Defense Transportation: Process Reengineering Could Be Enhanced by
Performance Measures (Letter Report, 12/20/1999, GAO/NSIAD-00-7).

Pursuant to a congressional request, GAO provided information on defense
transportation, focusing on the: (1) progress in reengineering defense
transportation financial management processes; (2) challenges associated
with implementing these reengineered processes agencywide; and (3) the
extent to which the Department of Defense (DOD) is assessing the
infrastructure required to support the reengineered processes.

GAO noted that: (1) progress has been made in reengineering defense
transportation financial management processes through a reform
initiative; (2) the goal is to reduce costs, eliminate government-unique
documentation, reduce data requirements, improve accuracy, and adapt
best commercial practices; (3) DOD has proposed two separate efforts to
accomplish the initiative: (a) use an electronic payment system
(PowerTrack); and/or (b) use contractors to perform traffic management
functions, including transportation payment, to achieve cost savings and
other benefits; (4) the electronic payment system facilitates the
replacement of cumbersome government-unique documentation with
simplified commercial documentation, and DOD began using the system at
69 military installations as of September 1, 1999; (5) DOD plans to test
whether the payment function, plus other transportation functions, can
be contracted to a third-party logistics provider to reduce
infrastructure and achieve cost efficiencies; (6) although the
electronic payment system is being implemented now, the commercial
contract initiative has not yet begun the prototype testing phase; (7)
DOD faces challenges in implementing the electronic payment system
agencywide; (8) the most significant challenge will be the need to
modify the system to accommodate the existing unique interagency billing
process; (9) transportation costs may increase because the electronic
system imposes a fee on carriers that may be passed on to defense
customers through higher transportation rates; (10) agency officials
have acknowledged the need to determine if a commercial contract with a
third-party logistics provider can meet DOD contingency and surge
requirements; (11) DOD could not estimate the infrastructure reductions
for the contracting out effort because such reductions cannot be
estimated until completion of the prototype testing; (12) DOD has no
plans to compare the cost and benefits of the two approaches to
determine which could more effectively achieve its goals in
reengineering the transportation financial management processes; and
(13) although DOD's Government Performance and Results Act of 1993
(Results Act) Performance Plan for fiscal year 2000 identifies general
goals for its financial management initiative, there are no specific
savings targets or overall performance-oriented measures that relate to
such things as cost reductions and other improvements.

--------------------------- Indexing Terms -----------------------------

 REPORTNUM:  NSIAD-00-7
     TITLE:  Defense Transportation: Process Reengineering Could Be
	     Enhanced by Performance Measures
      DATE:  12/20/1999
   SUBJECT:  Transportation contracts
	     Performance measures
	     Financial management
	     Private sector practices
	     Contractor payments
	     Financial management systems
	     Interagency relations
	     Defense procurement
	     Electronic data interchange
IDENTIFIER:  DOD PowerTrack Electronic Payment and Reconciliation
	     System
	     DOD Electronic Data Interchange Program
	     Government Performance and Results Act
	     DOD Defense Reform Initiative

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Report to the Chairman, Subcommittee on Military Readiness, Committee on
Armed Services, House of Representatives

December 1999

DEFENSE TRANSPORTATION

Process Reengineering Could Be Enhanced by Performance
Measures
*****************

*****************

GAO/NSIAD-00-7

                                                     National Security and 
                                             International Affairs Division

B-283486

December 20, 1999

The Honorable Herbert H. Bateman
Chairman, Subcommittee on Military Readiness 
Committee on Armed Services
House of Representatives

Dear Mr. Chairman:

A number of studies since the late 1940s have cited the defense traffic
management organizational structure as costly and inefficient. This
structure consists of multiple transportation agencies each with separate
service and modal responsibilities. In 1996, we reported that the
fragmentation and duplication inherent to this structure led to higher
transportation costs for defense customers, and recommended that the
Department of Defense address the organizational structure as it
reengineers the transportation processes to achieve the full benefits of
the Department's reengineering efforts./Footnote1/ In response, the
Department stated it would implement several initiatives, including
reengineering transportation financial management processes, and then it
would assess the infrastructure required to support the reengineered
processes. 

This report responds to your request concerning improving the efficiency
and effectiveness of the defense transportation financial management
processes. Specifically, our objectives were to determine (1) progress in
reengineering defense transportation financial management processes,
(2) challenges associated with implementing these reengineered processes
agencywide, and (3) the extent to which the Department is assessing the
infrastructure required to support the reengineered processes. 

Results in Brief

Progress has been made in reengineering defense transportation financial
management processes through a reform initiative. The goal of this
initiative is to reduce costs, eliminate government-unique documentation,
reduce data requirements, improve accuracy, and adapt best commercial
practices. The Department has proposed two separate efforts to accomplish
the initiative: (1) use an electronic payment system, referred to as
PowerTrack, that would also eliminate the use of government-unique
documentation and/or (2) use contractors (through contracting out to third-
party logistics providers) to perform traffic management functions,
including transportation payment, to achieve cost savings and other
benefits. The electronic payment system facilitates the replacement of
cumbersome government-unique documentation with simplified commercial
documentation, and the Department has already begun using the electronic
payment system at 69 military installations as of September 1, 1999. The
benefits of electronically paying and reconciling transportation bills
include quicker carrier payment, reduced billing documentation, easier and
more reliable reconciliation of billing disputes, reduced workload, and
some savings from a reduction in the number of transactions processed by
the Defense Finance and Accounting Service. Regarding the second effort,
the Department plans to test whether the payment function, plus other
transportation functions, can be contracted to a third-party logistics
provider to reduce infrastructure and achieve cost efficiencies. Although
the electronic payment system is being implemented now, the commercial
contract initiative has not yet begun the prototype testing phase.

The Department faces challenges in implementing the electronic payment
system agencywide. The most significant challenge will be the need to
modify the system to accommodate the existing unique interagency billing
process, which is plagued with data accuracy and reliability problems. In
addition, transportation costs may increase because the electronic system
imposes a fee on carriers that may be passed on to defense customers
through higher transportation rates. The challenges associated with
contracting out transportation functions have not yet been identified, but
agency officials have acknowledged the need to determine if a commercial
contract with a third-party logistics provider can meet Department
contingency and surge requirements. 

While the Department has addressed the infrastructure required to support
the reengineered financial management processes for the PowerTrack effort,
it could not estimate the infrastructure reductions for the contracting
out effort because, according to Department officials, such reductions
cannot be estimated until completion of the prototype testing. We are
concerned, however, that the Department has no plans to comparatively
assess the cost and benefits of the two approaches to determine whether
PowerTrack or the third-party logistics provider could more effectively
achieve its goals, such as reducing costs and improving quality, in
reengineering the transportation financial management processes. Finally,
although DOD's Government Performance and Results Act of 1993 (Results
Act)/Footnote2/ Performance Plan for fiscal year 2000 identifies general
goals for its financial management initiative, there are no specific
savings targets or overall performance-oriented measures that relate to
such things as cost reductions and other improvements. We are recommending
that the Department comparatively assess the cost and benefits of the two
approaches and include in future Results Act Performance Plans performance-
oriented measures and specific savings targets so that it can measure the
success of the reform efforts.

Background 

The major defense transportation reengineering initiative is being
implemented under Management Reform Memorandum 15. This memorandum, issued
by the Deputy Secretary of Defense on July 7, 1997, directs the complete
reengineering of defense transportation documentation and financial
processes. The reengineering initiative has been incorporated in the
Department of Defense's (DOD) Defense Reform Initiatives, which are a
series of initiatives designed to achieve a revolution in DOD's business
and support operations by identifying and adopting the best business
practices from the private sector. This effort is being managed by the
Office of the Assistant Deputy Under Secretary of Defense for
Transportation Policy. The defense transportation reengineering
initiatives' key objectives are to reduce infrastructure costs, eliminate
government-unique documentation and processes, reduce data requirements
and improve accuracy, increase use of electronic commerce, and employ best
commercial practices. To meet its objectives, DOD officials proposed using
commercial documentation and credit cards as the cornerstones of the
financial management reengineering initiative and conducted short-term
pilot tests of these features. In February 1998, DOD concluded that the
pilot tests produced favorable results. They recommended that, because of
the tests' limited scope and use of manual procedures, the concepts be
prototyped in the airlift, sealift, and express delivery business areas.
The information from the prototypes would be used to address concerns
before agencywide implementation. 

The Department established four prototype tests to continue evaluating the
use of commercial documentation and credit cards. The airlift prototype
test, begun in July 1998, used credit cards for interagency billings,
expanding on the earlier pilot tests. The sealift prototype, begun in
September 1998, was designed to broaden the scope of the pilot test and
automate the processes that had been administered manually. Key processes
tested included use of credit cards for both commercial carrier and
interagency payments and use of simplified commercial documentation. The
surface and express prototypes began in April 1998. This testing was
broader in scope than the pilot test, involving the Army, the Air Force,
the Navy, and the Marine Corps as well as a number of depots. The initial
service prototypes primarily tested the use of credit cards, while the
Defense Logistics Agency and a few service sites tested the use of the
"PowerTrack" electronic payment and reconciliation system. PowerTrack is a
commercially owned online database accessible via the Internet, Electronic
Data Interchange, and telephone. All shipment information is submitted
electronically to PowerTrack and stored in its central database. Both DOD
and carriers have access to the database for instant approval and payment
of invoices and for online payment dispute resolution. The goal is to pay
carriers within 3 days using PowerTrack versus 30 to 90 days under the
existing systems.

In February 1999, the Deputy Secretary of Defense directed the DOD-wide
implementation of the defense transportation financial management reform
initiative. Specifically, he directed the elimination of government-unique
documentation, such as government bills of lading; the use of PowerTrack
for commercial transportation payment, certification, and reconciliation;
and the development of PowerTrack for interagency billing. DOD also
decided to conduct a 1-year regional prototype test of the use of a
contractor (third-party logistics provider), to provide domestic freight
transportation services, including financial management and payment
functions, in a selected geographic area. The test is planned to begin in
mid calendar year 2000. 

DOD estimated total investment costs for both of its defense
transportation reengineering initiatives of about $41.4 million for fiscal
years 1997 through 2000. This amount included $8.4 million for the pilot
and prototype efforts, $25 million for Defense Logistics Agency and
service system hardware and software changes, $5.9 million for contractor
support, and $2.1 million for an administrative office to implement
PowerTrack.

Progress Made in Implementing Reforms

DOD has made progress in reforming its transportation system through
initiatives planned or under way to reengineer its financial management
processes. Specifically, DOD is implementing the PowerTrack electronic
payment and reconciliation system agencywide. In conjunction with
PowerTrack, DOD is also using commercial documentation, thereby reducing
or eliminating cumbersome government-unique documents. In addition, DOD is
planning to test the use of a third-party logistics contractor to perform
in-house transportation functions to determine whether cost savings and
other benefits can be achieved. 

DOD was using the PowerTrack system at 69 installations as of September 1,
1999. The system has shown that it has the capability of providing quicker
payments to carriers and can help to resolve billing disputes more
quickly. On delivery of a shipment, PowerTrack can pay a carrier
automatically within 3 days if the carrier's electronic bill matches the
expected service cost. Under the old system, carrier payment could take as
long as 60 to 90 days. If the bill and cost of service amounts do not
match (for example, when the shipment weight varies or delivery
requirements are changed), PowerTrack allows for on-line reconciliation,
essentially through the use of e-mail within the PowerTrack system. Some
carriers believe that PowerTrack will ultimately enable them to reduce
staff, particularly staff currently involved in handling government bills
of lading. Most importantly, PowerTrack enables transportation officers to
verify receipt of the shipment prior to authorizing payment to the
carrier. This feature is a significant improvement over the current system. 

As part of the reform efforts and implementation of PowerTrack, DOD has
eliminated some government-unique documentation and is using commercial
transportation documentation. For example, the Department is eliminating
requirements for the government bill of lading for U.S. cargo and
replacing them with simplified commercial documents. DOD estimates it will
eliminate about 1 million government bills of lading, which carrier and
defense and industry officials have told us are extremely time consuming
to create, process, and store.

The planned initiative to contract out some transportation functions may
also demonstrate potential cost benefits. Beginning in mid 2000, DOD plans
to conduct a 1-year prototype test of the use of an outside contractor to
perform transportation functions, including documentation and payment
functions. A March 1998 report prepared by Coopers & Lybrand for DOD
discusses the use of a contractor to support reengineering of the
transportation financial management processes. Specifically, the report
entitled, Report of the Department of Defense Reengineering Task Force:
Reengineering Transportation Documentation and Financial Processes, Best
Commercial Practices, cites the benefits of using commercial companies to
perform some in-house transportation services because it would be cost-
effective as well as responsive to DOD's transportation requirements. The
report notes that any evaluation of using a third-party logistics provider
to perform in-house transportation functions, however, would require a
thorough analysis of a contractor's capability to satisfy contingency
requirements. 

Challenges in Implementing the PowerTrack Electronic Payment and
Reconciliation System

In moving forward with agencywide PowerTrack implementation, DOD is
working to resolve many issues. PowerTrack can provide substantial
benefits. However, DOD faces challenges in modifying PowerTrack to operate
with DOD systems. In particular, they need to develop a way to accommodate
the existing unique interagency billing and payment process for the
airlift and sealift business areas. Further, the interagency billing and
payment process is plagued with data accuracy and reliability problems. In
addition, PowerTrack is not widely used in the commercial transportation
industry, and some carriers are concerned about the impact of the carrier
fee in the low-profit margin freight business. These carriers believe the
use of PowerTrack could ultimately result in increased freight rates to
DOD. 

Further Tests to Resolve Issues Related to Interagency Billing Are Planned
--------------------------------------------------------------------------

The Department faces challenges in implementing PowerTrack in its
interagency billing and payment process. DOD did not test PowerTrack in
accomplishing this process, and the PowerTrack system must be modified to
accommodate it. Implementing PowerTrack with the existing interagency
billing system will be a difficult process because, as we reported
previously, the DOD shipper is often billed by many defense agencies for
reimbursement of a single shipment. Further, customers are often billed
without adequate supporting data so they have difficulty determining if
they have been billed accurately. Additional testing of using PowerTrack
to make interagency payments is planned before proceeding with full
implementation of this process. Prototyping PowerTrack for sealift
interagency payments began in September, and the airlift interagency
prototype began in November 1999.

In addition, current plans to use PowerTrack for interagency billing and
payment will encounter an interagency reimbursement system that is plagued
with data accuracy and reliability problems. PowerTrack cannot correct the
systemic data accuracy and reliability problems in existing systems and
requires accurate input data for automatic reconciliation. However, agency
officials believe that PowerTrack, with its feedback and correction
capabilities, may provide a means to help address some of the systemic
data problems. According to agency officials, PowerTrack will need
modifications in order to work with the interagency reimbursement process.

PowerTrack Is Not Widely Used in the Transportation Industry
------------------------------------------------------------

PowerTrack is not widely used by commercial companies and has only been
available since April 1998. Electronic Data Interchange, which does not
require that carriers pay a fee as PowerTrack does, is widely used in
industry, and it is also used by the Defense Finance and Accounting
Service with many of DOD's largest carriers. Electronic Data Interchange
is the business-to-business electronic exchange of documents using
standard formats that are widely recognized both nationally and
internationally. The use of standard data formats allows organizations to
exchange common business documents without having to customize their
hardware or software for each organization they do business with. Some
large carriers, who have made substantial investments in systems and
equipment in order to use Electronic Data Interchange, have expressed
satisfaction with it and are less inclined to favor PowerTrack. For
example, one large carrier representative told us that his company is
already getting paid in 7 days with Electronic Data Interchange and
electronic payment under the current system, and he does not see enough
advantage to using PowerTrack to get payment in as few as 3 days. However,
many small carriers have not made investments in Electronic Data
Interchange technology; a Defense Finance and Accounting Service official
stated that he believes PowerTrack will be a less costly alternative for
them. Although PowerTrack offers carriers the ability to use Electronic
Data Interchange, carriers do not need substantial investments in
associated technology to use the PowerTrack system. Further, DOD has had
only limited experience with PowerTrack, having first started prototype
testing with the system in April 1998. DOD does not expect to complete
agencywide implementation of PowerTrack until September 2000.

Transportation Costs May Increase Because of Carrier Fees
---------------------------------------------------------

PowerTrack fees could result in higher transportation costs for DOD
shippers at military installations that use defense transportation
services. PowerTrack charges carriers a transaction fee, similar to credit
card fees in the commercial world. Carrier fees generally range from about
1 to 2 percent of the transaction amount, gradually decreasing to the
minimum
1 percent as the transaction amount increases. Other than start-up and
modification costs, the government will not incur transaction fees or
other PowerTrack costs. However, transportation costs could increase if
carriers pass the PowerTrack fee to defense shippers in the form of higher-
priced negotiated freight contracts.

Some carriers oppose the PowerTrack transaction fees and DOD's plan to
make participation in PowerTrack mandatory in order to bid for future
freight business. While some carriers believe quicker payments justify the
carrier fee, others believe the time value of money does not offset the
fee. Moreover, some carriers are concerned about the negative impact of
the fee in their low margin businesses: the American Trucking Association,
for example, has expressed concerns about the PowerTrack fee and its cost
impact on member trucking firms. 

Overall Results of the Reform Efforts Need to Be Measured

The Department has not addressed how it would comparatively assess the
cost and benefits of the two efforts-using PowerTrack and/or a third-party
logistics provider-to achieve its goals, particularly in terms of reducing
costs and infrastructure. While the Department has addressed the
infrastructure required to support the reengineered financial management
processes for the PowerTrack effort, such reductions, according to
Department officials, cannot be determined for using a contractor to
provide transportation functions until prototype testing is completed.
However, as noted previously in this report, a recent study cites
potential cost and efficiency benefits from doing so. In addition, as we
reported in 1996, process fragmentation, duplication, and organizational
overlap are major factors driving up defense transportation costs. For
example, as many as five separate units' actions within two component
commands may be required to handle a single overseas shipment. These
separate organizations require separate staffs and separate supporting
infrastructures, the costs of which are ultimately included in customer
charges. We noted that waiting to address long-standing organizational
issues until process improvements are made would likely represent a
significant barrier to achieving the full benefits of reengineering
efforts./Footnote3/

Three-quarters of the estimated $11.2 million annual savings resulting
from PowerTrack implementation is expected to be derived from a
significant reduction in the number of transactions processed by the
Defense Finance and Accounting Service and a concomitant reduction in
revenue since it charges a fee for each transaction. Although the Defense
Finance and Accounting Service has identified 250 positions that could be
eliminated under PowerTrack implementation, it cannot eliminate the
transportation payment function at the Finance and Accounting Service
because it also handles household goods payments that are not covered
under the PowerTrack electronic system. 

DOD has not identified the potential organizational implications of the
contracting out effort or projected any infrastructure reductions that
could result from this effort. DOD officials told us they must wait for
the prototype test of the contract concept that is scheduled to begin in
mid 2000 and be completed 1 year later. DOD officials told us they cannot
wait to complete the prototype for contracting transportation functions
before proceeding with the electronic system. They point out that the two
efforts are not mutually exclusive, and they would like to use PowerTrack
in conjunction with contracting out.

Reform Effort Lacks Quantitative Performance Measures in the Results Act
Performance Plan
---------------------------------------------------------------------------

Although DOD has established general goals for its financial management
initiative, it has not identified specific savings targets or expected
outcomes for the initiative for its fiscal year 2000 Government
Performance and Results Act Performance Plan. The Results Act requires
agencies to establish annual performance plans and include performance
goals defining the level of performance to be achieved by a program
activity. The Results Act further requires agencies to establish
performance indicators to measure or assess the outcomes of each program
activity and provide a basis for comparing actual program results with the
established performance goals. DOD's fiscal year 2000 performance plan
provides a qualitative performance indicator for its defense
transportation financial management initiative and cites the goals of
increasing transportation efficiency and reducing infrastructure costs.
The plan outlines broad strategies for accomplishing these goals, but does
not provide quantitative measures by which to judge the relative success
of the initiative in reducing infrastructure costs and improving operating
efficiencies. For example, although DOD cites "reducing data requirements"
as a strategy for achieving its broad goals, it does not provide a
quantitative indicator or target by which to measure the success of this
effort in reducing costs and improving efficiencies. 

Conclusions

The Department of Defense has made progress in reforming the defense
transportation system. We support these ongoing efforts to reengineer
costly processes. However, we are concerned that the Department has no
plans to comparatively assess the costs and benefits of reengineering
transportation financial management processes through PowerTrack or
through contracting to a third-party logistics provider. Finally, the
Department has not included its savings targets or expected performance
outcomes in its fiscal year 2000 Results Act Performance Plan. 

Recommendations

We recommend that the Secretary of Defense comparatively assess the cost
and benefits of using PowerTrack or contracting out the function to a
third-party logistics provider to reengineer the transportation financial
management process. In addition, we recommend that the Secretary of
Defense include the specific savings targets and overall performance-
oriented measures in future Results Act Performance Plans to enable a
clear assessment and comparison of the extent to which these or other
efforts could achieve the goals of the transportation reform initiative.

Agency Comments and Our Evaluation

The Department of Defense provided comments on a draft of this report (see
app. I). The Department disagreed with the draft report recommendations
because it believes it (1) has already addressed infrastructure reductions
to the extent possible and (2) is using metrics to measure the success of
the reform efforts. 

As we discussed in our draft report, we agree that the Department has
cited cost reductions resulting from reengineering its transportation
financial management processes for the PowerTrack effort. Also, as noted
in the draft report, DOD believes it is premature to estimate savings from
the use of a third-party logistics provider until prototype testing is
completed. The intent of our recommendation was for DOD to comparatively
assess the cost and benefits of the two approaches--using PowerTrack
and/or a third-party logistics provider--to determine the best approach
for improving the process and achieving cost reductions. Accordingly, we
clarified our final recommendation to reflect that position.

With respect to our recommendation to develop performance measures with
quantifiable goals, the Department stated that it has developed several
key metrics to measure success of its electronic payment initiative. In
response, DOD provided information on metrics it is using for PowerTrack
and other metrics it is planning to develop for the third-party logistics
effort. While we agree that the Department has identified metrics, or is
in the process of developing them, our concern is that the measures are
not linked to the overall reform initiative and are not included in the
Results Act Performance Plans. For example, to a make a comparison between
PowerTrack and the contractor initiative, performance-oriented measures
related to the overall initiative, such as cost reductions and service
improvements to DOD customers, are needed. As we stated in the report, the
current (fiscal year 2000) performance plan contains no specific goals and
does not refer to any metrics. Including performance indicators in future
years performance plans would help to provide a means to measure the
success of reforming the transportation financial management process. We
clarified our recommendation in this regard.

DOD also provided some technical comments that we have incorporated as
appropriate.

Scope and Methodology

To determine DOD's progress and challenges in implementing the defense
transportation reengineering initiatives and to determine if DOD is
assessing the infrastructure necessary to support the reengineered
processes, we obtained and reviewed relevant DOD documents and contractor
reports. In addition, we interviewed cognizant officials at the Office of
the Assistant Deputy Under Secretary of Defense for Transportation Policy,
Washington, D.C. We also obtained relevant information and interviewed
officials at the Defense Logistics Agency Headquarters, Fort Belvoir,
Virginia; Defense Distribution Center Headquarters, New Cumberland,
Pennsylvania; U.S. Transportation Command, Scott Air Force Base, Illinois--
and from two component commands--the Air Mobility Command and the Military
Traffic Management Command. To obtain additional information on potential
savings, we interviewed officials at the Defense Finance and Accounting
Service located in Arlington, Virginia.

To obtain industry perspective on the defense transportation reengineering
initiatives, we interviewed various defense transportation system
commercial cargo carriers, including representatives of six motor carrier
and two ocean carrier companies. We also interviewed officials of three
third-party logistics companies. 

We conducted our review from August 1998 through November 1999 in
accordance with generally accepted government auditing standards.

We are sending copies of this report to the Honorable William S. Cohen,
Secretary of Defense; General Charles T. Robertson, Jr., Commander in
Chief of the U.S. Transportation Command; the  Honorable Louis Caldera,
Secretary of the Army; the  Honorable Richard J. Danzig, Secretary of the 
Navy; the Honorable F. Whitten Peters, Secretary of the Air Force; the
Honorable Jacob J. Lew, Director, Office of Management and Budget; and
other interested congressional committees. 

If you have any questions regarding this letter, please contact me at
(202) 512-8412. Major contributors to this report are Nomi Taslitt, Greg
Symons, Nora Landgraf, and John Wiethop.

Sincerely yours, 

*****************

*****************

David R. Warren, Director
Defense Management Issues

--------------------------------------
/Footnote1/-^ Defense Transportation: Streamlining of the U.S.
  Transportation Command Is Needed (GAO/NSIAD-96-60, Feb. 22, 1996).
/Footnote2/-^ The Results Act requires federal agencies (including DOD) to
  set strategic goals, measure performance, and report on the degree to
  which goals were met. Its intent is to focus agencies more on results,
  service delivery, and program outcomes. This is expected to provide the
  Congress and other decisionmakers with objective information on the
  relative effectiveness and efficiency of federal programs.
/Footnote3/-^ Defense Transportation: Streamlining of the U.S.
  Transportation Command Is Needed (GAO/NSIAD-96-60, Feb. 22, 1996).

COMMENTS FROM THE DEPARTMENT OF DEFENSE
=======================================

*****************

*****************

*****************

*****************

*****************

*****************

*****************

*****************

The following are GAO's comments on the Department of Defense's (DOD)
letter dated October 25, 1999.

GAO Comments

   1.We acknowledge in the report that DOD believes it is premature to
         determine the extent that the use of contracting out can reduce
         DOD infrastructure until it is determined whether contracting out
         can meet its requirements. However, the goal setting process can
         still continue. DOD does not have a sound basis for assessing how
         well third-party logistics providers will or will not meet its
         needs unless it can set infrastructure reduction goals prior to
         implementing the prototype testing effort. As stated in the
         report, a prior DOD study indicates substantial infrastructure
         savings associated with contracting out some transportation
         functions. 

   2.The Department stated that it had identified $11.2 million in
         infrastructure savings using the electronic payment system,
         referred to as PowerTrack in our report. About $8.2 million of
         the $11.2 million that DOD cites in estimated savings is based on
         Finance Service transaction billings, not on actual reductions of
         infrastructure or personnel. Although DOD notes that the Finance
         Service is adjusting its infrastructure to meet changes in
         workload as PowerTrack is being implemented, no substantial
         personnel reductions have yet occurred. As our report notes,
         Finance Service personnel cannot be totally eliminated until the
         household goods portion of transportation payment is reengineered
         or included under the PowerTrack electronic system. Further,
         unless the Finance Service actually eliminates personnel, the
         infrastructure savings will not accrue, and billings for the
         remaining services could potentially increase. 

   3.DOD notes in its response that the remaining $3 million of the
         $11.2 million in estimated savings is contingent on the
         successful completion of the interagency prototypes, further
         stating that infrastructure adjustments will be made when
         PowerTrack is implemented in these business areas. However,
         implementation of PowerTrack in the interagency process has not
         yet been determined; therefore, the associated infrastructure
         reductions may or may not occur. The interagency portion of
         PowerTrack, as noted in the report, is a major challenge to
         successful implementation of the reengineered system. 

   4.Regarding DOD's comment that the transportation payment process is
         not a primary focus of the test to evaluate the use of
         contracting out some transportation functions, our point is that
         many third-party logistics providers already offer payment and
         reconciliation services. While DOD identified possible savings
         through the electronic system, the opportunity for potentially
         greater savings and elimination of unnecessary infrastructure may
         be possible through the contracting effort. However, absent this
         type of comparative analysis, DOD will not have the opportunity
         to compare the two types of approaches to reengineer the
         transportation payment function. 

   5.DOD added that, even if the prototype is successful, the use of third-
         party logistics providers to perform the transportation payment
         and other functions will be applicable to only a segment of the
         domestic surface freight movement business because outside
         contractors do not normally handle some types of cargo routinely
         moved by DOD, which include munitions, bulk fuels, and oversize
         shipments. While we recognize that contracting out may not be
         appropriate for some shipments, it need not be overly restrictive
         during the prototype effort and should allow for testing the full
         range of capabilities of third-party logistics providers.
         Moreover, DOD states that it plans to use PowerTrack in the third-
         party logistics process and does not consider the payment
         function a primary focus of that effort. By doing so, we believe
         DOD is missing an opportunity to comparatively assess the
         potential benefits and cost reductions that may be achieved by
         contracting out the transportation payment and reconciliation
         process. In addition, it should be noted that DOD has included
         both initiatives under its reform effort to reengineer the
         transportation financial management processes. 

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