DOD Infrastructure: DOD's Planned Finance and Accounting Structure Is Not
Well Justified (Letter Report, 09/18/95, GAO/NSIAD-95-127).
Pursuant to a congressional request, GAO reviewed the Department of
Defense's (DOD) plan to consolidate over 300 defense accounting offices
into 5 large existing finance centers and 20 new sites during the next 7
years, focusing on: (1) the process DOD used to identify the number and
locations of the new operating centers; (2) the consolidation's
potential impact on customer service; and (3) DOD plans to include
commercial business practices in the consolidation.
GAO found that: (1) the DOD plan to consolidate and reduce personnel is
necessary to achieve a more effective and efficient finance and
accounting service; (2) DOD has not achieved a balance between cost
considerations, maintaining customer service, and improving business
operations in its process to select the number and locations of new
operating centers; (3) DOD has decided to open 20 new operating
locations without first determining what functions they would perform or
if these centers would support its operations; (4) DOD has mainly
emphasized maximizing short-term cost savings during the decision-making
process; (5) 15 of the 20 operating locations will be housed in excess
DOD facilities, even though these facilities may be less desirable from
a customer service, cost, or quality workforce standpoint; (6) DOD has
not reengineered the finance and accounting functions to be performed at
the new locations, thus, DOD business operations will not likely be
improved; and (7) DOD has time to reconsider its consolidation
decisions, since it will be some time before the operating locations
will be fully staffed and operational.
--------------------------- Indexing Terms -----------------------------
REPORTNUM: NSIAD-95-127
TITLE: DOD Infrastructure: DOD's Planned Finance and Accounting
Structure Is Not Well Justified
DATE: 09/18/95
SUBJECT: Military downsizing
Federal agency reorganization
Reductions in force
Human resources utilization
Defense cost control
Strategic planning
Financial management
Accounting
Military facilities
IDENTIFIER: Defense Business Operations Fund
DFAS Opportunity for Economic Growth Program
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Cover
================================================================ COVER
Report to Congressional Requesters
September 1995
DEFENSE INFRASTRUCTURE - DOD'S
PLANNED FINANCE AND ACCOUNTING
STRUCTURE IS LARGER AND MORE
COSTLY THAN NECESSARY
GAO/NSIAD-95-127
Defense Infrastructure
(709088)
Abbreviations
=============================================================== ABBREV
DFAS - Defense Finance and Accounting Service
DOD - Department of Defense
Letter
=============================================================== LETTER
B-259036
Letter Date Goes Here
The Honorable Herbert H. Bateman
Chairman
The Honorable Norman Sisisky
Ranking Minority Member
Subcommittee on Military Readiness
Committee on National Security
House of Representatives
On May 3, 1994, the Department of Defense (DOD) announced a plan to
consolidate over 300 defense accounting offices into 5 large existing
finance centers\1 and 20 new sites called operating locations during
the next 5 to 7 years. The plan, which is expected to reduce DOD
finance and accounting personnel from 46,000 to 23,000, is aimed at
streamlining DOD's financial operations and setting the stage for
future process enhancements and budgetary savings. In total, DOD
expects the consolidation will save between $8 billion and $9 billion
(present value) over the next 20 years.
On August 3, 1994, your Subcommittee asked us to evaluate this plan.
Your Subcommittee wanted to know if the plan reflected leading-edge
business practices that would result in substantial cost reductions
and high-quality customer service and included a sound implementation
strategy that was achievable within stated time frames. Your
Subcommittee also wanted to know when DOD would begin to save money
and if the potential for consolidating finance and accounting
operations had been fully realized. This report assesses (1) the
process DOD used to identify the number and locations of the finance
and accounting centers and operating locations, (2) the potential
impact of the consolidation on customer service, and (3) DOD's plan
to include leading-edge business practices in the consolidation.
--------------------
\1 DOD's five large centers are located in Columbus, Ohio; Cleveland,
Ohio; Denver, Colorado; Indianapolis, Indiana; and Kansas City,
Missouri.
RESULTS IN BRIEF
------------------------------------------------------------ Letter :1
We see DOD's plan to consolidate and reduce personnel as a necessary
step toward a more effective and efficient finance and accounting
service. Consolidating and reengineering finance and accounting
functions while sustaining ongoing operations, however, is a
difficult and complex task. In such an undertaking it is important
to strike a balance between cost considerations and other factors
important to maintaining customer service and improving business
operations. Based on our analysis of the process DOD used to select
the proper number of new operating locations and decide where they
should be located, we do not believe DOD achieved that balance.
Specifically, we found the following:
DOD decided to open 20 new operating locations without first
determining what finance and accounting functions they would
perform or if 20 was the right number to support its operations.
DOD's primary emphasis during the decision-making process was on
maximizing short-term cost savings, not on determining what was
best from a finance and accounting business perspective.
DOD, in selecting the 20 specific operating locations, used a
process that placed significant weight on using excess DOD
facilities, primarily those on military bases closed or
realigned during the base realignment and closure process. As a
result, 15 of the 20 locations will be housed in excess DOD
facilities, even though DOD considered several of them less
desirable from a customer service, cost, or quality workforce
standpoint. About $173 million of military construction funding
will be needed during fiscal years 1997, 1998, and 1999 to bring
these sites up to par.
DOD, for the most part, has not reengineered the finance and
accounting functions that will be performed at the 20 operating
locations. Thus, the consolidation may reduce the number of
locations performing finance and accounting functions, but it
will not likely improve DOD's business operations. Once these
functions are reengineered, DOD may be faced with the need to
consolidate them once again.
Although DOD is opening 13 operating locations this fiscal year and 3
more in early 1996, it will be some time before they are fully
staffed and operational. We believe this provides DOD time to
reconsider its consolidation decisions. Accordingly, as DOD proceeds
with this consolidation process, it needs to develop an updated
estimate of the number of locations and personnel needed to meet
current and future operating requirements and use this information to
reassess its site selection decisions for new operating locations.
BACKGROUND
------------------------------------------------------------ Letter :2
The scope of DOD's finance and accounting network is extremely large
and complex. The network pays about 6 million people (3 million
uniformed men and women, 1 million civilians, and 2 million retirees
and annuitants) and more than 15 million invoices annually charged to
nearly 12 million contracts. The network disburses over $250 billion
annually and is the source of financial information and thousands of
reports used by executives and managers throughout DOD.
Prior to 1991, the military services managed this network. There
were 5 large finance and accounting centers (one for each service
plus a contractor pay center) and over 300 small defense accounting
offices at various military bases and installations. This network
was not only inefficient (each service had unique and often
duplicative processes and systems) but was also unable to produce
reliable financial information and reports. To help solve these
problems, in January 1991, DOD created the Defense Finance and
Accounting Service (DFAS). DFAS' mission was to strengthen DOD's
financial management operations by standardizing, consolidating, and
streamlining finance and accounting policies, procedures, and
systems. It was given management control of the 5 large finance
centers and some of the functions carried out at over 300 defense
accounting offices. Of the estimated 46,000 people in the finance
and accounting network at the time, DFAS eventually assumed
organizational responsibility for about 27,000. The remaining 19,000
people stayed with their respective military service to perform
managerial accounting and various installation-related and customer
service functions.
DFAS is a Defense Business Operations Fund entity. It operates as a
revolving fund and provides finance and accounting services to the
military departments and defense agencies. DFAS recoups its costs
through various fees and charges billed to those departments and
agencies. DFAS' fiscal year 1995 operating budget, which is about
$2.0 billion, comes primarily from operations and maintenance funds
appropriated to the military departments and defense agencies.
Therefore, by reducing its operating costs, DFAS will reduce the fees
charged to the military services and demands on operations and
maintenance funds.
The consolidation of financial operations is a major piece of DOD's
plan for achieving much needed financial management reform. Although
the planned consolidation is expected to provide a streamlined and
less costly infrastructure, other pieces of DOD's plan will also need
to be implemented before significant improvement in financial
operations will be realized. Other pieces include reengineering its
business and organizational practices, standardizing financial data
and definitions, and improving financial systems so they allow DOD to
comply with the requirements of the Chief Financial Officers Act.
Collectively, the pieces of the plan could result in major
improvements to DOD's financial operations. DOD hopes to implement
its plan by the end of 1999.
DFAS' first attempt to consolidate and streamline its finance and
accounting operations was done through a program known as the
Opportunity for Economic Growth. Under this program, which began in
March 1992, 112 communities in 33 states submitted economic incentive
packages and competed for the opportunity to house a large (4,000 to
7,000 person) finance center. DFAS evaluated their proposals\2 and
recommended to the Secretary of Defense five "winners." Before these
winners were announced, however, the new Secretary of Defense
canceled the initiative in March 1993, believing it was not sound
public policy. Rather, he believed it was an auction for public jobs
that placed the cost of national defense on local communities rather
than the nation as a whole. He was also concerned that moving large
finance and accounting centers to new cities would seriously degrade
customer service.
Shortly thereafter, the Secretary announced a new consolidation
initiative. Under this initiative, the Secretary directed DFAS to
select a small number of sites (from 5 to 15). DFAS subsequently
evaluated 132 potential locations, including most of the cities that
had competed under the Opportunity for Economic Growth process and 16
bases that had been closed or realigned. After this analysis was
completed in May 1994, the Deputy Secretary of Defense announced that
finance and accounting operations would be housed in the existing 5
large centers plus 20 new operating locations.\3
--------------------
\2 DFAS' primary evaluation criterion was the extent communities were
willing to subsidize the cost of facilities and operations. However,
community and facility characteristics were also considered.
\3 On July 1, 1994, a 21st site was added to the network. Located at
Ford Island, Hawaii, this site will support DOD's finance and
accounting operations in the Pacific theater.
BETTER BALANCE IS NEEDED
BETWEEN BUDGETARY AND CUSTOMER
SERVICE GOALS
------------------------------------------------------------ Letter :3
One of the more important aspects of the consolidation initiative was
for DOD to determine the appropriate size and location of its finance
and accounting network (e.g., how many offices and people are needed
to meet not only today's requirements but also future requirements
once new systems, processes, and technologies are introduced). Size
and location are important because they help form the foundation upon
which the new network will be built. Wrong decisions could cause the
network to be mis-sized, leading to costly future reorganizations,
consolidations, or realignments. In making its consolidation
decision, however, DOD's primary emphasis was on achieving short-term
budgetary gains rather than on establishing the best network for
meeting current and future operational and customer needs. As a
result, DOD may be establishing a larger than necessary finance and
accounting network and increasing the risk of creating short-term
customer service problems.
PLANNED DFAS INFRASTRUCTURE
MAY BE LARGER THAN NECESSARY
---------------------------------------------------------- Letter :3.1
Throughout both DFAS consolidation initiatives, defense managers
indicated that finance and accounting operations should be
consolidated into as few sites as possible. Under the Opportunity
for Economic Growth process, for example, all DFAS operations were to
be brought into five large centers. This carried over to the second
consolidation initiative when the Secretary of Defense (on June 7,
1993) directed DFAS to analyze options for 5 to 15 sites. According
to testimony by DOD officials,\4 reducing the number of sites to "no
more than a handful" was essential if DOD was to achieve the savings,
operational improvements, and efficiencies envisioned from the
consolidation.
Following this guidance, DFAS established the Consolidation Task
Force to study alternatives and carry out the site-selection process.
The Senior Review Council, made up of DFAS executives,\5 was also
established to oversee the Task Force's work. During the first month
of its study, the task force gathered information about how to
properly size DOD's finance and accounting operations. It reviewed
research conducted by academia and other DOD, federal, and private
sector organizations and obtained the views of 25 senior DFAS
officials. It concluded that there was no "right size" for
consolidation sites but suggested that the existing 5 centers should
have from 1,000 to 5,000 employees and new operating locations should
have from 500 to 1,500 employees. During this time, the Review
Council discussed potential organizational structures that would move
DOD's finance and accounting operations toward a joint operations
environment rather than a military service-oriented environment. The
Review Council wanted to avoid managing a large number of small
organizations and dividing finance and accounting functions among
many sites.
Based on this work, DFAS, in conjunction with the DOD Comptroller's
staff, completed a site-selection process plan in August 1993. This
plan specified 5 to 15 sites as the acceptable number of sites and
750 as the minimum number of people at each site. The plan included
an explicit assumption that "larger rather than smaller and fewer
rather than a larger number of sites was preferable." During the next
several months, the Task Force assessed various alternatives,
analyzed cost information, and deliberated over different
organizational structures. Based on input from the Senior Review
Council in January 1994, the Task Force narrowed its assessment to 2
primary alternatives, each involving a target population of 23,000
employees.
The first alternative would have placed 23,000 employees at the 5
existing centers. The 5 centers employ about 11,000 people, so some
facilities would have required substantial modification to
accommodate the growth. The second alternative would have expanded
the 5 centers to about 13,000 people and assigned 10,000 people to 6
additional sites--4 sites with 1,500 employees and 2 sites with 2,000
employees. In terms of cost, the Task Force considered several
factors (e.g., personnel costs, one-time transition costs for
severance pay and relocation of employees, building renovation costs,
rent, and utilities) and estimated that the 2 alternatives would save
between $6.4 billion and $8.8 billion (present value) over the next
20 years.\6 According to Senior Review Council representatives, six
sites was the preferred alternative because it would save more money
and allow an optimum consolidation of finance and accounting
functions.
After further review, however, DOD officials\7 decided on a different
course of action. In May 1994, the Deputy Secretary of Defense
announced that finance and accounting functions would be consolidated
into the 5 existing centers and 20 additional operating locations.
His decision was based primarily on two rationale:
1.The cost of activating and operating 20 smaller sites over 20 years
is comparable to the cost of 6 additional operating locations.
2.Twenty sites, staffed with fewer people, can be activated quicker
than either of the 2 alternatives studied by DFAS. This would allow
DOD to close the 300 defense accounting offices sooner and begin
reducing the number of employees in the finance and accounting
network--the area where DOD expects to achieve the most budgetary
savings.
We have several concerns with this decision. First, it was based on
maximizing short-term cost savings, not on making the best business
decisions. Although these two concepts are not mutually exclusive,
we found no analysis that suggested that 20 operating locations was
the appropriate infrastructure to support either current or future
operating requirements or customer needs. DOD clearly decided on the
number of locations first and then attempted to determine which
finance and accounting functions they would perform.
Besides not being a good business practice, this action had a direct
impact on previous DFAS planning initiatives and concept of
operations. Since the beginning of the Opportunity for Economic
Growth process, for example, DFAS management had been planning to
consolidate finance and accounting functions either within the 5
large centers or at a limited number of other locations. According
to DFAS officials, larger sites gives them greater flexibility to
adjust and reorganize to meet future technological, workload, and
customer service changes. Under this operating concept, the DFAS
Indianapolis center, which handles accounting for the Army, was
planning for two large operating locations. One location would have
consolidated base-level finance and accounting functions for the
training and combat commands; a second site would have consolidated
finance and accounting functions for logistics and depot activities.
Further, the DFAS Columbus center was planning to consolidate all
vendor pay functions within the center; it did not see a need for any
additional operating locations. When DOD announced its consolidation
decision, however, it gave DFAS Indianapolis six operating locations
and DFAS Columbus two. As of April 1995, these two centers still had
not settled on the functions and workloads that would operate at
these locations.
Our second concern is that DOD did not estimate the costs of a
20-site option and, consequently, does not know how those costs might
compare with other alternatives. During the time DOD executives were
considering DFAS alternatives, they did ask the Consolidation Task
Force to analyze the cost savings associated with retaining the 5
large centers plus either 10 or 15 additional operating locations.
The Task Force's analysis showed that the two options would save
between $8.1 billion and $8.8 billion (present value).\8 Table 1
compares the cost estimates and potential savings of the various
consolidation alternatives. As the table shows, 6 and 15 locations
offer about the same amount of savings.
Table 1
Cost Estimates and Savings of DFAS
Consolidation Alternatives (20-Year
Present Value)
(Dollars in billions)
Cost of
Consolidation Cost of existing Estimated
alternatives alternatives structure savings
------------------------- ------------- ------------- -------------
Five centers $21.2 $27.6 $6.4
Five centers & 6 18.5 -19.5 27.6 8.1 -8.8
operating locations\a
Five centers & 10 19.0 -19.5 27.6 8.1 -8.6
operating locations\a
Five centers & 15 18.8 -19.1 27.6 8.5 -8.8
operating locations\a
----------------------------------------------------------------------
\a The cost of these alternatives varied according to the sites
evaluated. For example, for the six-site alternative, the sites that
provided the lowest cost alternative of $18.8 billion were different
than those that provided the best labor force alternative of $19.5
billion.
According to a Consolidation Task Force representative, the
15-location option offers as much or more cost savings than other
options because DOD's analysis assumed that the transfer or addition
of personnel at new operating locations was limited to 375 positions
per year, per location. More locations, therefore, would allow the
work to be transferred from the 300 Defense Accounting Offices more
rapidly, resulting in a quicker drawdown of personnel and an earlier
realization of savings. Although the infrastructure costs associated
with 15 sites is more expensive than other options, DOD believed the
additional cost would be more than offset by the early consolidation.
Based on this premise, DOD assumed that 20 sites would result in a
quicker drawdown of personnel and even more savings. No additional
analysis was done to confirm this assumption.
To determine if this premise was accurate, we ran an analysis for a
20-site option, using the same parameters, assumptions, and discount
rate as the Consolidation Task Force. This analysis showed that 20
operating locations, with a minimum of 750 people each, increases the
target population of the operating locations from 11,500 to 15,000.
Consequently, the workforce of the 5 existing centers and the 20
operating locations would total 26,500 people, or 3,500 more than
DOD's target of 23,000 people. This increases the 20-year cost of
the consolidation by at least $2.8 billion (present value).\9
In discussing the results of this analysis with the DFAS Director and
other DOD representatives, we were told that 750 people per site was
not a minimum but rather a target and they had no intention of
retaining a population of more than 23,000 people. They explained
that there is really no way to tell how many people will be at an
operating location, but they would not arbitrarily increase the size
just to reach a planning goal of 750.
Although we agree that DOD should not arbitrarily increase the size
of its operating locations, these statements raise questions about
whether 20 locations are needed. All DFAS analysis prior to the site
selection, for example, was based on the need for at least 750 people
per operating location. Potential sites, buildings, and renovation
costs were analyzed and decisions were made with that in mind.
Because DOD does not yet know how many people will be assigned to
each location, it has no way of knowing whether its facility planning
assumptions are accurate. Consequently, it may be over- or
underestimating its facility needs at the various locations.
In addition, DOD does not have any specific analysis to support its
position that the 20 sites could be activated sooner to support a
faster drawdown of personnel. Although it seems logical that smaller
sites can be activated sooner than larger sites, much depends on the
condition of the available facilities; the time needed to make
necessary renovations; the time required to establish a management
structure to recruit, hire, and train new employees; the time
required to transfer current employees and workloads from offices
that will close; and the quality of the workforce available at the
new location. As discussed later in this report, DOD considered some
of these factors in selecting the 20 sites, but they had little
impact on which sites were selected.
--------------------
\4 Statement by the Principal Deputy Assistant Secretary of Defense,
Production and Logistics, and Principal Deputy, DOD Comptroller,
before the Subcommittee on Military Installations and Facilities,
House Committee on Armed Services, regarding DFAS consolidation (June
10, 1993).
\5 Membership included about one-half of DFAS' 27 Senior Executive
Service members. Most DFAS headquarters' deputy directors and
several finance center directors were represented on the Council.
\6 Present value analysis is a commonly used technique to quantify
and compare costs for multiple alternatives. The analysis considers
the time value of money. The Consolidation Task Force established
costs in terms of 1993 dollars and escalated them to then-year
dollars using approved DOD inflation factors. After establishing
these costs, the Task Force conducted present value analyses using a
discount factor of 6.4 percent.
\7 A high-level group of DOD managers met several times during March
and April 1994 to review DFAS data and consider alternatives. This
group included the DOD Comptroller and Deputy Comptroller, the DFAS
Director, and other management and support personnel.
\8 As required by the Office of Management and Budget Circular A-94,
"Guidelines and Discount Rates for Benefit-Cost Analysis of Federal
Programs," the Task Force conducted a sensitivity analysis by varying
the cost factors (plus/minus 10 percent) and applying the 1994 DOD
discount rate of 5.75 percent.
\9 The additional cost is only for personnel. It does not include
costs for such items as training, equipment, and telecommunications
that will be incurred with a larger workforce and infrastructure.
SITE-SELECTION PROCESS
PLACED A LOWER PRIORITY ON
CUSTOMER SERVICE
---------------------------------------------------------- Letter :3.2
In any consolidation initiative, it is important to consider the
impact on the business operation--will the enterprise be able to
provide uninterrupted service to customers? DOD recognized this when
it made customer service one of four site-selection criteria.
According to DFAS officials, the idea was to place a high value on
sites with readily available, trained DFAS employees. Even though
these employees might have to learn a new functional process or
develop new skills, DOD assumed that a core group of DFAS employees
who are familiar with DFAS' mission and possess a mix of supervisory
and technical skills would help maintain customer service during the
transition period.
This criterion, however, did not play a large part in DOD's
site-selection decisions. An example relates to the Defense
Commissary Agency's vendor pay functions. Currently, DFAS has two
locations that perform this function: one in Hopewell, Virginia,
where the Commissary Agency's headquarters is located, and the other
in San Antonio, Texas. In fiscal year 1994, these two offices
processed 2.8 million invoices totaling $4.8 billion. According to
information provided to us by DFAS officials, there are two locations
where a consolidation would appear to be reasonable: (1) Hopewell,
Virginia, because it already performs vendor pay functions, is
colocated with the Commissary Agency's headquarters, and is the home
of the vendor pay computer system and (2) the DFAS center in
Columbus, Ohio, because it already has people trained in vendor pay
functions and does accounting and disbursing for the Commissary
Agency. DFAS Columbus, prior to the site-selection process, was
planning to bring Commissary Agency vendor pay functions into its
center.
Under the 20-site option, the plan is to consolidate this function in
Pensacola, Florida. Because fewer than 20 percent of the people are
expected to transfer to Pensacola, new staff will have to be hired
and trained. If not properly managed, such consolidations can result
in significant problems. In 1991, for example, the Commissary Agency
went through a consolidation that was not well-managed. It resulted
in late vendor payments, prompt pay penalties,\10 and companies going
out of business because they could not get paid.
The same potential for customer service problems exists with
nonappropriated fund accounting. DFAS has already consolidated most
of the Army's nonappropriated fund accounting at the Red River Army
Depot in Texas, but the Air Force and Navy are still doing their
accounting in decentralized field offices around the world. As part
of the consolidation initiative, DFAS plans to consolidate all of
nonappropriated fund accounting at one location. The location for
nonappropriated fund accounting (Chanute Air Force Base in Rantoul,
Illinois) was not determined until after the site-selection process
was completed. According to DFAS officials, it will be difficult to
transfer the Army's consolidated operation to Chanute while DFAS is
trying to bring Air Force and Navy operations on line. Few people
are expected to transfer from Red River Depot to the Chanute
location. Because DFAS has no employees in the Chanute area, almost
an entirely new workforce will have to be hired and trained.
--------------------
\10 The Prompt Payment Act (31 U.S.C. 3901-3906) requires the
federal government to pay interest on late payments to vendors.
DOD'S SITE-SELECTION PROCESS
FAVORED EXCESS DOD FACILITIES
OVER OTHER FACTORS
------------------------------------------------------------ Letter :4
Once DOD decided to consolidate finance and accounting functions at
the 5 existing centers and 20 operating locations, it then had to
decide where to locate these activities. Since the Opportunity for
Economic Growth program was canceled, it was clear that the location
of the five large centers would not change. There were many options,
however, for selecting the sites for operating locations. During the
evaluation and scoring process, for example, DOD used 4 criteria to
evaluate sites in 132 communities: (1) cost to the government, (2)
maintenance of customer service, (3) availability of a good labor
supply, and (4) use of excess defense assets. It assigned each of
the selection criteria a value of between 0 and 100 points. We have
two basic concerns with the site-selection and scoring process.
First, before DOD conducted the scoring and evaluation process, it
did not determine the relative importance of and assign corresponding
weights to each criteria--each was initially given equal weight.
Once the initial scoring process was completed, DOD arrayed the data
using nine different weighting schemes, sometimes, for example,
giving more weight to cost and at other times giving cost a
relatively low priority. This scheme resulted in 10 different
priority listings. Finally, DOD arrayed all 10 lists and counted the
number of times each site showed up in the top 20. This became the
11th list. All 11 lists were then given to the Deputy Secretary of
Defense as potential selection options. He selected list number 11.
We question the soundness of this process. Determining the relative
importance of the four criteria during the selection process rather
than before the process begins may not lead to sound decision-making.
DOD recently stated this position during base closure and realignment
hearings. Specifically, DOD said that predetermining the rules,
including weighting factors, was absolutely necessary in order to be
as objective and fair as possible.\11
Second, the process, in effect, guaranteed that base closure and
realignment sites or other excess DOD facilities would be selected,
even if they were more costly to modify and operate and were ranked
lower from a customer service and labor supply standpoint. Scores
for three of the criteria, for example, provided a relative ranking
of the communities using a wide spectrum of points: customer service
scores ranged from 15 points to 100 points; quality labor force
scores ranged from 58.5 points to 100 points; and
cost-to-the-government scores ranged from 0 to 100 points. However,
for the use of excess defense assets, there were only two possible
scores. Excess defense sites received the full 100 points while
nondefense sites received 0 points. Using this scoring method, 15 of
16 communities with excess DOD assets were selected as operating
locations. The 16th community ranked 21st.
We conducted a sensitivity analysis to determine how locations would
have fared if no credit or points had been given for the availability
of excess DOD assets. Our analysis assigned equal weights to cost,
customer service, and availability of a good labor force. It also
assumed that DOD had adequately considered the economic merits of
using excess DOD facilities during its evaluation of costs. This
analysis showed that the rankings of the sites changed significantly
when no points were given for excess DOD assets. Only three of the
base closure and realignment sites would have been ranked among the
top 20 sites.
A factor that affected the relative ranking of the base closure sites
was the cost to renovate and make them useful for finance and
accounting operations. During the cost analysis of potential sites,
$115 million was the estimated cost to renovate the 15 excess DOD
facilities. DFAS now estimates it will need $173 million in military
construction money during fiscal years 1997, 1998, and 1999 to
complete renovations at these sites. Appendix II describes the
results of DOD's architectural and engineering assessment. It shows
that 8 of the 15 facilities were considered good, 5 were
characterized fair, 1 was rated poor, and 1 was sold by DOD before it
could be activated. A variety of problems need to be corrected at
the facilities rated fair or poor.
The Oakland Naval Supply Center, for example, will need $18 million
to improve seismic characteristics, remove asbestos, and expand
parking at the facility. This is $136 per square foot, which is less
than new construction cost but more than the estimated cost to lease
administrative space in the Oakland area. The facility at Fort Ord,
a hospital building built in 1972, needs about $20 million for
extensive interior renovations to provide suitable office space. It
also needs a major modification to its heating and cooling system.
At Chanute Air Force Base in Rantoul, Illinois, the original building
selected by DFAS would have cost about $26 million to renovate, but
it was subsequently sold by DOD to a private developer. DFAS expects
that an alternative site on base, which it has not yet finished
evaluating, will cost about $18 million to renovate.
Funding for these renovations will require the use of military
construction appropriations. If approved, these funds will not be
available until at least fiscal year 1996, and renovations will
probably not begin until 1997 or later after design specifications
are finalized and contracts are awarded. In the interim, the use and
capacity of some facilities will be limited. For example, according
to DFAS officials, the Fort Ord facility, an 8-story hospital
building, cannot house more than about 200 DFAS employees until
extensive renovations are complete.
Yet, DOD is moving ahead with its consolidation plans. On November
14, 1994, DOD announced that 43 defense accounting offices would
close and 13 of the new operating locations would begin limited
operations by the end of fiscal year 1995. On March 7, 1995, DOD
announced plans to close another 32 defense accounting offices during
the first half of fiscal year 1996. This is happening even though
DFAS has not yet received congressional funding to renovate the sites
and does not know what functions it will place at some of the
facilities, and, therefore, what types of personnel it needs to
recruit and hire.
--------------------
\11 Statement by the Assistant Secretary of Defense (Economic
Security), before the Base Closure and Realignment Commission (Mar.
1, 1995).
DFAS CONSOLIDATION PRECEDES
MOST REENGINEERING EFFORTS
------------------------------------------------------------ Letter :5
Business process reengineering is a quality improvement concept DOD
introduced about 4 years ago as part of its Corporate Information
Management initiative. Reengineering allows organizations to develop
a baseline and critically evaluate their current business processes,
eliminate unnecessary tasks, and, in some cases, reinvent the way
they do business. It has been used successfully by many businesses
over the past several years as they have attempted to downsize and
become more competitive. More recently, the Secretary of Defense
asked each defense organization to apply reengineering techniques to
its high payoff processes and develop truly innovative approaches for
reducing business-process cycle times. The ultimate goal is a
50-percent reduction by the year 2000.
DFAS has recognized the importance of reengineering in streamlining
its operations and reducing the size of its finance and accounting
workforce. Its consolidation planning documents, for example, refer
to 30- to 50-percent productivity gains that might be possible
through reengineering. For some processes that operate at its large
finance centers, DFAS has implemented reengineering initiatives. For
example, both its transportation payment process and its retiree and
annuitant payment process have been consolidated and streamlined to
gain efficiencies and improve customer service. In addition, DFAS is
considering several additional center processes for reengineering.
These include the contract payment process at the Columbus center and
the garnishment process at the Cleveland center.
On the other hand, DFAS has not yet applied reengineering techniques
to the finance and accounting processes it plans to place at the 20
operating locations. DFAS officials stated that reengineering its
processes at the same time it was consolidating its operations would
be difficult to manage and cause unnecessary risk to its operations.
Instead, it plans to use existing systems and processes to perform
many of the same basic functions at the new operating locations as it
did at the smaller defense accounting offices: vendor pay, travel
processing, general funds accounting, and Defense Business Operations
Fund accounting. Once these functions are reengineered, it is likely
that fewer personnel with different skills may be needed to carry out
the new business processes.
For example, DOD reported that it spent $3.5 billion on temporary
duty travel in fiscal year 1993. It also estimated that its
processing costs may be at least 30 percent of the direct travel
cost--well above the 10-percent average reported for private
companies and the 6-percent rate that industry considers an efficient
operation. In a recent report,\12 we estimated that DOD could save
hundreds of millions of dollars in travel processing costs by
following private industry best practices. Although DOD has
chartered a task force to reengineer travel management and consider
private industry best practices, it has not considered any of these
practices in its consolidation plans. One best practice, for
example, involves consolidating travel voucher processing at a single
location. Under the DFAS consolidation, voucher processing will be
done at almost all of the 20 new operating locations. Consequently,
if DOD's travel task force concludes that one voucher processing site
(or a small number of processing sites) is sufficient, DFAS will once
again have to consolidate a portion of its financial operations.
Another example involves DOD's civilian pay functions. Currently,
DFAS employees are responsible for paying DOD civilians handle about
684 pay accounts each. Under the consolidation initiative, DFAS
intends to reduce the number of pay systems from 25 to 2 and reduce
the number of locations responsible for processing civilian pay to 4.
Once the system standardization and consolidation are finished, DFAS
officials told us that each employee should be able to handle 1,600
pay accounts. Although this would be a substantial productivity
gain, private sector companies that have aggressively reengineered
their employee pay functions average about 3,000 pay accounts per
person. If DFAS could achieve this level of productivity, it would
need 470 fewer people than what it expects under its planned
consolidated pay operation. This would save DFAS another $16 million
in annual operating costs and might reduce the number of locations
needed for civilian payroll operations.
--------------------
\12 Travel Process Reengineering: DOD Faces Challenges in Using
Industry Practices to Reduce Costs (GAO/AIMD/NSIAD-95-90, Mar. 2,
1995).
RECOMMENDATIONS
------------------------------------------------------------ Letter :6
As DOD proceeds with the consolidation and reengineering of finance
and accounting functions and locations, we recommend that the
Secretary of Defense direct the DOD Comptroller to
develop an updated estimate of the number of locations and
personnel required to perform finance and accounting functions.
In developing this estimate, it is important that the
Comptroller consider not only today's concept-of-operations but
also how finance and accounting operations will be performed
once DFAS has complied with DOD's business process reengineering
goals and directives.
use the updated information to reassess the site selection
decisions for new operating locations. This reassessment should
balance DOD's desire for short-term cost savings with the need
to select sites that, from a business perspective, offer the
greatest opportunity for maintaining or enhancing finance and
accounting operations and service to DFAS' customers.
MATTERS FOR CONGRESSIONAL
CONSIDERATION
------------------------------------------------------------ Letter :7
Before approving military construction funds for renovating excess
facilities for finance and accounting operations, the Congress may
want to ensure that DOD has adequately assessed and justified the
size and locations of its finance and accounting network.
AGENCY COMMENTS AND OUR
EVALUATION
------------------------------------------------------------ Letter :8
Following DOD's initial review of a draft of this report, we met with
representatives of the Comptroller's Office and DFAS to discuss their
preliminary comments. Although they generally agreed with the facts
and contents of the report, they did not believe we had given DFAS
adequate credit for some of the reengineering initiatives it had
implemented at the large finance centers. They also did not believe
we had adequately recognized that DFAS expects the consolidation will
save between $8 billion and $9 billion over the next 20 years. We
added information to the report in both these areas.
The major point raised by the DOD representatives, however, concerned
our draft recommendation to stop the consolidation until the number
of operating locations and sites was reevaluated. Although they
agreed with the recommendation in principle, they said that stopping
the consolidation at this point in time could be detrimental to
current finance and accounting operations. They pointed out that
several defense accounting offices had already been closed and 13 new
operating locations opened or partially opened to pick up the
workload. Stopping the buildup of these sites, in their view, could
jeopardize DFAS' ability to support its military customers.
After considering DOD's position, we modified our recommendation to
request that DOD reevaluate its consolidation and site- selection
decisions concurrently with its ongoing consolidation efforts. Based
on this change, DOD now concurs with the recommendations and has
committed to reevaluate the number of locations and personnel
required to perform finance and accounting functions by November 30
of 1995 and each year thereafter. Likewise, beginning on December
15, 1995, it has agreed to annually reassess its site-selection
decisions and report its findings to the Secretary of Defense. (See
app. III.)
---------------------------------------------------------- Letter :8.1
We performed our review from August 1994 through July 1995 in
accordance with generally accepted government auditing standards.
(See app. I for details on our objectives, scope, and methodology.)
We are sending copies of this report to the Chairmen, Senate
Committee on Governmental Affairs, Senate Committee on Armed
Services, House Committee on Government Reform and Oversight, and
Senate and House Committees on Appropriations; the Director, Office
of Management and Budget; the Secretary of Defense; and other
interested parties. We will make copies available to others on
request.
If you have any questions on this report, please call me on (202)
512-8412. Major contributors to this report are listed in appendix
IV.
David R. Warren
Director, Defense Management
and NASA Issues
OBJECTIVES, SCOPE, AND METHODOLOGY
=========================================================== Appendix I
The Subcommittee on Military Readiness, House Committee on National
Security, asked us to address the following questions about the
Department of Defense's (DOD) plan to consolidate its finance and
accounting operations:
Does the plan reflect leading-edge business practices that are
likely to lead to substantial cost-reductions and high quality
customer service?
How will the planned structure achieve productivity gains that will
enable DFAS to reduce its workforce from 46,000 to 23,000
people?
Is the plan's implementation strategy sound and achievable within
stated time frames?
When will the military services begin to realize reductions in the
prices they are charged for the Defense Finance and Accounting
Service (DFAS)?
During this phase of our audit work, we focused on the consolidation
implementation strategy and the use of leading-edge business
practices to reduce costs and improve customer service. To determine
the soundness of the implementation strategy, we reviewed DOD's
site-selection process, which determined the infrastructure for
finance and accounting operations and formed the basis for developing
a consolidation implementation strategy.
To assess how DFAS determined the number of sites needed, we reviewed
guidance and criteria prescribed by the Secretary of Defense,
statements made by DOD officials to congressional oversight
committees, documentation describing the Opportunity for Economic
Growth, documentation of meetings held by DFAS' Senior Review
Council, and efforts made by the Consolidation Task Force to
determine how private sector organizations addressed the issue of
organizational size. We also reviewed implementation plans to
identify the functions and workloads that are planned for the various
operating locations. During our review, we interviewed DOD
officials, particularly Task Force members, about the costs and
personnel requirements of organizational structures with 6, 10, 15,
and 20 operating locations.
To determine how candidate sites were evaluated and selected, we
reviewed DFAS' site-selection process plan to determine if it
incorporated the Secretary of Defense's guidance, defined the
selection criteria, specified the analytical processes and products,
assigned weights to the selection criteria, and identified the
responsibilities of the DFAS Director, the Senior Review Council, and
the Consolidation Task Force. We reviewed the facts and assumptions
used to analyze the candidate sites, the scoring process for each
criterion, and the rankings and costs for organizational structures
that included 6, 10, 15, and 20 operating locations. We also
conducted a sensitivity analysis to determine the impact of one of
the selection criteria--reuse of excess DOD assets--on the rankings
of the 750-person candidate sites. Our analysis excluded this
criterion and gave equal weight to the criteria of cost, customer
service, and quality labor force. We then compared this ranking with
DOD's rankings using all of the criteria. During our review, we met
frequently with DOD officials, particularly Task Force members, about
various aspects of the selection process.
To determine how excess DOD facilities were assessed, we reviewed
DFAS' site-selection process plan to identify criteria used to
qualify candidate facilities for consideration. We analyzed the
results of an engineering and architectural company's assessments of
DOD's excess facilities and cost estimates to renovate each facility.
We compared DFAS' military construction estimates for renovating
these facilities to the engineering and architectural company's
estimates. We used this information to identify problems with the
facilities and compare the estimated renovation costs of each
facility. Using DFAS' planned square footage for renovation and
planned staffing level of 750 people per site, we calculated the
renovation costs on the basis of both cost per square foot and cost
per person.
To determine how customer service would be affected by site-selection
and activation decisions, we reviewed DFAS plans to determine how
they addressed the Secretary of Defense's concerns about maintaining
customer service and complied with the site-selection criterion that
emphasized maintaining customer service. Accordingly, we analyzed
DFAS' plans to maintain customer service when field offices are
closed and their workloads and functions are transferred to operating
locations. To the extent it was available, we analyzed data
identifying where finance and accounting functions are currently
operating and where they will be consolidated. We also analyzed
documentation identifying the number of DFAS employees expected to
transfer to operating locations, the number of current employees
already located in metropolitan areas where operating locations will
be established, and the number of employees expected to be hired. We
also discussed with DFAS officials training requirements for
employees who could be assigned to operating locations during fiscal
year 1995. We obtained information about training classes for
employees who are expected to be transferred or hired.
We performed our work at the Headquarters, Office of the Secretary of
Defense (Comptroller); Headquarters, Defense Finance and Accounting
Service; and DFAS finance centers located in Cleveland, Ohio;
Columbus, Ohio; Denver, Colorado; Indianapolis, Indiana; and Kansas
City, Missouri. We also contacted officials assigned to the District
Office, Army Corps of Engineers, Louisville, Kentucky. We performed
our review from August 1994 through March 1995 in accordance with
generally accepted government auditing standards. We discussed our
report with cognizant DOD officials and incorporated their views
where appropriate.
PROCESS DOD USED TO ASSESS EXCESS
FACILITIES
========================================================== Appendix II
To consider the reuse of excess DOD facilities, the Consolidation
Task Force first coordinated with the military services to identify
available facilities. It then screened the facilities to identify
those that would be available and would provide at least 125,000
square feet, the minimum amount of space needed to house 750
employees. Next, each facility was evaluated to determine its reuse
potential. In total, 48 facilities were evaluated.
An architectural and engineering company, under contract with the
Army Corps of Engineers, conducted the facility evaluations. The
company was required to evaluate each facility for its suitability
for finance and accounting operations and develop cost estimates for
necessary renovations. Facility suitability was rated on numerous
factors, including the amount of usable contiguous space available,
the level of risk associated with redesign and construction, access
to utilities, the availability of infrastructure support
requirements, proximity to an airport, existence of environmental
problems, and physical security of the facility. The contractor
rated the suitability of each facility as good, fair, or poor and
provided a relative ranking of all facilities.
Table II.1 summarizes the results of the architectural and
engineering assessments and provides DFAS' updated renovation cost
estimates for each facility.
Table II.1
Planned DFAS Operating Location
Facilities
(Dollars in millions)
Area
Bldg. (sq. Rehab Suitabilit Date Area Rehab Cost per Cost per
Location no. ft.) cost y Rank available Remarks (sq. ft.) cost\a sq. ft.\b person\c
------------ ------ -------- ------ ---------- ------ ---------- ----------------------------- ---------- ---------- ---------- ----------
Charleston 198 228,035 $ 2.7 Fair 7 N/A Moderate demolition needed to 125,280 $5.9 $47 $ 7,900
Naval Supply create large floor areas
Yard suitable for offices.
(Charleston, Contains some asbestos and
SC) has lead paint.
Gentile Air 45/46 447,632 14.6 Good 11 Sept. 1996 Built in 1954/1956. Recently 202,000 11.4 56 15,200
Force renovated. Probably has
Station asbestos.
(Dayton,
OH)
Ft. Sill 4700 197,252 8.0 Good 21 June 1994 Built in 1966 as a hospital. 197,252 12.8 65 17,100
(Lawton, OK) Extensive interior
demolition. Some asbestos.
Lexington- 4 138,360 2.7 Fair 9 Jan. Built in 1943. Warehouse 138,360 7.3 53 9,700
Blue Grass 1994 easily convertible to open
Army Depot office space. Has asbestos.
(Lexington, Inadequate parking.
KY)
Loring Air 3502 142,400 4.4 Good 12 Sept. Hospital built in 1988. 142,400 9.2 65 12,300
Force Base 1994 Costly demolition of hospital
(Limestone, systems.
ME)
Memphis 787 128,000 2.8 Good 4 Jan. Newer facility. Easily 128,000 6.6 52 8,800
Naval Air 1997 modified to open office.
Station Modern.
(Memphis,
TN)
Newark Air 4 747,077 15.2 Poor 28 Sept. DFAS areas not contiguous. 166,566 8.2 49 10,900
Force Base 1996 Poor internal configuration
(Newark, for offices. Built in 1954,
OH) extremely high roof, no
windows, has asbestos. DFAS
will have to treat potable
water onsite.
Oakland 311 131,878 8.4 Fair 26 Sept. Built in 1942. New entrance 131,878 18.0 136 24,000
Naval Supply 1995 tower needed. Moderate
Center interior demolition needed
(Oakland, for office space. Parking lot
CA) needs major expansion.
Seismic upgrade required.
Asbestos present.
Offutt Air 500 130,000 3.6 Good 5 Dec. Built in 1955. Space on 3rd 125,000 7.4 59 9,900
Force Base 1994 floor for DFAS. 5,000 sq. ft.
(Omaha, also designated for storage.
NE)
Orlando 301 156,960 0.4 Good 1 Jan. New 3-story electronics 156,960 4.2 27 5,600
Naval 1994 training school, never
Training occupied. If assumed parking
Center expansion not possible,
(Orlando, suitability then becomes
FL) fair.
Chanute Air 3 n/a n/a n/a n/a n/a Original assessment was 146,423 18.0 123 24,000
Force Base completed on building 3.
(Rantoul, Subsequently, the building
IL) was sold to a private
developer. Building 68 was
chosen as an alternate site.
DFAS' estimate is for
building 68.
Rock Island 62 155,409 7.4 Good 10 Oct. Now partially occupied. Built 155,409 13.8 89 18,400
Arsenal 1994 in 1878. Historic landmark.
(Rock Has asbestos.
Island, IL)
Griffis Air 1 195,332 8.6 Good 22 Dec. Built in 1942 as a warehouse. 183,332 12.6 69 16,800
Force Base 1994 Partly converted to office
(Rome, NY) space. Has some identified
asbestos.
Norton Air 951, 189,168 10.3 Fair 25 Sept. Two-story office built in 189,168 17.5 93 23,300
Force Base 952, 1996 1963. Probably contains
(San 953 asbestos. Needs seismic
Bernardino, upgrade. Separated from main
CA) base, not part of closure.
Ft. Ord 4385 360,060 19.4 Fair 24 July Built in 1972 as a hospital. 145,536 20.0 137 26,700
(Seaside, 1994 Needs extensive interior
CA) demolition to create suitable
office space. HVAC
distribution will be
difficult.
Total 3.5(mil) 114.9 2.3 (mil) 173.0
-----------------------------------------------------------------------------------------------------------------------------------------------------
Source: Defense Finance and Accounting Service (DFAS) military
construction funding request and Corps of Engineers architectural and
engineering assessments.
\a Renovation cost estimate was taken from DFAS' request for military
construction funding for fiscal years 1997-99. DFAS' estimate
includes cost for building renovation and installation of wiring for
telecommunication and ADP equipment.
\b Cost per square foot was calculated using the following formula:
cost to rehab/square footage.
\c Cost per person was calculated using the following formula: cost
to rehab/750 (planned staffing level at the operating locations)
(See figure in printed edition.)Appendix III
COMMENTS FROM THE DEPARTMENT OF
DEFENSE
========================================================== Appendix II
(See figure in printed edition.)
MAJOR CONTRIBUTORS TO THIS REPORT
========================================================== Appendix IV
NATIONAL SECURITY AND
INTERNATIONAL AFFAIRS DIVISION,
WASHINGTON, D.C.
-------------------------------------------------------- Appendix IV:1
James E. Hatcher, Assistant Director
James E. Fuquay, Evaluator-in-Charge
Cheryl K. Andrew, Senior Evaluator
Michael J. Enriquez, Senior Evaluator
David S. Epstein, Senior Evaluator
RELATED GAO PRODUCTS
=========================================================== Appendix 0
Defense Infrastructure: Enhancing Performance Through Better
Business Practices (GAO/T-NSIAD/AIMD-95-126, Mar. 23, 1995).
DOD Procurement: Overpayments and Underpayments at Selected
Contractors Show Major Problem (GAO/NSIAD-94-245, Aug. 5, 1994).
Defense Business Operations Fund: Improved Pricing Practices and
Financial Reports Are Needed to Set Accurate Prices (GAO/AIMD-94-132,
June 22, 1994).
Financial Management: DOD's Efforts to Improve Operations of the
Defense Business Operations Fund (GAO/T-AIMD/NSIAD-94-146, Mar. 24,
1994).
DOD Procurement: Millions in Overpayments Returned by DOD
Contractors (GAO/NSIAD-94-106, Mar. 14, 1994).
Financial Management: Status of the Defense Business Operations Fund
(GAO/AIMD-94-80, Mar. 9, 1994).
Financial Management: Strong Leadership Needed to Improve Army's
Financial Accountability (GAO/AIMD-94-12, Dec. 22, 1993).
Letter to the Deputy Secretary of Defense (GAO/AIMD-94-7R, Oct. 12,
1993).
Financial Management: Opportunities to Strengthen Management of the
Defense Business Operations Fund (GAO/T-AFMD-93-6, June 16, 1993).
Financial Management: Navy Records Contain Billions of Dollars in
Unmatched Disbursements (GAO/AFMD-93-21, June 9, 1993).
Military Bases: Analysis of DOD's Recommendations and Selection
Process for Closures and Realignments (GAO/NSIAD-93-173, Apr. 15,
1993).