programs. DOD's acquisition community often
takes on responsibility for technology development and product development
concurrently. Without mature technologies at the outset, a program will
almost certainly incur cost and schedule problems. Without mature
technologies, it is difficult to know whether the product being designed
and produced will deliver the desired capabilities or, alternatively, if
the design allows enough space for technology integration. Our work has
shown that very few DOD programs start with mature technologies.

We continue to annually assess DOD's weapon system acquisition programs,
and the breadth of our work gives us insights into a broad range of
programs as well as the overall direction of weapon system acquisitions.
In examining our defense work, we have observed 15 systemic acquisition
challenges facing DOD--which we have included as appendix I to my
statement. DOD is depending on the weapons currently under development to
transform military operations for the 21st century. As we have recently
reported, the complexity of DOD's transformational efforts is especially
evident in the development of several megasystems or major weapon systems
that depend on the integration of multiple systems-- some of which are
developed as separate programs--to achieve desired capabilities. ^[58]35
This strategy often requires interdependent programs to be developed
concurrently and to be closely synchronized and managed, as they may, for
example, depend on integrated architectures and common standards as a
foundation for interoperability. If dependent systems are not available
when needed, then a program could face cost increases, schedule delays, or
reduced capabilities. Furthermore, the larger scope of development
associated with these megasystems produces a much greater fiscal impact
when cost and schedule estimates increase.

The current fiscal environment also presents challenges for DOD's plans to
transform military operations. As the nation begins to address long-term
fiscal imbalances, DOD is likely to encounter considerable pressure to
reduce its investment in new weapons. Within DOD's own budget, investment
in new weapon systems competes with funds needed to replace equipment and
sustain military operations in Iraq and Afghanistan. The nation's
long-term fiscal imbalances also will likely place pressure on DOD's
planned investment in major weapon systems. As entitlement programs like
Social Security, Medicare, and Medicaid consume a growing
percentage of available resources, discretionary programs--including
defense--face competition for the increasingly scarce remaining funds.
Sustaining real, top-line budget increases in any discretionary program
will be difficult in this constrained resource environment. DOD budget
projections conform to this tightening framework by offsetting growth in
procurement spending with reductions in research and development,
personnel, and other accounts. The minimal real increases projected in
defense spending through fiscal year 2011 depend on these offsets.
However, these projections do not reflect recent experience, nor do they
take into account higher than anticipated cost growth and schedule delays,
which can compound the fiscal impact and affordability of DOD's planned
investment.

^35GAO,  Defense  Acquisitions:  Assessments  of  Selected  Weapon  Programs,
GAO-07-406SP (Washington, D.C.: Mar. 30, 2007).

Program approvals in DOD have also shown a decided lack of restraint.
DOD's requirements process generates more demand for new programs than
fiscal resources can support. DOD compounds the problem by approving so
many highly complex and interdependent programs. Once too many programs
are approved, the budgeting process must broker trades to stay within
realistic funding levels, Because programs are funded annually and
departmentwide, cross-portfolio priorities have not been established,
competition for funding continues over time, forcing programs to view
success as the ability to secure the next funding increment rather than
delivering capabilities when and as promised. DOD recognizes this dilemma
and has embraced best practices in its policies, instilled more discipline
in requirements setting, strengthened training for program managers, and
reorganized offices that support and oversee programs. However, this
intention has not been fully implemented and it has not had a material
effect on weapon system programs. To translate policy into better
programs, several additional elements are essential, including having a
sound business case for each program that focuses on real needs and
embodies best practices, sound business arrangements, and clear lines of
responsibility and accountability.

                            DOD Contract Management

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
warfighters' needs, creating unnecessary risks of paying higher prices
than justified. DOD's long-standing problems with contract management have
become more prominent as DOD's reliance on contractors to provide services
continues to grow.

Recently, I have been quite vocal about the large and growing long-range
structural deficits the federal government faces. Given this fiscal
reality, it is imperative that DOD gets the best return it can on not only
major weapon systems, but also on its investments in goods and services.
In our recent testimony we noted that within the federal government, DOD
is the largest purchaser of a variety of goods and services. ^[59]36 In
fiscal year 2006 DOD spent about $297 billion, or 71 percent of the more
than $400 billion spent by the federal government, on goods and services
to equip and support the military forces, but is not able to ensure it is
using sound business practices to acquire the goods and services needed to
meet the warfighters' needs.

In November 2006, we reported that DOD's approach to managing service
acquisitions has tended to be reactive and has not fully addressed the key
factors for success at either the strategic or transactional level.
^[60]37 At the strategic level, DOD has yet to set the direction or vision
for what it needs, determine how to go about meeting those needs, capture
the knowledge to enable more informed decisions, or assess the resources
it has to ensure departmentwide goals and objectives are achieved. Actions
at the transactional level continue to focus primarily on awarding
contracts and do not always ensure that user needs are translated into
well-defined requirements or that postcontract award activities result in
expected performance. In June 2007, we reported that DOD used
time-and-materials contracts, one of the riskiest contract types for the
government because they could be awarded quickly and labor hours or
categories can be adjusted if requirements are unclear or funding
uncertain. ^[61]38 Even though these contracts call for appropriate
government monitoring of contractor performance, there were wide
discrepancies in the rigor with which monitoring was performed and most of
the contract files we reviewed did not include documented monitoring
plans. DOD also used undefinitized contract actions (UCA) to rapidly fill
urgent needs. While this is permitted in a variety of circumstances, we
reported in June 2007 that DOD did not meet the definitization time frame
requirement of 180 days after award on
60 percent of the 77 UCAs we reviewed. ^[62]39 Since DOD tends to obligate
the maximum amount of funding permitted--up to 50 percent of the
not-to-exceed amount--immediately at award of UCAs, contractors may have
little incentive to quickly submit proposals. Lack of timely negotiations
contributed significantly to DOD's decision on how to address $221 million
in questioned costs on the $2.5 billion Restore Iraqi Oil contract.
^[63]40 All 10 task orders for this contract were negotiated more than 180
days after the work commenced. As a result, the contractor had incurred
almost all its costs at the time of negotiations, which influenced DOD's
decision to pay nearly all of the questioned costs.

^36GAO, Federal  Acquisitions and  Contracting: Systemic  Challenges  Need
Attention, GAO-07-1098T (Washington, D.C.: July 17, 2007).

^37GAO, Defense  Acquisitions: Tailored  Approach Needed  to Improve  Service
Acquisition Outcomes, GAO-07-20 (Washington, D.C.: Nov. 9, 2006).

^38GAO, Defense Contracting: Improved Insight and Controls Needed over  DOD's
Time-and-Materials  Contracts,  GAO-07-273  (Washington,  D.C.:  June  29,
2007).

Additionally, DOD management and oversight of contractors continues to be
problematic for two reasons: inadequate numbers of trained contract
oversight personnel and second, insufficient training for those officials
responsible for contract oversight.

On multiple occasions, we and others have reported on the challenges
caused by DOD's lack of contract management and oversight personnel. For
example, in our June 2004 report on Iraq contract award procedures, we
found that inadequate acquisition workforce resources presented challenges
to several agencies involved in Iraq reconstruction efforts and, at times,
resulted in inadequate oversight of contractor activities. ^[64]41
Similarly, in 2004, we reported that administrative contracting officers
from the Defense Contract Management Agency, who were responsible for
monitoring the LOGCAP contract in Iraq, believe that they needed an
increase in the number of qualified staff to fully meet their oversight
mission. ^[65]42 In an April 2005 report, we found that DOD, faced with an
urgent need for interrogation and other services in support of military
operations in Iraq, turned to the Department of the Interior for contract
assistance. However, numerous breakdowns occurred in the issuance and
administration of the orders for these services, including inadequate
oversight of contractor performance. ^[66]43

^39GAO, Defense Contracting: Use of Undefinitized Contract Actions
Understated and Definitization Time Frames Often Not Met, GAO-07-559
(Washington. D.C.: June 19, 2007).

^40GAO, Defense Contract Management: DOD's Lack of Adherence to Key
Contracting Principles on Iraq Oil Contracts Put Government Interests at
Risk, GAO-07-839 (Washington, D.C.: July 31, 2007).

^41GAO, Rebuilding Iraq: Fiscal year 2003 Contract Award Procedures and
Management Challenges, GAO-04-605 (Washington, D.C.: June 1, 2004).

^42GAO, Military Operations: DOD's Extensive Use of Logistics Support
Contracts Requires Strengthened Oversight, GAO-04-854 (Washington, D.C.:
July 19, 2004).

More recently, in December 2006 we reported that DOD does not have
sufficient numbers of contractor oversight personnel at deployed
locations, which limits its ability to obtain reasonable assurance that
contractors are meeting contract requirements efficiently and effectively.
^[67]44 For example, an Army official acknowledged that the Army is
struggling to find the capacity and expertise to provide the contracting
support needed in Iraq. In addition, officials responsible for contracting
with MNF-I stated that they did not have enough contract oversight
personnel and quality assurance representatives to allow MNF-I to reduce
the Army's use of the LOGCAP contract by awarding more sustainment
contracts for base operations support in Iraq. Additionally, a Defense
Contract Management Agency official responsible for overseeing the LOGCAP
contractor's performance at 27 installations in Iraq told us he was unable
to personally visit all 27 locations himself during his 6-month tour in
Iraq. As a result, he was unable to determine the extent to which the
contractor was meeting the contract's requirements at each of those 27
sites. Moreover, he only had one quality assurance representative to
assist him. The official told us that in order to properly oversee this
contract, he should have had at least three quality assurance
representatives assisting him. The contracting officer's representative
for an intelligence support contract in Iraq told us he was also unable to
visit all of the locations that he was responsible for overseeing. At the
locations he did visit he was able to work with the contractor to improve
its efficiency. However, because he was not able to visit all of the
locations at which the contractor provided services in Iraq, he was unable
to duplicate those efficiencies at all of the locations in Iraq where the
contractor provided support.

Since the mid-1990s, our work has shown the need for better predeployment
training for military commanders and contract oversight personnel on the
use of contractor support. Training is essential for military commanders
because of their responsibility for identifying and validating
requirements to be addressed by the contractor. In addition, commanders
are responsible for evaluating the contractor's performance and ensuring
the contract is used economically and efficiently. Similarly,
training is essential for DOD contract oversight personnel who monitor
contractor performance for the contracting officer.

^43GAO, Interagency  Contracting:  Problems  with  DOD's  and  Interior's  to
Support Military Operations, GAO-05-201 (Washington, D.C.: Apr. 29, 2005).

^44GAO-07-145.

As we reported in 2003, military commanders and contract management and
oversight personnel we met in the Balkans and throughout Southwest Asia
frequently cited the need for better preparatory training. ^[68]45
Additionally, in our 2004 review of logistics support contracts, we
reported that many individuals using logistics support contracts such as
LOGCAP were unaware that they had any contract management or oversight
roles. ^[69]46 Army customers stated that they knew nothing about LOGCAP
before their deployment and that they had received no pre-deployment
training on their roles and responsibilities in ensuring that the contract
was used economically and efficiently. In July 2005 and again in June
2006, we reported that military units did not receive any training on
private security contractors in Iraq and the military's roles and
responsibilities regarding private security contractors. ^[70]47

In our December 2006 report, we noted that many officials responsible for
contract management and oversight in Iraq stated that they received little
or no training on the use of contractors prior to their deployment, which
led to confusion over their roles and responsibilities. ^[71]48 For
example, in several instances, military commanders attempted to direct (or
ran the risk of directing) a contractor to perform work even though
commanders are not authorized to do so. Such cases can result in increased
costs to the government.

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

^45GAO, Military Operations: Contractors Provide Vital Services to Deployed
Forces but Are Not Adequately Addressed in DOD Plans, GAO-03-695
(Washington, D.C.: June 24, 2003).

^46GAO-04-854.

^47GAO, Rebuilding Iraq: Actions Needed to Improve the Use of Private
Security Providers, GAO-05-737 (Washington, D.C.: July 28, 2005) and
Rebuilding Iraq: Actions Still Needed to Improve the Use of Private
Security Providers, GAO-06-865T (Washington, D.C.: June 13, 2006).

^48GAO-07-145.

For questions regarding this testimony, please contact Sharon L. Pickup at

GAO Contact

                     (202) 512-9619 or [72][email protected].

Appendix I: Systemic Acquisition Challenges at the Department of Defense

    1. Service budgets are allocated largely according to top line historical
       percentages rather than Defense-wide strategic assessments and current
       and likely resource limitations.
    2. Capabilities and requirements are based primarily on individual
       service wants versus collective Defense needs (i.e., based on current
       and expected future threats) that are both affordable and sustainable
       over time.
    3. Defense consistently overpromises and underdelivers in connection with
       major weapons, information, and other systems (i.e., capabilities,
       costs, quantities, and schedule).
    4. Defense often employs a "plug and pray approach" when costs escalate
       (i.e., divide total funding dollars by cost per copy, plug in the
       number that can be purchased, then pray that Congress will provide
       more funding to buy more quantities).
    5. Congress sometimes forces the department to buy items (e.g., weapon
       systems) and provide services (e.g., additional health care for
       nonactive beneficiaries, such as active duty members' dependents and
       military retirees and their dependents) that the department does not
       want and we cannot afford.
    6. DOD tries to develop high-risk technologies after programs start
       instead of setting up funding, organizations, and processes to conduct
       high-risk technology development activities in low-cost environments,
       (i.e., technology development is not separated from product
       development). Program decisions to move into design and production are
       made without adequate standards or knowledge.
    7. Program requirements are often set at unrealistic levels, then changed
       frequently as recognition sets in that they cannot be achieved. As a
       result, too much time passes, threats may change, or members of the
       user and acquisition communities may simply change their mind. The
       resulting program instability causes cost escalation, schedule delays,
       smaller quantities, and reduced contractor accountability.
    8. Contracts, especially service contracts, often do not have definitive
       or realistic requirements at the outset in order to control costs and
       facilitate accountability.
    9. Contracts typically do not accurately reflect the complexity of
       projects or appropriately allocate risk between the contractors and
       the taxpayers (e.g., cost plus, cancellation charges).
10. Key program staff rotate too frequently, thus promoting myopia and
       reducing accountability (i.e., tours based on time versus key
       milestones). Additionally, the revolving door between industry and the
       department presents potential conflicts of interest.
11. The acquisition workforce faces serious challenges (e.g., size,
       skills, knowledge, and succession planning).
12. Incentive and award fees are often paid based on contractor attitudes
       and efforts versus positive results (i.e., cost, quality, and
       schedule).
13. Inadequate oversight is being conducted by both the department and
       Congress, which results in little to no accountability for recurring
       and systemic problems.
14. Some individual program and funding decisions made within the
       department and by Congress serve to undercut sound policies.
15. Lack of a professional, term-based Chief Management Officer at the
       department serves to slow progress on defense transformation and
       reduce the chance of success in the acquisitions/contracting and other
       key business areas.

(351095)

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