Defense Reform Initiative: Organization, Status, and Challenges (Chapter
Report, 04/21/99, GAO/NSIAD-99-87).

Pursuant to a congressional request, GAO reported on: (1) actions taken
through the Defense Reform Initiative (DRI) management structure to
facilitate achieving the program's objective; and (2) progress the
Department of Defense (DOD) made in implementing individual reform
initiatives.

GAO noted that: (1) by adopting proven management change concepts in
implementing the DRI program, DOD has addressed some of the obstacles
that have limited the success of past reform efforts; (2) the Secretary
and Deputy Secretary of Defense have shown strong support for the
program and established an organizational framework to give additional
structure and guidance to the effort; (3) this framework consists of a
Defense Management Council, a Coordinating Group to support the Council,
and a DRI Office to track implementation and identify issues that need
management attention; (4) further, using special directives, performance
contracts, and other planning guidance, DOD has sought to
institutionalize and provide a sustained emphasis on the DRI; (5) this
framework, taken in total, has helped create a Defense-wide focus on
infrastructure reduction and provides a forum where problems caused by
cultural barriers and parochial interests can be addressed; (6) because
the DRI framework has been in place for just over a year, it is too soon
for GAO to assess how effective it will be in the long term; (7) GAO
did, however, identify several areas where DOD could build on its
initial efforts and give even greater impetus to its goal of achieving a
revolution in business affairs; (8) these include: (a) incorporating
other major ongoing reform efforts in the DRI so it can develop a more
comprehensive, integrated strategy for reforming Defense business and
support activities; (b) more clearly delineating the funding
requirements needed to achieve major reforms; and (c) enhancing the
Department's ability to measure DRI results, particularly through
financial management and related reforms; (9) each of the four DRI
pillars include a variety of reform or reengineering initiatives, many
of which were already ongoing before they were brought under the DRI
umbrella; (10) DRI has given each of these initiatives increased
visibility and top-level support within the Department and, in many
instances, imposed new goals and milestones for accomplishing their
objectives; (11) each initiative varies in its progress toward meeting
its objectives and milestones; (12) many still face a variety of issues
that could affect their ultimate success and will likely take longer to
complete than the milestones established by the DRI; (13) the success of
the DRI will depend largely on DOD's ability to maintain a high degree
of emphasis on the initiatives over the long term; and (14) past reform
efforts started out well but tended to lose momentum as the Department's
leadership and priorities changed.

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

 REPORTNUM:  NSIAD-99-87
     TITLE:  Defense Reform Initiative: Organization, Status, and 
             Challenges
      DATE:  04/21/99
   SUBJECT:  Defense economic analysis
             Financial management
             Reductions in force
             Defense cost control
             Reengineering (management)
             Military downsizing
             Defense budgets
             Privatization
             Federal agency reorganization
             Performance measures
IDENTIFIER:  Defense Reform Initiative
             DOD Future Years Defense Program
             Army Working Capital Fund
             DOD Quadrennial Defense Review
             
******************************************************************
** This file contains an ASCII representation of the text of a  **
** GAO report.  This text was extracted from a PDF file.        **
** Delineations within the text indicating chapter titles,      **
** headings, and bullets have not been preserved, and in some   **
** cases heading text has been incorrectly merged into          **
** body text in the adjacent column.  Graphic images have       **
** not been reproduced, but figure captions are included.       **
** Tables are included, but column deliniations have not been   **
** preserved.                                                   **
**                                                              **
** Please see the PDF (Portable Document Format) file, when     **
** available, for a complete electronic file of the printed     **
** document's contents.                                         **
**                                                              **
** A printed copy of this report may be obtained from the GAO   **
** Document Distribution Center.  For further details, please   **
** send an e-mail message to:                                   **
**                                                              **
**                                            **
**                                                              **
** with the message 'info' in the body.                         **
******************************************************************
ns99087 GAO

United States General Accounting Office

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

April 1999 DEFENSE REFORM INITIATIVE

Organization, Status, and Challenges

GAO/NSIAD-99-87

GAO United States General Accounting Office

Washington, D.C. 20548 Lett er

National Security and International Affairs Division Lett er

B-280522 Letter

April 21, 1999 The Honorable Herbert H. Bateman Chairman,
Subcommittee on Military Readiness Committee on Armed Services
House of Representatives

Dear Mr. Chairman: In November 1997, the Secretary of Defense
issued his Defense Reform Initiative (DRI) Report outlining a plan
for reforming the Department's business affairs. To implement the
report's initiatives, the Secretary established a Defense
Management Council and chartered it with responsibility for
overseeing the effort and serving as his internal board of
directors for management. As you requested, this report discusses
(1) actions taken through the DRI management structure to
facilitate achieving the program's objectives and (2) progress
made in implementing individual reform initiatives.

We are sending copies of this report to the Honorable William S.
Cohen, Secretary of Defense; the Honorable F.W. Peters, Acting
Secretary of the Air Force; the Honorable Louis Caldera, Secretary
of the Army; the Honorable Richard Danzig, Secretary of the Navy;
Lt. Gen. Henry T. Glisson, Director, Defense Logistics Agency; Mr.
Gary Amlin, Director of the Defense Finance and Accounting
Service; the Honorable Jacob J. Lew, Director, Office of
Management and Budget; and interested congressional committees and
members. We will also make copies available to others upon
request.

If you or your staff have any questions concerning this report,
please contact me on (202) 512-8412. Major contributors to this
report are listed in appendix IV.

Sincerely yours, David R. Warren, Director Defense Management
Issues

Page 2 GAO/NSIAD-99-87 Defense Reform Initiative

Executive Summary Purpose For the past several years, the
Department of Defense (DOD) has been

working to reduce its infrastructure and support costs. The
Defense Reform Initiative (DRI), announced in November 1997, is
DOD's latest effort to further this goal. DOD is looking to the
DRI to make its current organization and business practices more
agile and responsive. DOD also hopes that this initiative will
provide a major source of savings that can be used to help fund
DOD's planned $20 billion annual increase in weapon systems
modernization.

The Chairman, Subcommittee on Military Readiness, Committee on
Armed Services, House of Representatives, requested that GAO
evaluate DOD's efforts to implement the DRI by assessing (1)
actions taken through the DRI management structure to facilitate
achieving the program's objectives and (2) progress DOD has made
in implementing individual reform initiatives.

Background The genesis of the DRI was the Quadrennial Defense
Review (QDR), which was completed in May 1997. Among other things,
the QDR called for DOD

to reduce its support infrastructure and streamline its business
practices. The DRI, as a follow-on effort to the QDR, is built
around four major reform efforts, or pillars:

 reengineering defense business and support functions, primarily
by adopting and applying the private sector's best practices;
reorganizing and reducing the size of DOD headquarters elements
and

Defense agencies, including the Office of the Secretary of
Defense;  expanding the use of competitive sourcing to open DOD's
commercial

activities to competition from the private sector; and  conducting
two additional base realignment and closure (BRAC) rounds

and eliminating other facilities that are no longer needed and/or
drain resources.

While DOD expected each of these efforts to reduce infrastructure
costs, most savings were to come from two initiatives. The first
involved subjecting thousands of government positions that provide
commercial-type functions and activities to public/private
competitions to find the most cost-effective source for the work.
The second involved conducting two additional BRAC rounds in
fiscal years 2001 and 2005. DOD estimated that competitive
sourcing would save about $6 billion through fiscal year 2003 and
over $2 billion each year thereafter. The two

Executive Summary Page 3 GAO/NSIAD-99-87 Defense Reform Initiative

additional BRAC rounds were estimated to produce about $2.8
billion in net annual recurring savings once implementation costs
had been offset. DOD did not estimate savings expected from the
other initiatives.

GAO previously reported that implementing reforms such as the DRI
is not an easy task. 1 To be successful, DOD must address
obstacles that have previously kept it from effectively
implementing management reforms across the Department. These
include (1) cultural barriers and parochialism among the military
services and Defense agencies, (2) lack of incentives among DOD
managers to seek and implement change, (3) deficient management
data that prevents DOD from costing its business operations, (4)
lack of clear results-oriented goals and performance measurements
needed to gauge success, and (5) inconsistent management
accountability and follow-through.

Results in Brief By adopting proven management change concepts in
implementing the DRI program, DOD has addressed some of the
obstacles that have limited the

success of past reform efforts. The Secretary and Deputy Secretary
of Defense have shown strong support for the program and
established an organizational framework to give additional
structure and guidance to the effort. This framework consists of a
Defense Management Council (DMC), a Coordinating Group to support
the Council, and a DRI Office to track implementation and identify
issues that need management attention. Further, using special
directives, performance contracts, and other planning guidance,
DOD has sought to institutionalize and provide a sustained
emphasis on the DRI. This framework, taken in total, has helped
create a Defense-wide focus on infrastructure reduction and
provides a forum where problems caused by cultural barriers and
parochial interests can be addressed.

Because the DRI framework has been in place for just over a year,
it is too soon for GAO to assess how effective it will be in the
long term. GAO did, however, identify several areas where DOD
could build on its initial efforts and give even greater impetus
to its goal of achieving a revolution in business affairs. These
include (1) incorporating other major ongoing reform efforts in
the DRI so it can develop a more comprehensive, integrated
strategy for reforming Defense business and support activities;

1 Defense Management: Challenges Facing DOD in Implementing
Defense Reform Initiatives (GAO/T-NSIAD/AIMD-98-122, Mar. 13,
1998).

Executive Summary Page 4 GAO/NSIAD-99-87 Defense Reform Initiative

(2) more clearly delineating the funding requirements needed to
achieve major reforms; and (3) enhancing the Department's ability
to measure DRI results, particularly through financial management
and related reforms.

Each of the four DRI pillars include a variety of reform or
reengineering initiatives, many of which were already ongoing
before they were brought under the DRI umbrella. To varying
degrees, DRI has given each of these initiatives increased
visibility and top-level support within the Department and, in
many instances, imposed new goals and milestones for accomplishing
their objectives. Each initiative varies in its progress toward
meeting its objectives and milestones. Many still face a variety
of issues that could affect their ultimate success and will likely
take longer to complete than the milestones established by the
DRI. Consequently, the success of the DRI will depend largely on
DOD's ability to maintain a high degree of emphasis on the
initiatives over the long term. Past reform efforts started out
well but tended to lose momentum as the Department's leadership
and priorities changed.

GAO is recommending that DOD include other major reform efforts in
the DRI program, develop an integrated strategy and action plan
for managing the DRI effort, and identify funding requirements and
targets for the program.

Principal Findings Implementation Strategy May Help DOD Avoid
Problems of Prior Reform Efforts

DOD's senior leadership has created Department-wide awareness of
DRI goals. In addition, DOD has used special directives, known as
Defense Reform Initiative Directives (DRID), to provide specific
direction, including milestones, to DOD components responsible for
implementing individual initiatives. In general, service and
Defense agency officials have viewed these DRIDs as effective
tools in communicating expectations and providing some basis for
tracking required actions. The DMC is also developing performance
contracts for eight Defense agencies/activities to improve the
Department's oversight of them and outline goals for cost
reductions and service improvements. Further, the Department has
sought to incorporate a DRI emphasis in its implementation of the
Government Performance and Results Act and its requirements for
strategic goals and performance plans. The Department's fiscal
year 2000 performance plan includes the DRI-related goals of
streamlining infrastructure and pursuing

Executive Summary Page 5 GAO/NSIAD-99-87 Defense Reform Initiative

business practice reforms. It specifies a variety of performance
indicators that will be used to assess overall progress. The
Department has also used its annual budget guidance to components
to emphasize the importance of the DRI. At the same time, the
services are expected to absorb most costs of implementing the
initiatives using their existing operating budgets.

Opportunities to Build on Current Reform Efforts

While the DRI organization has provided important focus and
direction to its initiatives, there are several areas where it
could build on its initial efforts to achieve the dramatic
improvements it seeks in its business processes. First, DOD did
not include in the DRI all of the major ongoing business process
reform efforts in the Department. Both DOD and the Congress have
called for significant reform efforts beyond those in the DRI,
including improving and streamlining DOD's financial management
systems, logistics functions, and acquisition workforce. The DRI
included only a few initiatives related to the broader goal of
logistics reengineering and did not include the major efforts
planned to reform financial management systems. Including more of
the major reform initiatives under DRI could lead to the
development of a more complete picture of needed and planned major
reform efforts and, to the extent that they are interrelated,
could provide the basis for developing a more comprehensive,
integrated strategy for achieving the reforms.

Second, DOD is requiring its components to fund most up-front
investment costs out of their existing budgets. This means that
DRI initiatives have to compete annually for investment funds with
higher departmental priorities such as readiness, sustainability,
and modernization. At the same time, investment costs have not
been fully identified for some of the major reform initiatives.
The process of making tradeoffs among competing priorities would
be more effective if DOD had a clearer picture of overall
investment requirements and established, as part of the annual
budgeting process, Department-wide funding targets for the DRI
program. This would more clearly establish funding expectations
for the services and Defense agencies and inform the Congress on
how much of the Defense budget is needed for key reform efforts.

Third, one of the key aspects of a reform effort is the ability to
establish baseline costs and measure the impact of change. Because
of the poor condition of DOD's financial management systems,
obtaining this type of information is difficult. As a result, DOD
tends to rely on performance indicators that track progress or
status rather than measure results. With respect to DRI, DOD
officials stated that their primary indicators of

Executive Summary Page 6 GAO/NSIAD-99-87 Defense Reform Initiative

success will be reductions in support funding requirements in
their operating accounts. This approach will make it difficult to
identify the precise impact the DRI is having on budget
requirements. However, it is well known that DOD's financial
management systems are currently unable to generate the type of
information needed to establish baseline costs or track the impact
of changes. Therefore, whenever DOD officials estimate the
potential or actual impact of an initiative or reform effort, the
estimate is often based on either anecdotal information or data
that may have important limitations. DOD has been attempting to
improve its financial management systems and processes for many
years and recently issued, at the direction of the Congress, a
biennial strategic plan for improving financial management. Until
the efforts outlined in this plan are either completed or much
further along, DOD's ability to effectively measure program
results will remain limited.

Progress Is Varied Across DRI Initiatives

Each of the four DRI pillars includes a variety of reform or
reengineering initiatives, many of which were already ongoing
before they were brought under the DRI umbrella. Each initiative
varies in its progress toward meeting its objectives and
milestones, and many still face a variety of obstacles that could
affect their ultimate success.

The first pillar, adopting best business practices, includes the
broadest range of initiatives, from paperless contracting and the
increased use of electronic commerce to reengineering the movement
of household goods. Among them, the greatest progress is occurring
in the initiatives related to increasing the use of purchase cards
for small purchases and reengineering DOD's travel system.
Progress is being made in other areas such as moving toward
paperless contracting and reforming DOD's system for transporting
military members' household goods, but completion of these and
other efforts is likely to take several years and in certain
instances will not meet the milestones established under the DRI
program.

The second pillar, organizational realignments, has progressed
well, and, with limited exceptions, DOD has accomplished many of
the organizational changes called for by the DRI Report. At the
same time, other reductions called for by the Congress, such as
headquarters reductions, may be more difficult to implement.
Specifically, DOD is still developing plans to meet congressional
direction to reduce management headquarters and headquarters
support activities by 25 percent.

Executive Summary Page 7 GAO/NSIAD-99-87 Defense Reform Initiative

The third pillar, streamlining through competition, builds on
efforts launched prior to publication of the DRI Report to
competitively examine thousands of government positions involved
in commercial-type activities over a 5-year period for potential
conversion to the private sector. Currently, DOD plans to examine
about 229,000 positions during that time frame. This effort is one
of two initiatives from which DOD is projecting specific savings
that are being incorporated into future-year budget plans. GAO's
prior work indicates potential for significant savings from such
competitions, regardless of whether they are won by the public or
private sectors. However, for a variety of reasons, GAO continues
to urge caution when estimating such savings, particularly since
DOD has not fully determined the up-front investment costs
required to implement this initiative and the impact of investment
costs on savings in the short term. Additionally, DOD components
have fallen behind in launching and completing many of the initial
studies. Various Defense officials have raised concerns about the
number of government positions related to commercial activities,
the number of positions that can reasonably be studied during the
prescribed time frame, and the likelihood that the projected
savings can be realized.

The fourth pillar focuses on reducing infrastructure through a
variety of methods. One key effort calls for two additional BRAC
rounds. This is the second initiative from which specific savings
projections have been made. However, because of issues related to
concerns about costs and savings from prior rounds as well as
about the way some closure decisions were handled by the executive
branch during the 1995 round, the Congress has not been willing,
to date, to authorize additional BRAC rounds. Other major
infrastructure reduction initiatives under this pillar include
Defense agency consolidations, demolition of excess facilities,
and privatization of utilities. Progress is being made toward the
goal of demolishing 8,000 excess structures by 2003, and DOD has
directed the services to set aside funding to accomplish this
goal.

Less progress has been made toward privatizing utility systems,
and DOD has recently extended the DRI milestone for completing
this initiative from January 2000 to September 2003. The services
have expressed concern about the time-consuming process and
significant up-front investment costs required to implement this
initiative. DOD, in a December 1998 program budget decision,
required the services to set aside over $240 million in funding
over the next several years to cover the costs of these
privatizations but acknowledged that the true cost could not be
accurately estimated until further analysis is completed. It
directed the

Executive Summary Page 8 GAO/NSIAD-99-87 Defense Reform Initiative

services to complete further analyses of cost requirements for the
upcoming 2001 budget cycle. DOD estimates that once the
privatizations are completed, it may save $327 million. GAO has
not completed sufficient analyses to determine the reasonableness
of projected costs or savings.

DOD's efforts to privatize military family housing are aimed at
using private capital to upgrade housing faster than DOD could on
its own and improve the quality of life for service personnel. DOD
is significantly behind in its efforts in this area. The DRI
called for privatizing 3,500 units by fiscal year 1998, 15,000
units by fiscal year 1999, and 30,000 units by fiscal year 2000.
The DRI also established a broader goal of privatization to help
eliminate all inadequate housing by fiscal year 2010. By early
1999, only a few sites involving about 1,000 housing units had
been privatized. Service officials attributed the slow progress to
the many legal, financial, contractual, and budgetary issues they
have had to tackle. GAO is continuing to monitor this issue.

Recommendations To strengthen and help sustain the reform effort,
GAO recommends (1) bringing all major reform initiatives under the
purview of the DRI

program and using the Results Act principles as a framework to
establish a more comprehensive, integrated strategy and action
plan for reforming the Department's major business and support
activities and (2) identifying investment funding requirements for
major reform initiatives and Department-wide funding targets for
the DRI program and communicating them to the Congress during the
annual budget process.

Agency Comments and GAO's Evaluation

In commenting on a draft of this report, DOD limited its response
to the report's recommendations (DOD's comments are in app. III).
Concerning GAO's recommendation that the Secretary of Defense
bring other major Defense reform initiatives, including logistics
and financial management, under the DRI program, DOD responded
that the Secretary had unified the DRI and acquisition reform
activities as a means of coordinating reform efforts within the
Department. DOD stated that the recommended application of Results
Act principles as a framework for a strategy is fully possible
only in some circumstances. However, it also stated that
integrated process teams had been organized to coordinate all DOD
reform activities, including the Results Act, to foster reform and
information sharing.

Executive Summary Page 9 GAO/NSIAD-99-87 Defense Reform Initiative

The Department's March 1999 update of the DRI, provided on CD-ROM
and available on the Defense Reform internet web site, included
logistics, financial management, acquisition reform, homeland
defense, and other reform activities under the scope of the DRI.
The Department also announced on March 23, 1999, that
organizational responsibility for the DRI program had been moved
to the office overseeing acquisition reform. While these changes
more closely link the original DRI programs with other related
reform initiatives, such as logistics and financial management
reforms, and could increase information sharing, the Department's
comments did not address steps it might take to develop a more
comprehensive integrated strategy and action plan for achieving
the DRI goals. GAO continues to believe such a plan is needed to
facilitate management oversight and maximize the program's
potential for meeting its goals. This plan could also help DOD
maintain its focus on the original DRI goalsreengineering business
operations and eliminating unneeded infrastructureconsidering that
it has broadened the DRI to include such efforts as homeland
defense, cyberspace security, and quality-of-life initiatives.
GAO's intent in recommending the use of Results Act principles was
to emphasize the importance of including the elements of
accountability, goals, and performance measures in formulating
this integrated plan. GAO's review of DOD's current Results Act
Performance Plan indicates that some of these elements are being
addressed; but, GAO also believes that more can be done to apply
these principles to the DRI initiatives.

Concerning GAO's recommendation that DOD more fully identify
investment funding requirements for the DRI program and
communicate them to the Congress, DOD responded that it was
reviewing funding and expanding efforts to consult with the
Congress. However, DOD did not specify its planned actions. GAO
continues to believe it is important for DOD to identify its
funding requirements for major initiatives as well as its overall
funding targets for the DRI program. Such information could
provide the Congress with improved information regarding funding
requirements and provide DOD with an improved basis for decision-
making, including for making tradeoffs among competing priorities.

Page 10 GAO/NSIAD-99-87 Defense Reform Initiative

Contents Executive Summary 2

Chapter 1 1ntroduction

12 DOD Is Seeking to Reduce Infrastructure Costs 12 DRI Addresses
Infrastructure Component of the QDR 13 DRI Management Structure 15
Prior Reform Efforts Have Produced Mixed Results 17 Factors That
Can Affect the Success of Reform Efforts 19 Objectives, Scope, and
Methodology 21

Chapter 2 Actions to Facilitate Execution of the DRI

24 Program Approach Represents a Good Start 24 Opportunities to
Build on Current Efforts 28 Conclusions 36 Recommendations 37
Agency Comments and Our Evaluation 37

Chapter 3 Individual Reform Initiatives Vary in Progress

39 Adopting Best Business Practices: Efforts Are Under Way,

but Progress Varies Among Initiatives 39 Changing the
Organization: Realignments and Reductions Are

Being Carried Out, With Some Exceptions 48 Streamling Through
Competition: Questions About Goals, Pace,

and Amount of Savings 50 Eliminating Unneeded Infrastructure:
Progress Toward Goals Is

Mixed 52 Conclusions 62

Appendixes

Appendix I: Management Reform Memoranda 63 Appendix II: Defense
Reform Initiative Directives 66 Appendix III: Comments From the
Department of Defense 73 Appendix IV: Major Contributors to This
Report 75

Contents Page 11 GAO/NSIAD-99-87 Defense Reform Initiative

Tables Table 3.1: Best Business Practices Initiatives 40 Table
3.2: Initiatives to Eliminate Infrastructure 53

Abbreviations

BRAC base realignment and closure CIM Corporate Information
Management DESC Defense Energy Support Center DFAS Defense Finance
and Accounting Service DISA Defense Information Systems Agency DLA
Defense Logistics Agency DMC Defense Management Council DMR
Defense Management Report DOD Department of Defense DRI Defense
Reform Initiative DRID Defense Reform Initiative Directive FYDP
Future Years Defense Program MRM Management Reform Memoranda POM
Program Objective Memorandum OSD Office of the Secretary of
Defense QDR Quadrennial Defense Review TAV Total Asset Visibility

Page 12 GAO/NSIAD-99-87 Defense Reform Initiative

Chapter 1

Introduction Chapt er1

The Department of Defense (DOD) has been working to reduce its
infrastructure and support costs. A number of internal studies
have reinforced the need to do this. The Defense Reform Initiative
(DRI), announced in November 1997, is DOD's latest effort to
reform its business activities and reduce infrastructure costs.
DOD hopes the DRI will make its current organization and business
practices (which were developed over the course of many years
during the Cold War) more agile and responsive. DOD also hopes
that this initiative will provide a major source of savings that
can be used to help fund DOD's planned $20 billion annual increase
in weapon systems modernization. The Secretary of Defense has
established a special management structure to provide oversight
and direction to the DRI effort. However, congressional concerns
about prior reform efforts and their mixed results have led to
caution about the likely outcomes of current initiatives. Over the
years, we and others have identified various factors that can
either hinder or promote the success of reform efforts.

DOD Is Seeking to Reduce Infrastructure Costs

In the early 1990s, DOD conducted two major defense reviewsthe
1991 Base Force Review and the 1993 Bottom-Up Reviewto assess
military force structure requirements in the post-Cold War era.
Following these reviews, the Congress mandated the Commission on
Roles and Missions of the Armed Forces to determine the
appropriateness of current allocations of roles, missions, and
functions among the armed forces and make recommendations for
changes. 1 Each of these reviews noted that DOD had excessive
infrastructure, which was limiting its ability to fund readiness
and modernization requirements. The Commission, for example,
pointed out that infrastructure accounted for more than half of
DOD's budget. It recommended that DOD reduce infrastructure costs
by relying on the private sector for services that do not have to
be performed by the government and reengineering DOD's support
organizations and functions. The Commission also called for DOD to
conduct a comprehensive strategy and force review at the start of
each administration, or every 4 years, to examine and select the
best force mix, budget level, missions, and support structures.
This review has been referred to as a Quadrennial Defense Review
(QDR).

The first QDR was completed in May 1997. It reviewed all aspects
of the U.S. defense strategy and program, including force
structure,

1 National Defense Authorization Act for Fiscal Year 1994, P.L.
103-160, section 951, 107 stat. 1738 (1993).

Chapter 1 Introduction

Page 13 GAO/NSIAD-99-87 Defense Reform Initiative

infrastructure, readiness, intelligence, modernization, and
people. With respect to infrastructure, the QDR's conclusions
closely matched those of the Commission on Roles and Missions of
the Armed Forces. With the expectation that the Defense budget
would stabilize at about $250 billion annually (in constant 1997
dollars), the QDR concluded that DOD could not achieve its
modernization and readiness goals without a concerted effort to
reduce infrastructure costs. To do this, it proposed:

 continued reductions in civilian and military personnel
associated with infrastructure, 2

 two additional rounds of base realignments and closures (BRAC),
major initiatives to reengineer and reinvent DOD support
functions, and  an increased emphasis on using the private sector
to perform

nonwar-fighting support functions. The savings from these
initiatives were expected to help DOD increase procurement funding
from about $42 billion in fiscal year 1998 to $60 billion in
fiscal year 2001.

DRI Addresses Infrastructure Component of the QDR

In response to the QDR infrastructure proposals, the Secretary of
Defense established a Defense Reform Task Force to review
departmental activities and look for ways to consolidate
functions, eliminate duplication of effort, and improve
efficiency. The DRI Report, which the Task Force issued in
November 1997, identified a framework for accomplishing the QDR
objectives and for initiating a revolution in business affairs, as
described by the Secretary of Defense in his preface to the
report. This framework is built around the following major reform
efforts, or pillars:

 Adopting best business practices Reengineering Defense business
and support operations primarily by adopting and applying
revolutionary new business and management practices learned from
the private sector. Key initiatives include making many of DOD's
contracting and financial operations paperless, relying more on
the private sector (through prime vendor contracts) to store and
distribute inventory to DOD customers, and reengineering DOD's
official business travel system.

2 Our report on the 1999-2003 Future Years Defense Program noted
that the services planned to reduce civilian and military
personnel by 175,000 by 2003. See Future Years Defense Program:
Substantial Risks Remain in DOD's 1999-2003 Plan (GAO/NSIAD-98-
204, July 31, 1998).

Chapter 1 Introduction

Page 14 GAO/NSIAD-99-87 Defense Reform Initiative

 Changing the organizationReorganizing and reducing the size of
DOD headquarters elements so they focus on corporate-level tasks
(e.g., providing policy guidance, developing long-range plans,
monitoring and evaluating performance, and allocating resources).
Key initiatives include reducing headquarters staff assigned to
the Office of the Secretary of Defense (OSD), Defense agencies,
Defense field and support activities, and the Joint Chiefs of
Staff. Headquarters offices would also be reorganized and
consolidated to eliminate redundancies and provide better support
to the Secretary of Defense.  Streamlining through competition
Expanding the use of competition

between the public and private sector to improve performance and
reduce the cost of DOD business and support activities. DOD
believed such competitions could reduce annual operating costs by
about 20-30 percent for each activity studied, regardless of
whether the competition was won by the public or the private
sector. The DRI report suggested competing about 200,000 positions
using the Office of Management and Budget Circular A-76 process.
Eliminating unneeded infrastructure Eliminating facilities that
are no

longer needed and/or that drain resources. The key component of
this effort was to seek congressional approval for two additional
BRAC rounds in 2001 and 2005. Other initiatives include the
consolidation of support activitiesresearch and development
laboratories, test and evaluation facilities, and the Defense
Finance and Accounting Service (DFAS)demolition of excess
buildings, privatization of military family housing construction,
and privatization of military-owned utility systems.

Quantifiable DRI savings were to come primarily from two
initiatives: public/private competitions and BRACs. The DRI Report
projected $6 billion in cumulative savings from competitive
sourcing by 2003 and over $2 billion each year thereafter. 3 It
projected that two future BRAC rounds together would produce $2.8
billion in annual savings after the BRAC decisions had been
implemented. 4 DOD believed that savings from these two
initiatives were imperative in order to increase weapons
modernization funding to $60 billion. While the other initiatives
might also result in savings, DOD did not attempt to measure their
potential impact

3 More recently, DOD has projected $11 billion in cumulative
savings from competitive sourcing by 2005 and over $3 billion in
annual recurring savings thereafter.

4 More recently, DOD has projected $3.4 billion in annual
recurring savings after completion of two additional BRAC rounds.

Chapter 1 Introduction

Page 15 GAO/NSIAD-99-87 Defense Reform Initiative

and was not counting on them to help achieve the modernization
goal. Nevertheless, DOD believes the other initiatives are
important contributors to the revolution in business affairs and
will help improve the quality of service provided to DOD
customers. To encourage the military services and Defense agencies
to undertake the DRI initiatives, DOD officials told service
officials they could expect to retain savings achieved and apply
them to other needs.

DRI Management Structure

DOD has established a management oversight structure with the goal
of bringing sustained direction and emphasis to the DRI effort.
This structure includes the Defense Management Council (DMC) to
oversee the DRI efforts and advise the Secretary of Defense on new
reform efforts, a subordinate Coordinating Group to support the
DMC, and a DRI Office to monitor progress and identify areas where
management's attention is needed. The military services and
Defense agencies, which are ultimately responsible for
implementing the initiatives, have also established small offices
or points of contact to receive and collect information about the
DRI.

Defense Management Council

The DMC, as described by the Secretary of Defense, is expected to
serve as an internal board of directors that will, among other
things:

 advise the Secretary on matters of Defense reform,  identify ways
to improve business practices,  identify opportunities to
consolidate management activities,  identify opportunities to
improve operations by opening them to

competition with the private sector, and  negotiate performance
goals and measures for Defense agencies.

The DMC is chaired by the Deputy Secretary of Defense and includes
the Under Secretary of Defense (Comptroller), the Vice Chairman of
the Joint Chiefs of Staff; the three other Under Secretaries of
Defense, the three military service Under Secretaries, the four
military service Vice Chiefs, the General Counsel, and the
Director of the DRI Office. The DMC membership is comparable to
two other senior level groups used by the Secretary to provide
senior leadership and direction to important DOD-wide issuesthe
Defense Resources Board, which addresses DOD-wide budget
allocation issues, and the Joint Requirements Oversight Council,
which reviews all major procurement issues and decisions. The DMC
has met about 15 times since its establishment in November 1997.

Chapter 1 Introduction

Page 16 GAO/NSIAD-99-87 Defense Reform Initiative

Coordinating Group A part-time Coordinating Group, subordinate to
the DMC but comprised of senior level representatives from the
military services and OSD, was

established by the DMC at its first meeting. The Executive
Director for the group is the Director for Program Analysis and
Evaluation in the Office of the Secretary. Besides providing
leadership, the Executive Director is the group's primary
interface with the DMC. Among other things, the Executive Director
helps decide which issues to bring to the DMC and regularly
attends its meetings. Other members of the Coordinating Group
include the Deputy Director for Army Program Analysis and
Evaluation and the Marine Corps Assistant Deputy Chief of Staff
for Requirements and Planning. The Coordinating Group normally
meets every week to deal with ongoing DRI activities and resolve
problems that arise. It provides advice and assistance to the DMC,
drafts policy statements for the DMC's review and approval,
provides a forum for the military services and Defense agencies to
discuss concerns with policy statements, and help teams prepare
presentations for DMC meetings.

DRI Office Several months after the DRI was announced, the
Secretary established a DRI Office to help track the
implementation of the initiatives and advise

him when reform efforts were not progressing as expected.
According to the Office's Director, the Office was intentionally
kept smallup to eight peoplebecause he believed a large office
would not be in keeping with the DRI's cost-cutting theme.
According to the Director, this led to his employing a less formal
operating style and method of collecting information. The Director
said, for example, that he and his staff receive periodic
briefings from those responsible for implementing the initiatives
in the services and Defense agencies. The DRI Office also
maintains informal contacts with these people to stay abreast of
emerging developments. They obtain information on progress, which
they accumulate into status reports, and indications of problems
that might need management attention. While these problems could
be and sometimes are brought to the Coordinating Group or DMC for
discussion and resolution, the Director said that most are dealt
with informally, primarily by making sure key management officials
are aware of them.

Another important aspect of the job, according to the Director, is
to look beyond the DRI and identify other reform opportunities. He
specifically mentioned the need to reform DOD's Working Capital
Fundwhich funds internal DOD business operations totaling about
$80 billion annually in salesbut said there are many other
opportunities for reform. He believes his Office is uniquely
positioned to identify these opportunities and

Chapter 1 Introduction

Page 17 GAO/NSIAD-99-87 Defense Reform Initiative

marshal support for them. Besides being a member of and attending
DMC meetings (where decisions on new initiatives are made), he has
direct access to the Secretary of Defense.

Military Service and Defense Agency Focal Points

As the organizations that must implement the DRI, the military
services and Defense agencies have either established small
offices or points of contact to receive and collect information
about the initiatives. As officials in these offices described
them to us, the offices and contacts do not manage any part of the
DRI effort yet they have a role in expediting action and seeing
that specific initiatives are addressed in their organizations.
For example, they are typically the persons or offices that
receives policy directives from the DMC and forwards them to the
appropriate official for action. In some cases, they also track
the status of implementation efforts and summarize them for their
chain of command and for the DRI Office. As with the other
organizations discussed above, the services and agencies have kept
these oversight efforts small. This meets the DRI goal of not
creating a large implementing infrastructure and, according to
DOD, sends the message that reforms must be made through normal
management structures.

Prior Reform Efforts Have Produced Mixed Results

Over the past 10 years, DOD has undertaken a number of legislative
and administrative initiatives to downsize the organization and
improve the efficiency of its business operations. The most
notable results have come from four BRAC rounds that the Congress
authorized between 1988 and 1995. The BRAC rounds resulted in
decisions to close nearly 100 of what DOD characterized as major
domestic bases and many smaller facilities. The decisions, which
are still being implemented, are expected to produce a smaller and
less costly infrastructure, but not to the extent DOD leaders
would have liked. 5 Also, net savings have taken longer to begin
to accrue than initially expected. Expected revenues from land
sales did not materialize, and BRAC actions required up-front
investment costs that had to be offset before net savings could be
realized. Special legislation authorizing the most recent BRAC
rounds expired at the end of 1995, and because of controversies
surrounding BRACs, particularly in the 1995 round, the Congress
has been reluctant to authorize additional rounds.

5 See Military Bases: Status of Prior Base Realignments and
Closure Rounds (GAO/NSIAD-99-36, Dec. 11, 1998) and Military
Bases: Review of DOD's 1998 Report on Base Realignment and Closure
(GAO/NSIAD-99-17, Nov. 13, 1998).

Chapter 1 Introduction

Page 18 GAO/NSIAD-99-87 Defense Reform Initiative

Other Department-wide efforts to improve operations and reduce
infrastructure costs include the President's Blue Ribbon
Commission of Defense Management (also known as the Packard
Commission) and the Corporate Information Management (CIM)
initiative. The Packard Commission, comprised of a group of
business leaders, was established in 1988 to identify ways to
streamline and restructure DOD business operations. The Commission
issued the Defense Management Report (DMR) in July 1989. It
contained 250 wide-ranging decisions to consolidate business
functions, improve information systems, enhance management, and
employ better business practices. The decisions consolidated
business functions into several new organizations, including DFAS,
the Defense Contract Management Command, and the Defense
Commissary Agency. Other decisions established the Defense
Business Operating Fund (now called the Defense Working Capital
Fund), transferred supply management operations to the Defense
Logistics Agency (DLA), recommended increased competition and
interservicing for depot maintenance work, and proposed
consolidation of Defense research and test facilities. CIM was an
outgrowth of the DMR. It too was a Department-wide effort to
improve administrative operations and reduce costs by streamlining
business processes and consolidating, standardizing, and
integrating information systems. The DMR was expected to provide
savings of up to $70 billion over 5 years. CIM was expected to
save about $36 billion, over half of the projected DMR total.

The DMR effort produced savings but not to the degree initially
estimated by DOD. In addition, our past work found that, because
of limited documentation and the absence of standard accounting
and information systems, it was difficult to determine if the
savings resulted from DMR initiatives or from other factors such
as force-level reductions, reduced workloads, or Defense
downsizing. 6 Our recent analysis of DOD's Future Years Defense
Programs (FYDP) showed that the infrastructure portion of DOD's
budget had not decreased as DOD planned. 7 Consequently, planned
funding increases for modern weapon systems were repeatedly
shifted further into the future with each succeeding FYDP.
Moreover, our analysis showed that this trend is expected to
continue through fiscal year 2003.

6 See our report to the Chairman, Subcommittee on Readiness, House
Committee on Armed Services (GAO/NSIAD-94-17R, Oct. 7, 1993) and
Defense Management: Challenges Facing DOD in Implementing Defense
Reform Initiatives (GAO/T-NSIAD/AIMD-98-122, Mar. 13, 1998).

7 Future Years Defense Program (GAO/NSIAD-98-204, July 31, 1998).

Chapter 1 Introduction

Page 19 GAO/NSIAD-99-87 Defense Reform Initiative

Factors That Can Affect the Success of Reform Efforts

Over the years, we and others have reported on the systemic
management problems that have kept DOD from successfully
implementing reform efforts. We have also identified various
factors that must be present in any organization that attempts to
implement major reforms.

Factors That Can Impede Success

The key factors that have kept DOD from successfully implementing
past management reform initiatives include: 8

 Cultural barriers and parochialism Each of the military services
has its own way of doing business, its own budget and programming
authority, and its own parochial interest in maintaining the
status quo. As a result, it has been difficult for DOD to
implement Department-wide reform, particularly when the corrective
actions require the development and use of common systems and
processes across military services and organizational boundaries.
Even when there is common agreement among the leadership of the
Department, management reform initiatives that involve up-front
investments, the closure of installations, and the elimination of
military and civilian jobs sometimes are not fully implemented
unless they have widespread support throughout the military
services and Defense agencies.  Lack of incentives to seek and
implement change DOD managers have

had few incentives to improve DOD's financial, acquisition, and
infrastructure management approaches. In DOD's culture, the
success of a manager's career depends more often on moving
programs and operations through the DOD process rather than on
improving the process itself.  Deficient management dataDOD cannot
accumulate reliable cost

information on its business activities or critical operations. As
a result, DOD decisionmakers lack the comprehensive and reliable
data they need to establish baseline costs, track program
implementation, and make well-informed decisions.  Lack of clear
results-oriented goals and performance measures DOD's

strategic goals and objectives have not been linked to those of
the military services and Defense agencies, and DOD's guidance has
tended to lack specificity. Without clear, hierarchically-linked
goals and

8 See Defense Management (GAO/T-NSIAD/AIMD-98-122, Mar. 13, 1998)
and DOD High Risk Areas: Eliminating Underlying Causes Will Avoid
Billions of Dollars in Waste (GAO/T-NSIAD/AIMD-97-143, May 1,
1997).

Chapter 1 Introduction

Page 20 GAO/NSIAD-99-87 Defense Reform Initiative

performance measures, DOD managers have not been able to show how
their work contributes to the attainment of DOD's strategic goals.
Inconsistent management accountability and follow-through DOD has

not routinely linked organizational goals and performance measures
to specific organizational units or individuals that have
sufficient flexibility, discretion, and authority to accomplish
the desired results. These linkages are important because DOD's
top managers are normally in their positions for only short
periods of time. In 1994, for example, the median tenure of top
political appointees in OSD was 1.7 years. This turnover has
hindered the long-term planning and follow-through needed to carry
out significant management reforms. 9

Factors That Can Enhance the Chances of Success

While the above problems have inhibited the success of past DOD
reform efforts, there are a number of factors that can help
eliminate these problems and enhance the potential for success.
For example, successful public and private sector organizations
have overcome these types of problems by: 10

 displaying top management commitment and sustained support for
the reform effort;  establishing a clear management framework for
guiding and supporting

change;  communicating to and educating the organization about the
need for

and expected results of change;  providing the resources needed to
implement the reforms;  developing strategic and tactical plans
that cascade throughout the

organization and provide a roadmap to guide reform and track
progress;  delegating the authority to carry out individual
initiatives to

cross-functional teams made up of those who are affected by the
reform and own the process being changed; and

9 Political Appointees: Turnover Rates in Executive Schedule
Positions Requiring Senate Confirmation (GAO/GGD-94-115FS, Apr.
12, 1994).

10 See Weapons Acquisition: A Rare Opportunity for Lasting Change
(GAO/NSIAD-93-15, Dec. 1992), Organizational Culture: Techniques
Companies Use to Perpetuate or Change Beliefs and Values
(GAO/NSIAD-92-105, Feb. 27, 1992), Best Practices: Elements
Critical to Reducing Successfully Unneeded RDT&E Infrastructure
(GAO/NSIAD/RCED 98-23, Jan. 8, 1998), and Best Practices:
Successful Application to Weapon Acquisitions Requires Changes in
DOD's Environment (GAO/NSIAD-98-56, Feb. 24, 1998).

Chapter 1 Introduction

Page 21 GAO/NSIAD-99-87 Defense Reform Initiative

 establishing objective, outcome-oriented performance measures
that link to strategic and tactical plans, establish
accountability, and provide information for making mid-course
corrections.

We have highlighted these factors here to provide a backdrop for
our review of DOD's management of the DRI effort.

Objectives, Scope, and Methodology

Because of problems associated with prior Defense reform, the
Chairman, Subcommittee on Military Readiness, House Committee on
Armed Services, asked us to review DOD's progress in implementing
the DRI program. To respond to the Chairman's request, we assessed
(1) actions taken through the DRI management structure to
facilitate achieving the program's objectives and (2) progress
made in implementing individual reform initiatives.

To assess the work of the DRI management structure, we relied
primarily on testimonial evidence provided by senior-level
managers in various organizations throughout DOD. We used a common
set of questions during our discussions with senior managers to
ensure that we were consistent in the topics we addressed. Among
other things, we asked the managers about DOD's implementation
strategy and whether it addressed the underlying causes of
problems that limited the success of past reform efforts. These
questions dealt with the leadership provided by the Secretary,
Deputy Secretary, and other senior DOD managers; the management
framework for guiding and supporting the DRI's implementation; the
techniques used to communicate DRI goals and objectives throughout
the organization; and the adequacy of resources to implement the
DRI. We followed up on their answers to these questions and, where
appropriate, obtained documentation that supported their
statements and assertions.

Because we were particularly interested in the work of the DMC, we
requested minutes of its meetings. This, we believed, would give
us indications of the issues the DMC addressed and the decisions
it made about the DRI's implementation. We were told, however,
that no minutes were taken. Consequently, we obtained the
available agendas of its meetings and interviewed 5 of its 15
members. We provided the members questions in advance of the
meetings. Besides describing the types of issues that were
addressed at DMC meetings, these members provided their
impressions of the DMC's effectiveness during its first year. We
also met with members of the DRI Coordinating Group and discussed
the roles

Chapter 1 Introduction

Page 22 GAO/NSIAD-99-87 Defense Reform Initiative

and responsibilities of the Group, how issues are deliberated, how
decisions are made, and the likely success of the DRI.

To evaluate service and agency efforts to develop DRI
implementation plans, we met with senior management officials from
the military services and selected Defense agencies to discuss and
obtain documentation on their strategy for implementing the DRI.
We reviewed their strategic business plans to determine the extent
they addressed DRI goals and objectives. If a service or agency
had developed strategic or performance plans required by the
Government Performance and Results Act, we also reviewed them to
determine whether they were linked to DOD's strategic goals and
measures and provided a roadmap to track progress and gauge the
overall success of the DRI. We also reviewed the Defense Planning
Guidance for Fiscal Years 2000-2005 to determine how DRI goals and
objectives are supposed to be addressed and prioritized in future
military service and Defense agency budgets.

To determine DOD's progress in implementing individual
initiatives, we obtained and reviewed tracking information
assimilated by DOD. We also met with military service and Defense
agency representatives responsible for overseeing and implementing
specific initiatives to obtain information on the progress and
problems they were encountering. While we did not conduct an in-
depth review of each initiative, we obtained and reviewed
documentation related to their status and discussed the likelihood
that they will meet implementation schedules called for in the DRI
Report. Because DOD does not have good financial data, we were not
able to obtain reliable information on the savings the initiatives
did or are expected to achieve. Nevertheless, we discussed the
status and likelihood of achieving savings with the responsible
officials.

During our work, we interviewed officials in the Office of the
Secretary of Defense, including the Under Secretary of Defense
(Acquisition and Technology), the Under Secretary of Defense
(Comptroller), and the Director of the DRI Office. We also met
with two DOD-wide cross functional teams (the Task Force for
Reengineering Initiatives and the Paperless Contracting Working
Level Team) and conducted work at Army Headquarters, Air Force
Headquarters, Navy Headquarters, and Marine Corps Headquarters in
Washington, D.C.; Defense Finance and Accounting Service
Headquarters and Defense Information Systems Agency Headquarters,
Arlington, Virginia; Defense Logistics Agency Headquarters, Fort
Belvoir, Virginia; Air Force Materiel Command Headquarters,
Wright-Patterson Air Force Base, Ohio; Army Materiel Command

Chapter 1 Introduction

Page 23 GAO/NSIAD-99-87 Defense Reform Initiative

Headquarters, Naval Facilities Engineering Command, and Naval Sea
Systems Command, Arlington, Virginia; Naval Supply Systems
Command, Mechanicsburg, Pennsylvania; and the Army Installation
Service Activity, Rock Island, Illinois. We performed our work
from June 1998 through February 1999 in accordance with generally
accepted government auditing standards.

DOD provided written comments on a draft of this report. We
incorporated its comments where appropriate. The comments are
reprinted in appendix III.

Page 24 GAO/NSIAD-99-87 Defense Reform Initiative

Chapter 2

Actions to Facilitate Execution of the DRI Chapt er2

To give emphasis and direction to the DRI program, DOD's senior
leadership has used the special organizational framework it
established. Using special directives, performance contracts and
plans, and budget guidance, DOD has sought to institutionalize and
provide a sustained emphasis on the DRI. This represents a good
start toward providing the type of management attention and
oversight typically associated with successful reform efforts in
the private sector. However, given the limited time that the
framework has been in place, it is too soon for us to assess how
effective it is likely to be in facilitating completion of the
program (the current status of individual initiatives is
summarized in ch. 3). At the same time, there are several areas
where DOD could build on its initial efforts to help achieve the
revolution in business affairs it is seeking. These include (1)
bringing under the DRI other major ongoing reform efforts and
developing a comprehensive, integrated strategy for reforming
Defense business processes and support activities; (2) more
clearly delineating the funding requirements needed to achieve the
major reforms; and (3) improving Department-wide visibility of
DOD's financial management reform efforts.

Program Approach Represents a Good Start

To successfully manage a reform effort, top management must
effectively communicate the reason for the change and be actively
engaged in activities such as setting the overall scope and agenda
and establishing policy. In this respect, the Secretary of
Defense, Deputy Secretary, and other parts of the DRI organization
have given visible, continuous support to the purpose and
objectives of the DRI. The Deputy Secretary, as Chairman of the
DMC, is recognized within DOD as a leading advocate of Defense
reform. He has kept the pressure on the military services and
Defense agencies to meet the DRI goals. DOD officials said that
the DMC and the DRI Coordinating Group have also increased the
Department's overall awareness of the DRI and have provided an
important forum for addressing and resolving DRI-related problems.
Additionally, the Secretary, the Deputy Secretary, and other top
executives have used a variety of tools to communicate the goals
and objectives of the DRI program and provide program emphasis and
direction. These include (1) developing DRI directives to
communicate specific goals and objectives, milestones, and
decisions for selected initiatives; (2) creating performance
contracts to hold Defense agencies accountable for cost- cutting
and service improvement goals; (3) directing that service and
Defense agency plans address DRI objectives; and (4) using budget
guidance to ensure services and Defense agencies address the
initiatives.

Chapter 2 Actions to Facilitate Execution of the DRI

Page 25 GAO/NSIAD-99-87 Defense Reform Initiative

These have helped create an institutionwide focus on the initial
set of initiatives and provided a forum for addressing
implementation problems.

DRI Directives Communicate Specific Direction and Milestones

One of the most direct communication tools DOD has used to
implement the DRI program is Defense Reform Initiative Directives
(DRID). DRIDs are documents reviewed by the DMC and issued by the
Deputy Secretary of Defense 1 for individual initiatives. They
describe the initiatives, provide specific direction, and set
milestones for the DOD components responsible for carrying them
out. They are a continuation of what DOD previously called
Management ReformMemoranda (MRM). As of February 1999, DOD had
issued 17 MRMs and 49 DRIDs (see apps. I and II for a summary of
individual MRMs and DRIDs).

In general, service and Defense agency officials we interviewed
said that the DRIDs are effective communication tools in that they
are concise yet understandable and give targets to shoot for and a
basis to measure progress. Many officials also liked having the
opportunity to comment on DRIDs before they were issued. 2 They
pointed out instances where their comments had affected the scope
of the DRIDs. One example was DRID 45, Prime Vendor 3 Contracting
Program for Facility Maintenance Supplies. Both Air Force and Army
officials thought the draft language in this DRID would force the
services to use prime vendor contracts when an alternative
contracting method might be more advantageous. They wanted the
DRID to encourage the use of prime vendors when this was the most
economical way of purchasing supplies. The final DRID reflected
this concern and did not mandate the use of prime vendor
contracts.

According to officials in the DRI Office, the DMC does not plan to
issue DRIDs for every initiative. Instead, it will limit new DRIDs
to crosscutting

1 While the DMC reviews the DRIDs, the DRI Coordinating Group
drafts them and coordinates input from the affected military
services and Defense agencies. The Group limits the DMC's
involvement to only the unresolved or more important issues and
concerns.

2 All MRMs and about two-thirds of the DRIDs reflected top-down
decisions made following the QDR process and prior to release of
the DRI Report. As such, OSD did not seek input from the affected
Defense organizations. The Executive Director of the Coordinating
Group said that the Group had and would seek input on all
subsequent DRIDs. Comments from officials we interviewed were
based on DRIDs that reflected decisions made after the DRI was
announced.

3 Prime vendors are contractors that buy inventory items from a
variety of suppliers, store them in com- mercial warehouses, and
ship them to customers as needed.

Chapter 2 Actions to Facilitate Execution of the DRI

Page 26 GAO/NSIAD-99-87 Defense Reform Initiative

issues that require coordination or action from multiple DOD
organizations or that need special attention or direction.

Performance Contracts Provide Senior Management Oversight of
Defense Agencies

The DRI Report called for the development of performance contracts
for Defense agencies. These agencies provide numerous products and
services (finance and accounting, telecommunications, computers,
supplies and parts, etc.) to the military services and other
Defense agencies. DOD officials said the performance contracts
were intended to improve DOD's oversight of these agencies.
Specifically, the contracts are formal agreements between the
Defense agencies, their principal staff assistants in OSD, and the
Deputy Secretary. They are to include improvement goals for each
of the agencies in terms of cost, productivity, quality, and
responsiveness to customers. The contracts are to also include
specific performance measures and annual reporting requirements.
According to Defense agency officials, the leadership of these
agencies will be held accountable, through annual performance
appraisals, for meeting assigned goals.

To implement this initiative, DOD established a task force to work
with the agencies and develop draft performance contracts, which
were subsequently reviewed and approved by the DMC. To pilot the
project, the task force worked with three agencies and one Defense
activity to develop contracts for fiscal year 1999. 4 Four
additional agencies are scheduled to complete contracts for fiscal
year 2000. 5

DOD Is Beginning to Link QDR and DRI Goals Throughout the
Organization

In March 1998, we testified before the Subcommittee on Military
Readiness, House Committee on National Security, on the challenges
facing DOD as it attempts to implement the DRI. 6 In that
testimony, we pointed out that DOD's past reform efforts were
hampered because its strategic goals and objectives were not
linked to those of the military services and Defense agencies.
Without clear, hierarchically-linked goals and performance
measures, DOD managers lack straightforward road maps showing how

4 These organizations are DFAS, DLA, the Defense Contract Audit
Agency, and the Defense Health Program.

5 These organizations are the Defense Education Agency, Defense
Information Systems Agency, Defense Security Cooperation Agency,
and Defense Security Service.

6 Defense Management: Challenges Facing DOD in Implementing
Defense Reform Initiatives (GAO/T-NSIAD/AIMD-98-11, Mar. 13,
1998).

Chapter 2 Actions to Facilitate Execution of the DRI

Page 27 GAO/NSIAD-99-87 Defense Reform Initiative

their work contributes to the attainment of DOD's strategic goals.
This also increases the risk that these managers will operate
autonomously rather than collectively. We believe this issue is
important in the DRI environment because each of the services and
Defense agencies must assume part of the responsibility for
meeting DOD's infrastructure and personnel reduction targets.

As a first step toward addressing this issue, DOD has developed
Department-wide strategic and performance plans as required by the
Results Act. 7 The strategic plan, the QDR, sets DOD's general
direction over a 4-year period. The annual performance plan, now
appendix J of DOD's Annual Report to the President and the
Congress, is supposed to connect the QDR's long-term goals to the
day-to-day activities of DOD's managers and staff. 8 A key
performance goal included in DOD's recently issued performance
plan for fiscal year 2000, which we are currently assessing, is to
streamline DOD's infrastructure by redesigning the Department's
support structure and pursuing business practice reforms. The plan
cited a variety of performance indicators that it would track,
including the percentage of DOD's budget spent on infrastructure,
the number of public/private sector competitions, and improvements
in logistics response time.

As a second step, the Secretary in January 1998 directed
organizations at all levels of the Department to review their
strategic plans and mission objectives to ensure that they are
linked to the goals and objectives of the QDR and the DRI.
Organizations within DOD are beginning to comply with the
Secretary's direction, but some are further along than others.
DLA, for example, followed the Results Act framework to develop
strategic and performance plans that included a number of
references to DRI initiatives. The Navy, however, is just
beginning the strategic and performance planning process.
Nevertheless, Navy officials said they were aware of the
requirement to develop linkages to DRI goals and objectives and
intended to do so as they developed their plans.

7 The Results Act requires federal agencies to set strategic
goals, measure performance, and report on the degree to which
goals are met. Its intent is to focus agencies more on results,
service delivery, and program outcomes. It is expected to provide
the Congress and other decisionmakers with objective information
on the relative effectiveness and efficiency of federal programs.

8 See DOD's Draft Strategic Plan (GAO/NSIAD-97-21R, Aug. 5, 1997)
and Observations on DOD's Annual Performance Plan (GAO/NSIAD-98-
188R, June 5, 1998).

Chapter 2 Actions to Facilitate Execution of the DRI

Page 28 GAO/NSIAD-99-87 Defense Reform Initiative

DOD's Budget Guidance Directed the Funding of DRI Initiatives

While incorporating DRI requirements into DOD plans is an
important first step, implementing the requirements is more
difficult. Each year, for example, the military services and
Defense agencies have more budget priorities than they can
typically fund. Consequently, they must make choices among
competing priorities. In the past, management reforms,
particularly those that involved large up-front investments, have
not fared well during this selection process. DOD officials told
us that they hope to overcome this funding problem by
incorporating DRI requirements into the normal budgeting process.
They stressed that the planning, programming, and budgeting
system, as the budgeting process is called, determines how funding
decisions are made in DOD. If the DRI can be linked to it, they
said, there is a good chance that the overall program could
eventually meet its goals.

In this respect, the Defense Budget Planning Guidance 9 issued to
prepare the fiscal year 1999 Defense budget directed the services
and Defense agencies to construct budgets and programs consistent
with the corporate-level goals in the QDR. The guidance included
DOD's mission statement and strategic goals, including the goal to
fundamentally reengineer the Department and achieve a 21 st
Century infrastructure. The planning guidance for the fiscal years
2000-2005 Defense program expressed agreement with the aims and
principles of the DRI and directed the services and Defense
agencies to support QDR and DRI goals throughout the Future Years
Defense Programs (FYDP). It also referenced specific MRMs, DRIDs,
and other initiatives and provided guidance in developing program
budgets.

Opportunities to Build on Current Efforts

DOD's senior leadership has succeeded in creating Department-wide
awareness of DRI goals and objectives. Nevertheless, because the
DRI framework has been in place for just over a year, it is too
soon for us to assess how effective the program will be in the
long term. This will depend largely on DOD's ability to maintain
its emphasis on the DRI program. Past reform efforts, like the
DMR, also started out well but lost momentum when the savings did
not occur as expected and the Department's leadership and
priorities changed.

9 Defense Budget Planning Guidance is issued annually by DOD at
the beginning of the budget development process. It links the
goals in DOD's strategic plan to the programming and budgeting
process and provides funding priorities for DOD components.

Chapter 2 Actions to Facilitate Execution of the DRI

Page 29 GAO/NSIAD-99-87 Defense Reform Initiative

During our work, however, we identified three areas where DOD has
an opportunity to build on its current efforts to further improve
and sustain the DRI program. First, the DRI program does not
currently include all major DOD business process reform efforts,
and several that were included represented small elements of
larger reform efforts not under the DRI. If it used the framework
of the Results Act to include major reform efforts, DOD might be
in a better position to develop a comprehensive, integrated
strategy for reforming the business and support activities of the
Department. Second, DOD is requiring its components to fund most
up-front investment costs out of their existing budgets. This
means that initiatives will have to compete with higher
departmental priorities (e.g., readiness and sustainability,
modernization, and force structure) for investment funds. The
decisionmaking process might be enhanced by considering funding
requirements and priorities among all major initiatives
collectively. This could lead to a more complete picture of
overall reform investment requirements that could be communicated
to Defense components and the Congress and could provide a clearer
basis for tradeoffs among competing objectives. Third, DOD lacks
good financial and cost data to establish baseline costs and
determine the effectiveness of its reforms. DOD has been
attempting to improve its data for many years and in November 1998
issued, at the direction of the Congress, a Biennial Financial
Management Improvement Plan. The plan provided a first-ever vision
of DOD's future financial management environment and identified an
array of improvement initiatives. 10 On the other hand, it failed
to address several important areas, including the data integrity
of DOD's feeder systems.

DOD Could Benefit From a Comprehensive, Integrated Reform Strategy

In undertaking a comprehensive reform effort like the DRI, it is
important, in our view, that the DRI include all major ongoing
initiatives. Doing so would put the Department's leadership,
including the DMC and other organizations DOD established to
oversee the DRI, in a better position to develop a comprehensive,
integrated strategy for reforming DOD's major business and support
activities. Such a strategy would help DOD oversee and manage key
reform efforts, decide between competing priorities, and eliminate
potential overlapping or conflicting efforts.

10 Financial Management: Analysis of DOD's First Biennial
Financial Management Improvement Plan (GAO/AIMD-99-44, Jan. 29,
1999).

Chapter 2 Actions to Facilitate Execution of the DRI

Page 30 GAO/NSIAD-99-87 Defense Reform Initiative

In establishing the DRI, however, DOD did not include all the
major reform efforts that were ongoing in the Department. In
explaining why some ongoing initiatives were included and others
were not, a representative of the Defense Reform Task Force, which
was responsible for developing the DRI Report, said the Task Force
judgmentally selected initiatives where commercial practices might
be successfully applied across a range of DOD organizations,
functions, and activities. According to the representative, the
Task Force never intended for the DRI to be all-inclusive, and it
anticipated that other initiatives would come under the DRI
umbrella as time passed.

Some of the reform efforts not included in the DRI, however, are
significant and have impacts on many functional areas. For
example, the Under Secretary of Defense (Acquisition and
Technology), a member of the DMC, has announced plans to (1)
totally reengineer DOD's logistics processes; (2) dramatically
reduce the amount of logistical supplies required in combat
situations by, in part, improving confidence in supply and
transportation systems; (3) reduce the number of logistics
personnel, facilities, and inventories; and (4) implement a
modern, secure, and reliable integrated logistics information
system. To achieve these goals, the Under Secretary said that DOD
will use integrated supply chains for specific types of inventory,
expand the use of prime vendor agreements, and implement two-level
maintenance for all new systems.

Only certain components of the comprehensive logistics reform
effort were identified in the initial DRI Report. For example, the
DRI includes an effort to expand the use of prime vendor
agreements. As discussed previously, however, after a DRID
mandating this idea was circulated for comment, the DMC changed
the requirement so that military services and others would have
more flexibility to select other cost-effective alternatives.
Depending on how integral the prime vendor program is to the Under
Secretary's reengineering effort, this may or may not have been
the best course of action to take. If the comprehensive
reengineering effort had also been a DRI initiative, the DMC could
have been in a better position to make an informed decision, based
on the importance of the prime vendor program, on the larger goal
of reforming DOD's entire logistics process.

In addition, it is unclear how the Under Secretary's overall
reengineering plans will be affected by reform initiatives in the
individual services. For example, the Army has been developing
plans to rely on a sole-source contractor for wholesale logistics
support of the Apache and Apache Longbow weapon systems. The
objectives of the program include reducing

Chapter 2 Actions to Facilitate Execution of the DRI

Page 31 GAO/NSIAD-99-87 Defense Reform Initiative

overall support costs, improving parts availability, maintaining
aircraft readiness, and leveraging private-sector resources for
modernization. However, much controversy and uncertainty surrounds
this initiative in terms of its cost-effectiveness and impact on
other organizations and entities such as DLA and the Army Working
Capital Fund. 11 Unresolved are issues such as (1) how parts
inventory currently maintained by DLA would be drawn down, (2) how
reduced Army participation would affect overhead costs of other
DLA customers and the Army Working Capital Fund, and (3) how this
proposal fits into an overall plan for logistics reform. We are
currently reviewing this proposal but are not yet in a position to
say whether it would be cost-effective for the Army as well as for
DOD as a whole. 12

Another major reform not currently under the DRI umbrella involves
DOD's effort to comprehensively improve its financial management
systems. This effort is particularly large in scope in that it
touches every organizational component in DOD and is linked to the
success of other reforms in areas such as logistics and
acquisition. For example, a key component in reengineering DOD's
logistics process is the development of modern, reliable logistics
information systems. These systems will also be important feeder
systems for DOD's financial management systems. Moreover, for the
financial management reform effort to be successful, it must be
integrated with logistics and acquisition reform efforts. Yet,
financial management reform was not mentioned in the initial DRI
Report, and neither the DMC nor other management structures DOD
put into place to oversee and bring direction to the DRI program
are addressing it.

To ensure that DOD places sufficient emphasis on this improvement
effort, the National Defense Authorization Act for Fiscal Year
1998 directed DOD to create a biennial strategic plan for
improving financial management. The plan, now referred to as the
Biennial Financial Management Improvement Plan, is to be submitted
to the Congress no later than September 30 of each even-numbered
year and is to address all aspects of financial management within
DOD, including the finance systems,

11 The Working Capital Fund (formerly called the Defense Business
Operations Fund) was established in October 1991 by consolidating
nine existing industrial and stock funds and five other
organizations operated by DOD. It is essentially a group of
internal DOD business operations that sell goods and services to
DOD customers on a break-even basis. The Fund's estimated fiscal
year 1998 revenue of about $80 billion makes it equivalent to one
of the world's largest corporations.

12 This review was requested by the Subcommittee on Readiness,
Committee on National Security, House of Representatives (now
named the Committee on Armed Services, House of Representatives).

Chapter 2 Actions to Facilitate Execution of the DRI

Page 32 GAO/NSIAD-99-87 Defense Reform Initiative

accounting systems, and data feeder systems that support financial
operations. DOD submitted its first plan to the Congress on
October 26, 1998. In our assessment of this plan, we found that it
represents a great deal of effort and provides a first-ever vision
of DOD's future financial management environment. 13 In addition,
the plan includes an array of initiatives intended to move DOD
from its current state to its envisioned financial management
environment. However, we also found that the plan, while providing
an ambitious statement of DOD's planned improvement efforts, had
two important limitations. First, it did not provide links between
the envisioned future operations and the over 200 planned
improvement initiatives to determine whether the proposed
transition will create the target financial management
environment. Second, it did not address actions to ensure feeder
systems' data integrityan acknowledged major deficiency in the
current environment. Without identifying specific actions to
ensure such integrity, it is unclear whether the Department will
be able to effectively carry out not only its financial reporting
but also its other financial management responsibilities.

These examples illustrate the types of issues that could benefit
from increased visibility and discussions in senior leadership
forums such as that provided by the DMC. They also show that DOD's
reform efforts, while significant, have not been brought together
to provide a comprehensive, integrated plan for Defense reform.
Providing such a plan could provide a more complete picture of
major reform efforts that are needed and, to the extent that these
efforts are interrelated, provide the basis for developing a more
comprehensive, integrated strategy for achieving DOD's goals.

DOD Could Benefit From a Clearer Picture of Overall Funding
Requirements

Research in the private sector has shown that senior leadership
demonstrates its support for reform not only by communicating
goals and objectives but also by providing the necessary resources
to carry them out. While this does not guarantee success, it
lessens the potential that other programs may be negatively
affected by having their budgets cut to pay for the reform. For
the most part, DOD is requiring the military services and Defense
agencies to fund DRI implementation costs out of their existing
budgetary resources. With an expectation that the Defense budget
would stabilize at about $250 billion over the next several years
(in constant 1997 dollars), DOD's Comptroller said that the only
other option was to withhold funds from the services and agencies
and reapportion the funds back to

13 Financial Management (GAO/AIMD-99-44, Jan. 29, 1999).

Chapter 2 Actions to Facilitate Execution of the DRI

Page 33 GAO/NSIAD-99-87 Defense Reform Initiative

them in a different manner. However, the services and agencies
objected to this plan, preferring to make their own priority and
funding decisions.

This lack of direct funding is important because many of the
initiatives require significant up-front investments and, as
discussed in chapter 3, the extent of funding requirements for
some of the major initiatives has not been fully developed.
Service and agency officials told us that coming up with existing
funding needs has not been easy. For example, DOD will need a
large amount of resources to complete the large number of
public/private competitions annually (using the Office of
Management and Budget A-76 process) as called for in the DRI
Report. DOD has underestimated the cost of performing the A-76
studies and implementing their results. 14 Also, should the
Congress authorize additional BRAC rounds, they too will require
significant up-front investments that will take some time to
offset before DOD begins to realize a return on the investment.
The same is true for a variety of other reform initiatives, both
in and out of the DRI program.

One of these other initiatives is an effort to privatize DOD's
1,700 utility systems (water, sewage, electrical, waste water,
etc.). Service officials said that it may cost hundreds of
millions of dollars to complete feasibility studies, environmental
assessments, and other required actions for this initiative. These
officials also did not know if private utility companies would be
willing to assume ownership of the systems, considering their
current condition and cost to repair. OSD announced plans in
December 1998 to provide funding for selected utility
privatization projects but acknowledged that it would not know the
true cost of the initiative until additional analysis was
completed.

DOD is doing several things it believes will encourage the
services and agencies to fund the DRI out of their existing
budgets. First, it is allowing them to keep the estimated savings
from the initiatives and reapply them to their readiness and
modernization needs. 15 In this respect, anticipated savings from
competitive sourcing studies are already being reallocated from
the services' operating budgets to other needs within those
services. This is different from past reform efforts like the DMR,
where estimated

14 DOD Competitive Sourcing: Questions About Goals, Pace, and
Risks of Key Reform Initiative (GAO/NSIAD-99-46, Feb. 22, 1999).

15 As savings occur or are anticipated, DOD expects the military
services and Defense agencies to apply them to other internal
needs during the annual budgeting process and incorporate them
into the FYDP.

Chapter 2 Actions to Facilitate Execution of the DRI

Page 34 GAO/NSIAD-99-87 Defense Reform Initiative

savings were taken from the services' and agencies' budgets up
front and reapplied to other organizations within the Department.
Second, as discussed previously, DOD issued Defense planning
guidance for the fiscal years 2000-2005 Defense program that
included specific guidance to fund DRI-related initiatives. At the
same time, however, this planning guidance assigned infrastructure
funding the lowest priority relative to programs that support
readiness and sustainability, modernization, and force structure.
While this is an understandable ordering of prioritiesDOD must
first accomplish its key missionsit reinforces the uncertainty
associated with funding infrastructure reduction investments.

Finally, if these efforts fail, DMC members said they have the
option of directing the funding of initiatives. They pointed out
an instance in which one service did not comply with a DRI funding
priority in DOD's fiscal year 2000 budget guidance. This priority
related to the demolition of excess buildings, which DOD believes
will avoid the future costs of maintaining buildings that are no
longer needed for current operations. According to DOD's
Comptroller, a member of the DMC, the service was directed to find
money in its budget to fully fund the initiative, or the OSD would
make the necessary adjustments to the service's budget. The
Comptroller said that the service's subsequent budget submission
included full funding for the initiative. He did not say which, if
any, other service priorities were not funded as a result of this
action.

With funding for the DRI coming primarily from DOD components'
existing operating funds, tradeoffs will be required. Tradeoffs
could become more difficult as the magnitude of investment costs
for the DRI initiatives becomes more fully known. The process of
making these tradeoffs might be made more effective if DOD and the
services had a clearer picture of overall investment requirements
and established, as part of the annual budgeting process,
Department-wide funding targets for the DRI. This could lead to
DOD more clearly establishing funding expectations for the
services and Defense agencies and letting the Congress know how
much of the Defense budget is needed for key reform efforts.

DOD's Ability to Measure DRI Results Is Limited

One of the key aspects of a reform effort is the ability to
establish baseline costs and measure the impact of change. Because
of the poor condition of DOD's financial management systems,
obtaining this type of information is difficult and, in some
cases, impossible. As a result, DOD tends to rely on performance
indicators that track progress or status rather than measure
results. While some measures of progress are necessary to
understand

Chapter 2 Actions to Facilitate Execution of the DRI

Page 35 GAO/NSIAD-99-87 Defense Reform Initiative

what is left to be done, not having information on results or
outcomes including the costs associated with such results or
outcomesmakes it difficult for DOD or anyone to determine to what
extent overall goals and objectives are being met and what dollar
savings are being achieved. This condition could also limit DOD's
ability to implement the Results Act.

With respect to the DRI, DOD officials said that their primary
measure of success is the top line of the Defense budget. If the
operations and maintenance budget is reduced sufficiently to allow
the weapons modernization budget to increase to $60 billion by
fiscal year 2001, they will consider the DRI effort a success.
Using top-line budget figures are, at best, gross indicators. This
approach does not identify the precise impact the DRI has had on
the overall budget. In addition, information on the impacts of
specific initiatives is not readily available within the planning,
programming, and budgeting system. This lack of information was a
major drawback that limited DOD's ability to measure the impact of
reforms, particularly the DMR directives undertaken in the early
1990s. 16

To gauge the progress of individual initiatives, the DRI Office
periodically collects informationprimarily on initiatives with
established performance targets in an MRM or DRIDand provides
feedback to the Secretary of Defense, the DMC, and the
Coordinating Group. The DRI Office maintains a matrix or log
showing the status, plans, and the accountable office. This
matrix, however, contains few details on actual results, costs
incurred, or issues needing resolution and is not kept current for
all initiatives. The DRI Office, according to its Director, relies
primarily on information provided by DRI focal points in the
military services and Defense agencies and, sometimes, the teams
responsible for implementing the initiatives. Because most of the
tracking information does not come directly from DOD systems, it
must be compiled off-line, causing the information to be somewhat
dated by the time it is received by the DRI Office. The Director
said that his staff are attempting to improve and expand on the
information collected and hope to develop better performance
measures for reporting DRI progress and results.

It is well known, however, that DOD's financial management systems
are currently unable to generate the type of information needed to
establish the baseline costs necessary to track savings associated
with any changes.

16 Defense Outsourcing: Challenges Facing DOD as It Attempts to
Save Billions in Infrastructure Costs (GAO/T-NSIAD-97-110, Mar.
12, 1997).

Chapter 2 Actions to Facilitate Execution of the DRI

Page 36 GAO/NSIAD-99-87 Defense Reform Initiative

Therefore, whenever DOD officials estimate the potential or actual
impact of an initiative or reform effort, the estimate is often
based on either anecdotal information or data with limitations.
DOD has been attempting to improve its financial management
systems and processes for many years. It has many well-intentioned
planned and ongoing financial management improvement efforts.
However, fixing its serious, long-standing financial management
problems across its large complex organizational structure remains
a major challenge. Until this effort is successfully completed,
DOD's ability to effectively measure program results will continue
to be limited.

Conclusions DOD has made a good start by establishing a management
framework for the DRI that adopts many proven management change
concepts. Special

directives, performance contracts and plans, and budget guidance
are additional tools that could help DOD institutionalize and
sustain emphasis on the DRI. While it is too early to assess
program results, we identified several areas where DOD could
further enhance its management approach. First, DOD has other
major reforms underway that are not part of the DRI program. While
all reforms cannot and probably should not be included, greater
emphasis on including the critical fewparticularly those involving
major business processes and support activitieswould provide the
Department's leadership with a more comprehensive overview of the
Defense reform effort. This, along with following the results-
oriented management framework provided by the Results Act, would
also put DOD in a position to develop a comprehensive, integrated
strategy for reforming its major business processes and support
activities.

Second, DOD is requiring its components to fund many up-front
investment costs for the DRI out of their existing budgets. The
initiatives thus have to compete with higher departmental
priorities for annual investment funds. This process could be more
effective, in our view, if DOD had a clearer picture of projected
long-term costs for all major reform initiatives and a clearer
picture of overall investment requirements for the reform effort.
As part of the annual budgeting process, this picture would help
establish funding expectations for the military services and
Defense agencies and let the Congress know how much of the total
Defense budget would be spent on Defense reform issues. It would
also facilitate prioritizing actions most critically needed among
competing priorities in an integrated fashion.

Third, DOD lacks good financial management data from which it can
baseline costs and determine the effectiveness of its reforms. DOD
has

Chapter 2 Actions to Facilitate Execution of the DRI

Page 37 GAO/NSIAD-99-87 Defense Reform Initiative

been attempting to improve this condition for many years and has
just developed, at the direction of the Congress, a Biennial
Financial Management Improvement Plan. Our recent assessment of
this plan found that it provides a first-ever vision of DOD's
future financial management environment and includes an array of
initiatives intended to move DOD forward. On the other hand, the
plan has limitations that make it unclear whether DOD would be
able to effectively carry out its financial management
responsibilities. Because we have already provided numerous
recommendations on this topic in the past, we are not making any
additional recommendations in this report.

Recommendations To strengthen the Defense reform effort, we
recommend that the Secretary of Defense take the necessary actions
to:

 bring all major business process and infrastructure reform
initiatives, including logistics and financial management reform,
under the DRI program and follow the framework provided by the
Results Act to establish a more comprehensive, integrated strategy
and action plan for reforming the Department's major business
processes and support activities and  more fully identify
investment funding requirements for the major

reform initiatives and Department-wide funding targets for the DRI
program and communicate them to the Congress during the annual
budget process.

Agency Comments and Our Evaluation

In commenting on a draft of this report, DOD limited its response
to the report's recommendations. Concerning our recommendation
that the Secretary of Defense bring other major reform efforts,
such as logistics and financial management, under the DRI program,
DOD responded that the Secretary had unified the DRI and
acquisition reform activities as a means of coordinating reform
efforts within the Department. DOD stated that the recommended
application of Results Act principles as a framework for a
strategy is fully possible only in some circumstances where they
can be quantified. However, it also stated that integrated process
teams had been organized as a means of fostering reform and
information sharing.

We noted separately that the Department's March 1999 update of the
DRI, provided on CD-ROM and available on the Defense reform
internet web site, included logistics, financial management,
acquisition reform,

Chapter 2 Actions to Facilitate Execution of the DRI

Page 38 GAO/NSIAD-99-87 Defense Reform Initiative

homeland defense, cyberspace security, quality of life, and other
reform activities under the scope of the DRI. The Department also
announced on March 23, 1999, that organizational responsibility
for the DRI program had been moved to the office overseeing
acquisition reform, the Deputy Under Secretary of Defense for
Acquisition Reform. That official will also serve as Director of
the DRI Office and, in that capacity, report directly to the
Secretary of Defense.

While the Department has now more closely linked the original DRI
programs with other related reform initiatives, such as logistics
and financial management reforms, and plans to increase
information sharing, the Department's comments did not address
additional steps it might take to develop a more comprehensive
integrated strategy and action plan for achieving the DRI goals.
We believe such a plan is needed to facilitate management
oversight and maximize the potential that the reform program will
meet its goals. Such a plan could also help DOD maintain its focus
on the original DRI goalsreengineering business operations and
eliminating unneeded infrastructureconsidering that it has
broadened the DRI to include such efforts as homeland defense,
cyberspace security, and quality-of-life initiatives. Our intent
in recommending the use of Results Act principles in developing a
more comprehensive, integrated strategy was to emphasize the
importance of including Results Act elements of accountability,
goals, and performance measures in formulating an integrated plan.
Our review of DOD's current Results Act Performance Plan indicates
that some of these elements are being addressed; but we also
believe that more can be done to apply these principles to the DRI
initiatives and link the goals of the initiatives to the
Department-wide performance plan.

Concerning our recommendation that DOD more fully identify
investment funding requirements for the DRI program and
communicate them to the Congress, DOD responded that it was
reviewing funding and expanding efforts to consult with the
Congress. DOD noted that this was a high program priority, but it
was not specific about which actions it planned to take in
connection with this review. We continue to believe it is
important for DOD to identify its funding requirements for major
initiatives as well as its overall funding targets for the DRI
program. Such data could provide the Congress with improved
information regarding funding requirements and provide DOD with an
improved basis for decisionmaking, including for making tradeoffs
among competing priorities.

Page 39 GAO/NSIAD-99-87 Defense Reform Initiative

Chapter 3

Individual Reform Initiatives Vary in Progress Chapt er3

Each of the four DRI pillars includes a variety of reform or
reengineering initiatives, many of which were already ongoing
before they were brought under the DRI umbrella. However, DRI gave
each of these initiatives increased visibility and top-level
support within the Department and, in many instances, imposed new
goals and milestones for accomplishing their objectives. Each
initiative varies in its progress toward meeting its objectives
and milestones, and many of the initiatives still face a variety
of obstacles that could affect their ultimate success. DOD has
identified formal savings goals for only two initiatives:
competitive sourcing in pillar three and BRAC rounds in pillar
four. What follows is an overview of the progress on key
initiatives within each pillar.

Adopting Best Business Practices: Efforts Are Under Way, but
Progress Varies

Among Initiatives

Of the four pillars, adopting best business practices includes the
broadest range of initiatives, from the increased use of
electronic commerce to reengineering the movement of household
goods. While DOD has not established specific savings goals for
any of these initiatives, it believes they will not only improve
efficiency and save money but also better position DOD to respond
to war-fighters' requirements in today's and tomorrow's dynamic
defense environment. Progress varies among the individual
initiatives, and the outcome of some is uncertain. Table 3.1
provides an overview of the primary initiatives included in this
pillar, their associated goals and milestones, their status, and
related implementation issues.

Chapter 3 Individual Reform Initiatives Vary in Progress

Page 40 GAO/NSIAD-99-87 Defense Reform Initiative

Table 3.1: Best Business Practices Initiatives Initiative Goal/
milestone Status Issues

Paperless contracting Make all aspects of the major weapon systems
contracting process paperless by January 1, 2000, through
increased application of computer technology.

Integrated process team established to plan and coordinate work in
the services and Defense agencies. DOD will not meet deadline of
January 1, 2000. DOD estimates meeting the

goal during 2003. Establishing a standard

process, interfacing automated data processing systems, and
coordinating complementary efforts among many offices involved are

difficult, time- consuming tasks. Purchase cards By fiscal year
2000, buy 90 percent

of goods and services costing $2, 500 or less using the purchase
card. Services and agencies have steadily increased the use of the
purchase card. In fiscal year 1998, DOD doubled

the number of potential transactions for which card use is
directed.

Increasing card usage will require some reengineering for certain
types of

transactions; 90- percent goal may not be difficult to meet. DOD
is exploring benefits and risks of increasing dollar limit to $10,
000 or $25, 000.

Electronic malls Expand use of electronic malls. Allow for on-
line payment with purchase cards by July 1998. Use purchase cards
for all purchases by January 1, 2000. DLA and the services have
started

several electronic malls that allow on- line purchase from
suppliers. Others planned. On- line payment capability in place.
DOD is working to integrate existing sites into a single, DOD-
wide mall in accordance with congressional direction in the fiscal
year 1999 National

Defense Authorization Act. Prime vendors Increase use of prime
vendors for

DLA- managed items. Have prime vendor contracts for facility
maintenance supplies available for all installations in the United
States by January 1, 1999.

Limited progress expected in expanding use of prime vendors for
all classes of consumable items. Contracts for facility
maintenance supplies are in place for potential use by military
services.

Services have not embraced the concept to extent desired. DLA has
not yet expanded contracts to cover many of the items it manages.
Total asset visibility (TAV) A key part of achieving just in time

logistics. DOD committed to providing TAV. In- theater TAV to be
fully operational in year 2000.

DOD continues long- standing efforts to achieve TAV capability but
unlikely to meet year 2000 goal for in- theater TAV. DOD's
logistics strategic plan states that TAV will be totally
implemented by February 2004. Initiative is highly complex,

heavily dependent on systems in development, and has been an
objective for DOD for over 25 years. Travel system reengineering
Implement new system for official DOD travel by October 2000.
Significant progress made. However, full implementation throughout
DOD is not expected until 2001.

Initial contract serving 1 of 18 regions in U. S. awarded in
spring 1998. Results of previous pilots promising. Household goods
transportation Reengineer processes for moving military personnel
and their families. Limited pilot projects under way or

about to be started that will test improved approaches to moving
household goods of servicemembers.

Optimum approach yet to be determined. Plans for evaluating
success of each option still evolving. Impact on small businesses
remains a contentious issue.

Chapter 3 Individual Reform Initiatives Vary in Progress

Page 41 GAO/NSIAD-99-87 Defense Reform Initiative

As the table shows, paper-free contracting, prime vendors, and
total asset visibility are the three initiatives that may have the
most trouble meeting DRI objectives. The other initiatives, while
making progress, also face various hurdles.

DOD Not Expected to Meet Its Goal for Paperless Contracting Until
2003

DOD has established a goal of attaining paperless contracting for
major weapon systems by 2000. Currently, each of the services and
Defense agencies uses different computer systems, data formats,
and operating procedures, resulting in a contracting process that
is largely manual, paper intensive, and characterized by
redundant, time-consuming actions. Reengineering through
automation, placing contracting documents on-line for review and
action, and using electronic commerce technologies are all
expected to speed contract management and administrative
processes, substantially reduce paperwork, and cut costs.

Although the DRI called for achieving a paperless environment by
2000, this initiative received a lot of attention even before the
DRI Report was issued, and it continues to receive significant
support from the Deputy Secretary of Defense and the DMC. A May
1997 MRM first enunciated the 2000 goal. To implement the MRM, DOD
established an integrated process team that has been working to
baseline current procedures, determine interfaces among
participating organizations, identify opportunities for automating
tasks, and recommend system solutions. The Deputy Secretary has
also received periodic briefings on progress and has taken a
personal role in moving this effort forward. In addition, the
Deputy Secretary has issued several DRIDs to address discrete
parts of the contracting process (contract close-out and material
inspection and receiving), establish an overarching team to review
status and resolve conflicts among the offices involved, and
direct action in related areas of electronic commerce and in the
design of the future procurement process.

Although progress has been madefor example, the integrated process
team has recommended changes to regulations and the development of
computer applications to the contract close-out processit may be
several years past the 2000 deadline before this initiative is
fully implemented. Officials said that making the contracting
process paperless is a complicated undertaking involving numerous
organizations, information systems, and business processes. Key
technological issues such as developing electronic signatures to
prevent unauthorized access and use are yet to be resolved. Also,
the project depends on the completion of several automated systems
now under development, including systems to

Chapter 3 Individual Reform Initiatives Vary in Progress

Page 42 GAO/NSIAD-99-87 Defense Reform Initiative

standardize the procurement process and pay bills electronically.
Not all of these systems, however, will be completed in time to
meet the deadline. According to official estimates, the bill
paying system will not be implemented until December 2003.

Additionally, even after the initiative is completed, the process
will not be entirely paperless because not all aspects of the
contracting process are part of this initiative. For example, the
steps of defining the initial requirement for the weapon system
and formally advertising for bids are not included in this effort.
Moreover, actions to date have mainly focused on automating
current business processes. According to a representative of the
integrated process team and service contracting officials, more
substantial savings might be achieved if inefficient and redundant
processes were first reengineered and unnecessary tasks were
eliminated before system solutions were applied.

Purchase Card Use Is Increasing

Purchase cards are similar to commercial credit cards and are
issued to authorized DOD military and civilian users to acquire
and pay for low-cost supplies and services. Purchase cards have
been used throughout the government for several years and,
generally, have been used by DOD for purchases within the micro-
purchase limit, which is $2,500 or less. DOD implemented the card
to help streamline the acquisition process by decentralizing
purchasing authority for low-cost supplies and services. Use of
the cards avoids the traditional paper- and labor-intensive
process of centralized buying by a DOD contracting office. By
using the card as a reengineering tool, savings accrue from
efficiencies in the contracting, logistics, and financial
processes. During fiscal year 1998, DOD made approximately 7.5
million purchases for a total value of over $3 billion with the
cards.

The DRI Report called for DOD to use purchase cards for 90 percent
of all micro-purchases by fiscal year 2000. In March 1998, the
Deputy Secretary of Defense established a DOD Purchase Card
Program Office. This office brought more focus to the individual
efforts going on among the military services and Defense agencies.
At the end of the second quarter of fiscal year 1998, the Program
Office reported that DOD was using the cards for over 85 percent
of all micro-purchases and was on track to meet the 90-percent
goal before fiscal year 2000. Soon after the Program Office was
established, however, DOD realized that the cards were not being
used to pay for certain types of micro-purchases. For example, the
Purchase Card Program Manager told us that DOD has historically
paid about 200,000

Chapter 3 Individual Reform Initiatives Vary in Progress

Page 43 GAO/NSIAD-99-87 Defense Reform Initiative

commercial invoices for training and about 1 million Military
Interdepartmental Purchase Requests that were valued at or below
the micro-purchase threshold of $2,500. The Program Manager said
that recently, purchase cards have been identified as the method
of payment for the training invoices but using the cards to pay
Military Interdepartmental Purchase Requests was still under
review. Adding these additional transactions to the universe of
items that can be paid with purchase cards could affect DOD's
ability to meet its 90-percent goal before fiscal year 2000.
According to the Director, it will take time to reengineer the
payment processes for these two types of transactions so the
purchase card can be used.

DOD officials view purchase cards as complementary to their
efforts to facilitate paperless contracting because more than half
of all contracting actions are within the micro-purchase
threshold. Thus, DOD officials are pushing the services and
Defense agencies to use the cards to the fullest extent possible.
Additionally, they are exploring the benefits and risks associated
with raising the micro-purchase threshold to $10,000 or $25,000.
Officials estimate that raising the limit could eliminate as much
as 60 percent of all DOD base-level contracting actions, thereby
further streamlining DOD procurement processes and bringing
additional savings.

DOD Developing Electronic Shopping Malls

Electronic shopping malls are virtual one-stop shops in which DOD
customers can buy parts and supplies over the Internet. Currently,
DOD customers can purchase supplies from electronic malls
established by the DLA, the individual services, the Defense
Information Systems Agency (DISA), the General Services
Administration, and other organizations. The malls provide access
to electronic catalogs as well as government contracts. The DRI
Report established a general goal of expanding the use of
electronic tools like electronic malls to put buying decisions in
the hands of people needing the products and enable them to shop
for the best buy. More specifically, however, the report called
for all DOD malls to permit on-line payment with government
purchase cards by July 1, 1998. It further directed that the cards
be used for all mall purchases by January 1, 2000. No DRID was
issued on this initiative.

According to the electronic mall program office, the malls now
have the capability to accept purchase cards as called for in the
DRI. Further, customers also have the option of using other
electronic methods of billing and payment such as electronic data
interchange or electronic funds

Chapter 3 Individual Reform Initiatives Vary in Progress

Page 44 GAO/NSIAD-99-87 Defense Reform Initiative

transfer for large volume purchases where the use of a purchase
card would be impractical.

DOD is working to meet a requirement recently established by the
Fiscal Year 1999 Strom Thurmond National Defense Authorization
Act, which directed DOD to integrate all the separate malls into a
single, DOD-wide mall to provide a single point of access, format,
and ordering capability. A DOD official said this effort is under
way. The services and Defense agencies have been asked to provide
data on their malls to help DOD determine how many malls now exist
and develop a migration plan for bringing these malls together
under one integrated site. This plan is to be reported to the
Congress by the end of April 1999.

Use and Expansion of Prime Vendor Contracts Has Been Limited

Prime vendors are contractors that buy inventory from a variety of
suppliers, store it in commercial warehouses, and ship it to
customers when ordered. DOD wants to increase the use of prime
vendors to manage parts, reduce government inventories, and
improve delivery times. DLA began a prime vendor program for
medical supplies in 1993 1 and has since expanded it to include
many other categories of consumable items such as food and
clothing. 2 DLA has found that this program reduces delivery times
and decreases the need for and costs of maintaining government
inventories.

DOD recognized that the program could be expanded further,
particularly to include hardware items. Hardware items represent
97 percent of the 4 million items managed by DLA but accounted for
only 1 percent of prime vendor sales in fiscal year 1997. To help
expand the program, DOD in June 1997 issued an MRM that directed
DLA to develop regional contracts that the military services could
use to procure a portion of hardware items maintenance, repair and
operations supplies. The DRI Report then reiterated this emphasis
by highlighting hardware items as well, although it also called
for increasing the use of prime vendors for all categories of
items. A subsequent DRID further focused on hardware items by
directing the military services to expand their use of regional
contracts and

1 DOD Medical Inventory: Reductions Can Be Made Through the Use of
Commercial Practices (GAO/NSIAD-92-58, Dec., 1991).

2 Inventory Management: Greater Use of Best Practices Could Reduce
DOD's Logistics Costs (GAO/T-NSIAD-97-214, July 24, 1997).

Chapter 3 Individual Reform Initiatives Vary in Progress

Page 45 GAO/NSIAD-99-87 Defense Reform Initiative

instructing them to work with DLA to identify sites for
implementation and opportunities for expansion.

According to documents provided by DLA, prime-vendor sales for all
categories of items accounted for about 18 percent of all sales in
fiscal year 1997 and about 21 percent in fiscal year 1998.
Personnel items such as medical supplies, food, and clothing are
expected to account for most of the sales. For hardware items, DLA
has established regional contracts for maintenance, repair, and
operations supplies as called for in the MRM and is working with
the military services to identify sites to pilot test the
contracts. However, use of the contract is not mandatory, so it is
unclear to what extent these contracts will be used. Military
service officials raised concerns while the DRID was being drafted
about making the use of prime vendors mandatory. They pointed to
instances where the use of prime vendors resulted in higher costs
and slower service. Because of these concerns, the DRID that was
issued gave the military services the flexibility to use contracts
when they are the most cost-effective way of purchasing an item.

Besides the prime vendor program, DLA is pursuing other best
commercial practices. The National Defense Authorization Act for
Fiscal Year 1998 directed DLA to develop and submit to the
Congress a schedule for implementing the best commercial inventory
practices for nine categories of supplies. The schedule DLA
submitted includes numerous best-practice initiatives such as the
use of corporate contracts, direct-vendor-delivery arrangements,
and electronic commerce as well as the prime-vendor concept. The
act further directed that the schedule shall provide for the
implementation of such practices to be completed not later than
three years after the date of the enactment of the Act. We are
currently reviewing the extent to which DLA has implemented these
initiatives and will be reporting to the Congress at a later date.

Achieving Total Asset Visibility Continues to be a Difficult,
Long-term Undertaking

The DRI Report cited Defense logistics as a functional area where
reengineering could reap great benefits and specifically targeted
Total Asset Visibility (TAV). Although an issue since at least
1972, TAV has received heightened visibility since the Gulf War,
when logistics pipelines were clogged by thousands of duplicate
requisitions and the contents of more than half of the 40,000
large containers of equipment shipped to the war theater could not
be readily identified. Since then, DOD has continued efforts to
implement a TAV program to better identify and track equipment,

Chapter 3 Individual Reform Initiatives Vary in Progress

Page 46 GAO/NSIAD-99-87 Defense Reform Initiative

supplies, spare parts, and requisitions. However, full
implementation is still several years away.

The DRI Report stated that TAV, for forward-deployed in-theater
forces, will be fully operational by 2000. The DOD 1998 Logistics
Strategic Plan states that full TAV implementation will be
achieved by February 2004. Achieving TAV involves the successful
implementation of several large and complex information-technology
initiatives across organizational lines. In other words,
individual TAV and related logistics information systems operated
by each of the military services must be able to provide complete,
timely, and accurate data about assets and access to those assets.
This effort has proved difficult, and the Department continues to
face critical challenges, including the absence of a Department-
wide management framework for providing information to precisely
measure progress in reaching TAV program goals. We have ongoing
work in this area and plan to publish an in-depth report in April
of this year.

DOD Starting to Implement a Reengineered Travel Management System

DOD began reengineering the travel management system in 1994,
after recognizing that the process used to request, approve, and
pay for official travel by its personnel required substantially
more administrative costs and took much more time than best-
management practices in the private sector. To reengineer the
travel system, DOD officials benchmarked best practices in the
private sector, compared them with DOD's current processes and
requirements, and identified improved administrative procedures
and management systems. DOD then conducted 25 pilot projects to
test proposed redesigns and reported major improvements in cost,
cycle time, and customer satisfaction. In May 1998, it awarded an
initial contract for automated travel services in 1 of 18 regions
in the United States. DOD expects to phase in contracts in other
regions over the next 3 years, completing full implementation
sometime in 2001.

Most of the travel reengineering efforts preceded the DRI.
However, DRID 39 did address an element of travel reengineering:
it directed that functions of the Washington, D.C., area travel
office be transitioned to the private sector by October 1, 1998.
This action was completed in October 1998.

Pilot Efforts Are Under Way to Improve Transportation of Household
Goods

DOD has long been concerned about the quality of its program to
transport, store, and manage household goods. According to the DRI
Report, DOD paid about $2.8 billion in fiscal year 1997 to move
almost 800,000 military families. The DRI Report noted that DOD
moves more households than

Chapter 3 Individual Reform Initiatives Vary in Progress

Page 47 GAO/NSIAD-99-87 Defense Reform Initiative

any U.S. corporation, yet its system gives its personnel some of
the worst service in the nation. The report stated that 25 percent
of all DOD moves end with damage claims, compared to 10 percent in
the private sector. Also, best-in-class movers have customer
satisfaction rates of 75 percent, while DOD's have rates of only
23 percent.

Because of these and other problems, DOD proposed several years
ago to reengineer its personal property program, primarily as a
quality-of-life initiative. Its primary goals were to
substantially improve the quality that military personnel and
their families received from DOD's contracted movers; simplify the
entire process, from arranging moves to settling claims; and base
the program on business processes characteristic of world-class
customers and suppliers. Prior to the DRI Report, MRM 6 (dated
June 4, 1997) called for DOD to streamline and simplify policies
and procedures used by military personnel to arrange their own
moves.

The DRI Report gave attention to DOD efforts to adopt simplified
procedures, to increase reimbursements for do it yourself moves,
and to offer personnel at selected Navy locations the opportunity
to choose the carrier they want to use from a list of
participating carriers. Also, a larger pilot test began in early
1999 under the sponsorship of the Military Traffic Management
Command. This pilot will test, among other things, the merits of
selecting best-value carriers for moving household goods. We
reported in November 1996 on this pilot proposal. 3 As these pilot
projects are just underway, we have not had the opportunity to
evaluate the results.

One pilot effort that has been underway for over a year within the
Army involves moves originating at Hunter Army Airfield, Georgia.
This pilot is designed to test whether commercial practices can
provide relocation services for servicemembers moving from Hunter
Army Airfield. In March of this year we testified on the results
of this and the status of the other pilot projects before the
Subcommittee on Military Readiness, Committee on Armed Services,
House of Representatives. 4 In that testimony, we supported the
use of pilots as a means to test new concepts. With respect to the
Hunter Army Airfield pilot, however, we were unable to validate
the Army's evaluation of the pilot primarily because of problems
with the

3 Defense Transportation: Reengineering the DOD Personal Property
Program (GAO/NSIAD-97-49, Nov. 27, 1996).

4 Defense Transportation: Efforts to Improve DOD's Personal
Property Program (GAO/T-NSIAD-99-106, Mar. 18, 1999).

Chapter 3 Individual Reform Initiatives Vary in Progress

Page 48 GAO/NSIAD-99-87 Defense Reform Initiative

Army's study methodology and the reliability of data. As a result,
questions remain about the level of satisfaction among pilot
participants and how the pilot costs compare to the baseline costs
of the current program.

In summary, we noted that improving DOD's personal property
program has been a slow, complex process. Before any type of
conclusion about these efforts can be reached, however, DOD must
have accurate and credible data to determine the type and extent
of changes that should be made. To facilitate a timely completion
of the evaluation process, we concluded, among other things, that
DOD should develop a comprehensive strategy for testing the pilots
and assure that it has a methodologically sound evaluation plan to
assess each pilot's attributes in a comparable manner.

Changing the Organization: Realignments and

Reductions Are Being Carried Out, With Some Exceptions

Under this pillar, the DRI called for a series of reductions,
reorganizations, and other organizational adjustments within OSD,
Defense agencies, and other headquarters organizations. With
limited exceptions, DOD has acted to implement the changes called
for by the DRI. At the same time, other reductions called for by
the Congress may be more difficult to implement.

The DRI Report called for flatter, more streamlined headquarters
throughout DOD that would (1) ensure that the OSD focuses on core,
corporate-level tasks rather than get involved in program
management and day-to-day management of subordinate activities;
(2) strengthen OSD's focus on long-term strategic, program, and
financial planning; and (3) weed out unnecessary overlap,
complexity, and redundancy. The DMC formalized the organizational
decisions by issuing 34 DRIDs, the majority of which were
developed within 2 months after the DRI Report was released.
However, full implementing action was spread out over a longer
period of time.

According to a Coordinating Group member, many of the initiatives
for this pillar reflect decisions that were made during the QDR
process and brought under the DRI for oversight purposes. The DRI
Report called for specific staff reductions in various
organizations throughout DOD, generally over a period of several
years. These included reducing OSD personnel by 33 percentabout
1,000and Defense agency personnel by 21 percent about 27,000. The
report also called for a number of organizational transfers, such
as the shifting of oversight for the Defense Technical Information
Center from the Under Secretary of Defense for Acquisition and
Technology to DISA.

Chapter 3 Individual Reform Initiatives Vary in Progress

Page 49 GAO/NSIAD-99-87 Defense Reform Initiative

DOD organizations are making progress toward meeting DRI-directed
staff reduction goals. OSD, for example, has already met 80
percent of its goal, primarily by transferring 506 personnel to
other DOD organizations and eliminating 284 positionsa total
reduction of 790 personnel. Many of these transfers resulted from
specific DRIDs. In addition, Defense agencies are also reducing
their staff. Top management officials at DFAS, DISA, and DLAthree
of the largest Defense agenciesshowed us plans for reducing
personnel and told us they do not foresee a problem reaching the
21-percent goal by fiscal year 2003. However, instead of
transferring people, they expect to meet the goal by reengineering
activities, outsourcing functions, and using other methods such as
consolidations. Similarly, DOD budget documents show the DRI-
mandated cuts are being programmed for the Joint Staff and the
unified commands through fiscal year 2003, the deadline
established by the DRI for these two organizations.

However, not all the changes have been carried out as originally
planned. For example, the DRI called for dissolving the Office of
the Assistant Secretary of Defense for Command, Control,
Communications, and Intelligence; transferring its intelligence
functions to the newly created Office of the Assistant Secretary
of Defense for Intelligence; and spinning off its other functions
to other areas. DOD, however, decided not to disband the office
after the Deputy Secretary decided that it made more sense to keep
it in place. In other cases, a number of the changes were
completed or will be completed several months later than
originally planned. These slips in the schedule, however, do not
appear significant.

In addition to DRI-directed reductions, DOD has also faced
implementing reductions in headquarters personnel directed by the
Congress. For example, the National Defense Authorization Act for
Fiscal Year 1998 required DOD to reduce the number of management
headquarters and headquarters support activities by 25 percent
(from fiscal year 1997 levels) by September 30, 2002. Although DOD
intends to meet a portion of these reductions through the DRI-
related cuts, our work on this issue found that DOD did not
develop plans consistent with this legislation because the
Secretary of Defense had sought relief from the requirement. 5
When the Congress rejected the appeal, however, DOD assembled a
task force to develop alternatives for meeting the 25-percent
mandate. The task force is to complete its work in June 1999.

5 Defense Headquarters: Status of Efforts to Reduce Headquarters
Personnel (GAO/NSIAD-99-45, Feb. 17, 1999).

Chapter 3 Individual Reform Initiatives Vary in Progress

Page 50 GAO/NSIAD-99-87 Defense Reform Initiative

Streamling Through Competition: Questions About Goals, Pace, and
Amount of Savings

The DRI Report recommended studying about 200,000 government
positions over a 5-year period for potential conversion to the
private sector. It projected that this effort would produce $6
billion in savings during that period and more than $2 billion in
annual recurring savings each year thereafter. 6 This effort is
one of two DRI initiatives from which DOD is projecting specific
savings that are being incorporated into future year budget
programs. Defense officials told us that the issue of competitive
sourcing has consumed the greatest amount of attention at DMC
meetings. Various Defense officials have raised questions about
the number of government positions related to commercial
activities, the number of positions that can reasonably be studied
during the prescribed time frame, and the likelihood that the
amount of savings the DRI has projected will be realized.

The DRI Report echoed concerns expressed in the QDR report that
tens of thousands of military and civilian positions within DOD
were being devoted to work involving functions and services that
were readily available in the private sector. Both the QDR and DRI
reports projected significant savings from outsourcing these
functions to the private sector, and the DRI Report recommended
that this effort be based on competitive sourcing studies under
the Office of Management and Budget's Circular A-76 on commercial
activities. Although use of A-76 was limited from the early to
mid-1990s, DOD in late 1995 reestablished the competition program
in the hopes of realizing significant savings that could be used
to fund modernization and other priority needs.

A DRID pertaining to competitive sourcing was issued on January
16, 1998. It called for the military services and Defense agencies
to update their previously developed listings of positions
involving commercial activities and to differentiate between
activities involving functions deemed inherently governmental in
nature that should remain in-house and those that could be subject
to A-76 competitions. The DRID estimated a January 1999 reporting
date to the Congress. The House Committee on Armed Services, in
its report on the National Defense Bill for Fiscal Year 1999, also

6 The number of positions to be subject to competition has varied
over time; in October 1998, Defense officials announced that
237,000 positions would be competed between fiscal year 1997 and
2005; however, the President's fiscal year 2000 budget request
stipulates that 229,000 positions are to be studied during that
time period and projects $11 billion in cumulative savings and
over $3 billion in annual recurring savings.

Chapter 3 Individual Reform Initiatives Vary in Progress

Page 51 GAO/NSIAD-99-87 Defense Reform Initiative

requested this type of analysis and that it be provided by January
1999. 7 As of April 1999, Defense officials were still preparing
the report.

The Deputy Secretary of Defense in a December 1998 memo stressed
the importance of achieving the projected savings from competitive
sourcing. He said DOD had $10 billion in funding for readiness and
modernization programs that depended on the successful
implementation of the competitive sourcing program. While we
believe that competitive sourcing competitions are likely to
produce savings, we have urged caution regarding estimates of
savings likely to be achieved. We previously noted that prior
savings estimates, which provided a basis for current estimates,
were based on initial savings estimates from outsourcing
competitions but that expected savings can change over time, as
the scope of the work or mandated wages changes. 8 More recently,
we completed two additional reviews of competitive sourcing
issues. One confirmed the benefits of competitive sourcing studies
and the potential for savings from these competitions, regardless
of whether the government or the private sector wins them. 9
However, the second identified questions about the magnitude of
savings likely to be realized in the short term and the ability of
DOD components to undertake and complete the number of studies
called for between now and 2005. 10 It also pointed out that DOD
has not fully calculated the investment costs associated with
undertaking these competitions or the personnel separation costs
likely to be associated with implementing them. Additionally,
delays in launching previously projected studies and greater times
to complete them than previously planned will add pressure to
complete larger numbers of studies in succeeding years and add to
an already heavy resource requirement in this area.

7 House National Security Committee Report (105-132), dated March
1, 1998, page 296.

8 Base Operations: Challenges Confronting DOD as It Renews
Emphasis on Outsourcing (GAO/NSIAD-97-86, Mar. 11, 1997).

9 DOD Competitive Sourcing: Results of Recent Competitions
(GAO/NSIAD-99-44, Feb. 23, 1999).

10 DOD Competitive Sourcing (GAO/NSIAD-99-46, Feb. 22, 1999).

Chapter 3 Individual Reform Initiatives Vary in Progress

Page 52 GAO/NSIAD-99-87 Defense Reform Initiative

Eliminating Unneeded Infrastructure: Progress Toward Goals Is
Mixed

This pillar focuses on reducing infrastructure through a variety
of methods, from eliminating unneeded facilities through
additional BRAC rounds to privatizing functions that DOD believes
could be more appropriately handled by the private sector. BRAC is
the second DRI initiative for which DOD has projected significant
savings, and DOD has begun to include savings from additional
rounds in its future years' budget plans. Table 3.2 provides an
overview of the initiatives in this pillar and their associated
goals, milestones, status, and implementation issues.

Chapter 3 Individual Reform Initiatives Vary in Progress

Page 53 GAO/NSIAD-99-87 Defense Reform Initiative

Table 3.2: Initiatives to Eliminate Infrastructure Initiative
Goal/ deadline Status Issues

Base closures Hold additional rounds in 2001 and 2005. The
Congress has not

authorized additional BRAC rounds. Congressional concerns about

prior rounds have produced reluctance to approve additional
rounds.

DISA consolidations Reduce number of data centers from 16 to 6.
DISA expects to have revised structure in place by fiscal year
2000.

Effort also involves reengineering activities and establishing 23
regional centers, using existing infrastructure. DFAS eliminations
Reduce number of operating locations by 8. DFAS estimates excess
capacity of 34 percent by fiscal year 2003. Study of operating
locations was to be completed by March 15, 1999, but has not been
issued.

Section 914 of the Fiscal Year 1999 Strom Thurmond National
Defense Authorization Act added new requirements that DFAS must
consider when assessing infrastructure and deciding which
locations to close. Research and development, test and evaluation
facilities No goals or deadlines given. DOD developing plan for

restructuring in accordance with section 912( c) of the fiscal
year 1998 National Defense Authorization Act. Issue currently
linked to potential

for future BRAC rounds. Demolitions Demolish excess structures.
Each service has specific goals

dictating amount of square footage to be demolished, with
completion dates ranging from 2000 to 2003.

All services expect to reach goals by deadlines. Good progress
attributed to management attention given to

this issue and especially to the extent of funding being set aside
for demolitions. Regional energy demonstrations Develop plan for
demonstrations by June 1, 1998. Plans submitted. Three

demonstrations completed. More expected. Defense Energy Support
Center,

which is managing the demonstrations, is also working with
services on utility privatization.

Utilities privatization Privatize all utilities by January 1,
2000. Services will not meet deadline. Effort is complex, time-
consuming, and expensive. Defense Management Council subsequently
extended deadline to September 30, 2003.

Housing privatization Privatize 3,500 units by fiscal year 1998,
15, 000 units by fiscal year 1999, and 30,000 by fiscal year 2000.
Eliminate all

inadequate housing by fiscal year 2010. Services will not meet
goals. Effort is complex and time- consuming.

Chapter 3 Individual Reform Initiatives Vary in Progress

Page 54 GAO/NSIAD-99-87 Defense Reform Initiative

Initiatives included in this pillar are the most directly related
to the reduction of Defense facilities infrastructure. Of the
initiatives, BRAC is the most controversial, although it offers
the greatest potential for long-term savings. Several require
significant up-front investments that would delay any net savings
or cost avoidance.

Potential for Future BRAC Rounds Is Uncertain

Despite four rounds of domestic BRAC actions between 1988 and
1995, DOD officials believe there continue to be excess facilities
that are a burden on DOD's budget in a resource-constrained
environment. Both the QDR and DRI reports reflected this view. The
DRI Report called for additional BRAC rounds in 2001 and 2005. 11
DOD officials now project that two additional rounds would
generate net savings of $3.4 billion a year once realignment and
closure actions were completed and the costs of implementing these
actions were offset by savings. DOD has reflected the impact of
these savings in future years budget plans. 12 Because of concerns
about issues such as cost and savings from prior BRAC rounds,
their economic impact, and executive branch handling of two
closure and realignment decisions in the 1995 round, the Congress
has been reluctant to authorize additional BRAC rounds.

Our work has shown that past BRAC recommendations will result in
substantial savings once implementation costs have been offset and
net savings begin to accrue. 13 However, we have also indicated
that because of weaknesses in data and records, DOD's savings
projections lack the degree of precision that some have desired.
Our most recent report also found that the majority of communities
surrounding closed bases are faring well economically in relation
to the national average. Our analysis of lessons learned found
that, despite the difficulties of BRAC decision-making, the
processes that evolved over the past four rounds are regarded by
many as a good starting point for any future BRAC legislation and
decision-making processes. We noted that the processes used
between 1988 and 1995 had several checks and balances to keep
political influences

11 A recent legislative proposal introduced in the Senate calls
for additional BRAC rounds in 2001 and 2005.

12 DOD's Future Years Defense Program incorporated some savings
from future BRAC rounds but these savings were offset by
implementation costs, resulting in net costs of $832 million for
fiscal year 2002 and $1.45 billion for fiscal year 2003. See
Future Year's Defense Program: How Savings From Reform Initiatives
Affect DOD's 1999-2003 Program (GAO/NSIAD-99-66, Feb. 25, 1999).

13 See Military Bases (GAO/NSIAD-99-17, Nov. 13, 1998) and
Military Bases (GAO/NSIAD-99-36, Dec. 11, 1998).

Chapter 3 Individual Reform Initiatives Vary in Progress

Page 55 GAO/NSIAD-99-87 Defense Reform Initiative

to a minimum. At the same time, we also noted that the success of
BRAC processes requires the cooperation of all participants.

DISA Megacenter Consolidation Under Way

Efforts to consolidate DOD computer operations date back to 1990.
At that time, DOD recognized that it needed to better meet its
information processing needs while reducing costs. Since then,
DISA has been created and many of DOD's computer operations have
been consolidated by moving workload and equipment from 194
computer centers to 16 DISA megacenters. Today, DISA provides
various computer and telecommunications services and command and
control support throughout DOD. Despite the earlier
consolidations, DOD believes its information processing
infrastructure needs further reduction. Toward that end, the QDR
and the DRI called for reducing the number of computer megacenters
from 16 to 6.

The DRI did not establish any deadlines for completing the
consolidations, and no consolidation-specific DRIDs were issued.
Nonetheless, the DRI's emphasis on this initiative is reflected in
a DISA performance contract that was developed in direct response
to the DRI and a subsequent DRID. The contract incorporates
expected cost reductions and performance improvements resulting
from consolidation efforts. DISA officials called this contract a
very effective management tool because it sets specific goals and
is used to hold DISA accountable for meeting these goals.

The consolidation goals that have been incorporated into the
contract reflect DISA's plans to have the revised structure in
place by the end of fiscal year 2000. Achieving this revised
structure involves not only reducing the number of megacenters but
also reengineering activities and establishing 23 regional
centers. These regional centers will not represent new
infrastructure as such. They will be formed from existing
organizations and are part of DISA efforts to realign
responsibilities for some organizations, eliminate others, and
absorb workload now handled by the military services. According to
DISA officials, the effort is on schedule. As of February 1999,
DISA had reduced the number of megacenters to 12 and had
established the regional centers. Further, the staffing reductions
that were to accompany the megacenter reductions were under way.
DISA's plans call for total reductions of 893 personnel between
fiscal years 1997 and the end of fiscal year 2000. As of February
1999, DISA had eliminated 869 positions, 97 percent of its goal.

Chapter 3 Individual Reform Initiatives Vary in Progress

Page 56 GAO/NSIAD-99-87 Defense Reform Initiative

DISA officials project that, once completed, the new structure
will result in a 50-percent reduction in costs and a 34-percent
reduction in personnel in its megacenter operations. DISA
officials also project that the effort will achieve $1.5 billion
in savings over a 10-year period ending in fiscal year 2007. We
have not completed sufficient work, however, to assess the
projected savings or timetable.

DFAS Study Shows Excess Capacity: Additional Consolidations Under
Study

Like the DISA consolidations, DFAS consolidations are also aimed
at reducing the number of locations. DFAS was established in 1991
to consolidate under one umbrella the finance and accounting
activities that had previously been splintered among the military
services and Defense agencies. Once responsibility for handling
these activities was shifted to DFAS, it reduced the number of
sites where its finance and accounting activities were handled
from more than 330 to 24. The current DFAS structure includes 5
large centers and 19 smaller facilities, called operating
locations. Despite previous reductions, DOD and our studies have
showed that the infrastructure could be consolidated further. 14
The DRI Report said the number of remaining DFAS operating
locations was to be further reduced by eight. The DRI did not set
a specific deadline, nor was any follow-up DRID issued to lay out
additional requirements.

After the DRI Report was issued, DFAS assessed the excess capacity
in its current structure according to its anticipated future
workload. The assessment estimated that DFAS would have 34 percent
excess capacity by the end of fiscal year 2003. DFAS then
identified a set of criteria to evaluate which locations it should
close. According to DFAS officials, before the DOD Comptroller had
a chance to review these criteria and approve them as the basis
for eliminating DFAS facilities, the Congress passed legislation
that added some new DFAS requirements. Section 914 of the Fiscal
Year 1999 Strom Thurmond National Defense Authorization Act
requires the Secretary of Defense to submit to the Senate and
House Armed Services Committees a strategic plan for improving the
financial management operations at each DFAS operating location.
The plan is to include (a) the workload that must be performed at
the operating location each fiscal year, (b) the capacity and
number of operating locations that are necessary for performing
this workload, and (c) a discussion of the costs

14 See DOD Infrastructure: DOD's Planned Finance and Accounting
Infrastructure Is Not Well Justified (GAO/NSIAD-95-127, Sept. 18,
1995), DOD Infrastructure: DOD Is Opening Unneeded Finance and
Accounting Offices (GAO/NSIAD-96-113, Apr. 16, 1996), and Defense
Infrastructure: Budget Estimates for 1996-2001 Offer Little
Savings for Modernization (GAO/NSIAD-96-131, Apr. 4, 1996).

Chapter 3 Individual Reform Initiatives Vary in Progress

Page 57 GAO/NSIAD-99-87 Defense Reform Initiative

and benefits that could result from reorganizing the operating
locations on the basis of the function they perform. The plan is
also to include the Secretary's assessment of the feasibility of
carrying out such a plan. Section 914 called for the Secretary to
submit the plan by January 15, 1999. However, this date was
subsequently extended to March 15, 1999. As of April 1999, this
plan was being reviewed by DOD's Comptroller and had not been
issued.

Future Plans to Address Excess Capacity in Research, Development,
Test, and Evaluation Facilities Are Unclear

This initiative aims at reducing the number of research and
development laboratories and test and evaluation centers that are
used to develop military technology and test the capabilities of
these technologies. Currently, DOD employs about 100,000 people in
67 federally owned facilities across the continental United
States. Reducing the number of research and development
laboratories and test and evaluation centers has been an ongoing
effort in DOD. The Department closed 62 sites as part of previous
BRAC rounds. Following these rounds, DOD and the Congress realized
that the laboratory infrastructure was still too large, and the
Congress directed DOD to develop plans for reducing the number of
laboratories even further. Although DOD launched an additional
study, it later halted this effort and decided instead to seek
further reductions through BRAC rounds because it believed that
significant reductions could not be achieved without a BRAC-like
authority to direct the efforts. Given this history, the DRI's
call to reduce the laboratories and centers is not new. The DRI
did not set specific goals or deadlines, nor were any subsequent
DRIDs issued on this matter. Our own work in this area shows that
efforts to achieve consolidations or reductions in excess capacity
have been ongoing for a number of years but continued efforts are
needed. 15 Despite current efforts, however, it is uncertain to
what extent DOD will achieve significant reductions without
authority for additional BRAC rounds.

The issue continues to receive DOD and congressional attention.
DOD is now developing new plans for streamlining the laboratories
and test centers according to congressional direction in the
Fiscal Year 1998 National Defense Authorization Act. Section
912(c) directed the Secretary of Defense to report to the Congress
DOD's plans for streamlining the acquisition workforce, as well as
the associated organizations and infrastructure. Laboratory
personnel are part of the acquisition workforce

15 Best Practices: Elements Critical to Reducing Successfully
Unneeded RDT&E Infrastructure (GAO/NSIAD/RCED-98-23, Jan. 8,
1998).

Chapter 3 Individual Reform Initiatives Vary in Progress

Page 58 GAO/NSIAD-99-87 Defense Reform Initiative

and the Secretary committed to lead a study on how to streamline
them. A follow-up August 1998 memorandum from the Under Secretary
of Defense (Acquisition & Technology) got this study under way,
directing that it be carried out by a steering group of top-level
officials from across DOD. According to the memo, the group is to
develop implementation plans with specific time lines and submit
its recommendations to the Under Secretary by April 1, 1999. This
submission date was subsequently extended to May 1, 1999.

Demolition Goals Likely to Be Achieved

This initiative focuses on demolishing excess structures. DOD
believes this will help cut costs and improve safety. While the
services had previously given varying degrees of emphasis to
demolition, the current emphasis is rooted in a 1997 MRM that
directed them to survey their installations and identify excess
structures. The results of this survey provided the basis for the
DRI's overall goal, which calls for demolishing more than 8,000
excess structures by 2003. A subsequent DRID further refined this
goal, laying out specific square footage targets for each service
and specific deadlines for eliminating this square footage.
Service officials said the DRI and the DRID clearly made
demolitions a priority.

Service officials are confident they will meet the DRI's goals.
Officials credited their progress to the attention that management
is paying to this initiative and, especially, to the funding that
is being set aside. For example, the Navy's funding for
demolitions increased from $6 million in fiscal year 1996 to $27
million in fiscal year 1998, with additional funding programmed in
future years. Similarly, funding for the Army's program, which
involves the largest share of square footage to be demolished,
jumped from $20 million in fiscal year 1997 to $104 million in
fiscal year 1998, with funding to remain at about $100 million a
year through 2003. According to latest projections, the Army will
demolish 53.2 million square feet of facility space by 2003, the
Navy 9.9 million square feet by 2002, the Air Force 14.9 million
square feet by 2003, and the Marine Corps 2.1 million square feet
by 2000.

Because demolishing buildings is costly, service officials
questioned the magnitude of savings that will result from this
initiative and preferred to characterize the long-term benefit as
a cost avoidance. Our prior work on this issue indicates that
demolitions can result in savings and cost avoidance because they
eliminate the need to maintain unneeded

Chapter 3 Individual Reform Initiatives Vary in Progress

Page 59 GAO/NSIAD-99-87 Defense Reform Initiative

structures and avoid future outlays for renovations. 16 We also
noted, however, that demolition costs can increase depending on
the type of construction and environmental considerations. We
noted that it is important to continue to examine the cost-
effectiveness of individual projects.

The Defense Energy Support Center Is Helping the Services Manage
Energy

This initiative is designed to help DOD minimize energy costs.
According to DOD, the Department spends $2.2 billion annually on
energy facilities and believes the magnitude of these expenditures
should give it substantial leverage in the market. The DRI Report
pointed out, however, that the Department is so busy managing the
power infrastructure that it gives energy management inadequate
attention. The DRI attempted to remedy this problem. It called for
renaming DLA's Defense Fuels Supply Center the Defense Energy
Support Center (DESC) and expanding the Center's responsibilities
to include finding ways to maximize energy savings. A subsequent
DRID further elaborated on this direction and instructed that DESC
conduct a series of demonstration projects. The DRID also
instructed DESC to help the military services in their efforts to
privatize their utilities, another DRI initiative that DOD thinks
will further its goal of shifting its focus to energy management.
The DRID directed DESC to develop plans to support these
objectives by June 1, 1998. It did not give deadlines for
completing the demonstration projects.

Although we have not reviewed this effort in depth, we have
learned that DESC completed the demonstration projects and that
military service managers are working with DESC on various issues.
For example, the services asked DESC to expand the scope of the
demonstration projects to include more military installations and
regions. In addition, Army and Air Force officials have sought
DESC's help with utility privatizations. In one instance, DESC
provided Air Force Materiel Command with $5 million to complete
studies. Recognizing the role that DESC could play in
privatizations, the DMC recently issued a new DRID that directed
DESC to develop a joint regional utility privatization plan with
the military services. A DESC manager said this effort should help
the services write the complex bid solicitations required for
privatizations.

16 Defense Infrastructure: Demolition of Unneeded Buildings Can
Help Avoid Operating Costs (GAO/NSIAD-97-125), May 13, 1997).

Chapter 3 Individual Reform Initiatives Vary in Progress

Page 60 GAO/NSIAD-99-87 Defense Reform Initiative

Utilities Privatization Will Require More Time Than Originally
Expected

In recent years, the military services have been examining the
potential for privatizing their utilities 17 as a means of using
private-sector capital to upgrade deteriorating facilities. At
DOD's urging, the Congress included language in the National
Defense Authorization Act for Fiscal Year 1998 that gave the
military services the authority to convey utility systems to
municipalities, the private sector, or other entities, avoiding
the need for the services to seek legislative authority for
individual actions. The DRI Report established the goal of
privatizing all utility systems except those needed for security
reasons or those that are uneconomical to privatize by January 1,
2000. Soon after, the DMC issued a DRID directing the military
services to develop and pursue privatization plans.

Various service officials said the DRI and the subsequent DRID
created an urgency to move out on privatizations throughout DOD.
Nonetheless, service officials said they will not meet the 2000
deadline. Since the DRI Report was issued, the services have
identified more than 1,700 utility systems as potential
privatization candidates, but only a few had been privatized as of
February 1999. 18 Service officials attributed the slow progress
to the up-front work required, including researching the myriad of
state and local laws governing utilities. Officials also said the
most time-consuming and expensive work is still to come. For
example, each privatization requires extensive feasibility and
environmental studies. Further complicating the situation is the
fact that the services have not set aside the up-front investment
funds required to complete the studies and execute the
privatizations, making progress difficult.

Top DOD management, however, has recognized the problems
surrounding this initiative. In December 1998, the Deputy
Secretary issued a DRID extending the deadline to September 30,
2003. Further, a December 1998 DOD program budget decision
directed the services to set aside funding over the next several
yearsfiscal years 1999 through 2004to cover the estimated $243.6
million in costs to complete the privatizations. The program
budget decision estimated that utility privatization might begin
to provide about $327 million in annual savings after
privatizations are completed in 2003. It also stated, however,
that the true cost of implementing the privatizations and the
savings that might be realized could not be accurately estimated
until further analysis was completed. It

17 Utilities systems refer to electric, gas, water and wastewater
facilities.

18 The Army had begun efforts to privatize some utilities prior to
the DRI. It privatized about 40 of them, mostly natural gas
systems.

Chapter 3 Individual Reform Initiatives Vary in Progress

Page 61 GAO/NSIAD-99-87 Defense Reform Initiative

directed the services to complete further analysis of cost
requirements for the upcoming 2001 budget cycle. In this respect,
some service officials expressed caution about the extent of
actual budget reductions likely to occur from these
privatizations. They told us that any reductions in operating
costs could be offset by higher utility rates. In some instances,
service officials also expressed concern that private utility
companies may not agree to take over some utility systems without
the services upgrading them from their deteriorated state.

However, top management has continued to emphasize the need for
action on this initiative. The December 1998 DRID required the
services to determine by September 30, 2000, whether specific
utilities should be privatized. It also required the services to
issue all solicitations for bids on those utilities by September
30, 2001.

Housing Privatization Will Not Meet DRI Goals

DOD's efforts to privatize military family housing are aimed at
using private capital to upgrade housing faster than DOD could on
its own. DOD began pursuing this effort following passage of
the1996 National Defense Authorization Act, which gave DOD broad
authority to pursue housing privatizations. Housing privatizations
were subsequently folded into the DRI, which called for
privatizing 3,500 units by fiscal year 1998, 15,000 units by
fiscal year 1999, and 30,000 units by fiscal year 2000. No DRIDs
have been issued on this initiative, but several officials
acknowledged that since the DRI was issued, DOD's emphasis on this
effort has increased significantly.

DOD, however, will not meet the DRI goals. By the time we finished
our fieldwork in early 1999, only a few sites, covering about
1,000 housing units, had been privatized. Service officials
attributed the slow progress to the many legal, financial,
contractual, and budgetary issues they had to work with. For
example, the services have had to determine how much service
members' housing allowances need to be increased to compensate for
the prospect that the government will no longer provide housing in
certain areas. Those increases needed to be included in the
budget. Other issues include how to structure privatization deals
and how various federal laws and regulations are to be applied.
Our July 1998 report on housing privatizations said DOD officials
have acknowledged that the effort is

Chapter 3 Individual Reform Initiatives Vary in Progress

Page 62 GAO/NSIAD-99-87 Defense Reform Initiative

moving more slowly than originally anticipated. 19 It also said
DOD expects the pace of privatization to accelerate as the
Department gains experience from the first few projects. We
questioned, however, whether that would occur, because each
project will be unique and will require individualized planning
and negotiation. We are continuing to monitor this issue.

Conclusions It is too early to tell to what extent individual
initiatives, taken collectively, will transform DOD's business
operations into more streamlined, less

costly processes. Many initiatives were ongoing at the time they
were brought under the DRI umbrella and have received increased
attention, focus, and direction. However, progress by individual
initiatives under each pillar is still mixed. While some progress
is being made, many of the initiatives will require more time to
implement than projected by DRI milestones.

DOD has included in its budget plans specific savings from only
two initiatives: competitive sourcing studies and BRACs. While we
believe competitive sourcing has the potential to produce long-
term savings, we have urged caution when estimating the magnitude
of these savings, particularly in the short term, because DOD has
not fully identified the investment costs needed to implement this
initiative. While BRAC reductions are expected to produce savings
in operating costs, the magnitude of short-term savings is unclear
given uncertainties about the costs required to implement any
future BRACs. However, DOD has included BRAC savings in its future
budget plans although the Congress has not authorized additional
BRAC rounds.

Information provided in this chapter is intended to provide a
high-level status and not a detailed assessment of each
initiative. To the extent that we have previously issued reports
on individual initiatives, numerous recommendations for program
improvements were made in those reports as warranted. Accordingly,
we are not making additional recommendations pertaining to the
individual initiatives in this report.

19 This figure includes units privatized by the Navy using
legislative authority granted specifically to the Navy in 1994.
This authority predated the 1996 authority DOD is now using as the
vehicle for the privatizations. Our report, Military Housing:
Privatization Off to a Slow Start and Continued Management
Attention Needed (GAO/NSIAD-98-178, July 17, 1998), examined DOD's
progress under the 1996 authority. The legislative authority
treated the Navy's privatizations as a separate issue. DOD,
however, includes those privatizations in assessing its progress
toward meeting the DRI's goals.

Page 63 GAO/NSIAD-99-87 Defense Reform Initiative

Appendix I

Management Reform Memoranda Appendi x I

MRM 1: Implementation and Expansion of Infrastructure Savings
Identified in the Quadrennial Defense Review (QDR), dated May 15,
1997. Established a special task force on Defense reform to
streamline the Department of Defense's (DOD) infrastructure as
proposed in the QDR. Recommendations for additional infrastructure
savings were to be fully viewed and considered in the fall of 1997
during the program and budget review process. The final report of
the task force, along with recommendations not acted upon during
the program review, was to be completed by November 1, 1997.

MRM 2: Moving to a Paper-free Contracting Process by January 1,
2000 , dated May 21, 1997. The Under Secretary of Defense
(Acquisition and Technology) was to develop a blueprint of a plan
to move to a totally paper-free contract writing, administration,
finance, and auditing process by July 1, 1997.

MRM 3: Streamlining Management of the Office of the Secretary of
Defense (OSD)-sponsored Higher Education Organizations and
Programs , dated May 21, 1997. OSD, Defense agencies, and field
activities were to identify those educational and professional
development programs and organizations by June 1, 1997.

MRM 4: Eliminating Unneeded Publications in OSD and Organizations
Under the Cognizance of OSD, dated May 21, 1997. The Assistant
Secretary for Public Affairs was tasked to review publications
sponsored by DOD organizations. After the DOD organizations
justified continuing publication in paper format, the Assistant
Secretary for Public Affairs was to submit a report on
publications printed on a recurring or periodical basis by August
1, 1997.

MRM 5: Disposal of Excess Government-owned Property, dated May 21,
1997. The Commander of the Defense Contract Management Command was
to develop a plan to eliminate excess government-owned property
under the stewardship and control of Defense contractors and
submit a coordinated plan by September 1, 1997, with the goal of
disposing of all excess property by January 1, 2000.

MRM 6: Streamlining Member-arranged Movement of Household Goods ,
dated June 4, 1997. The Commander of the U.S. Transportation
Command, in coordination with the Assistant Deputy Under Secretary
(Transportation Policy) was to develop and implement a plan that
would streamline and simplify policies and procedures for the
management of member-arranged

Appendix I Management Reform Memoranda

Page 64 GAO/NSIAD-99-87 Defense Reform Initiative

movement of household goods by service personnel. The plan was to
be submitted to the Secretary by July 1, 1997.

MRM 7: Streamlining the Management of Leased Property, dated May
21, 1997. An integrated process team was established to revise
existing or develop new policies and ensure consistent and
accurate record keeping and management of property leases on a
Department-wide basis. The team was to submit an initial report by
July 1, with a final blueprint by October 1, 1997.

MRM8: Disposal of Excess and/or Obsolete Structures , dated May
21, 1997. The Acting Under Secretary of Defense (Acquisition and
Technology) was to undertake a survey within 90 days of all
installations to develop a disposal list of excess structures.
That list was to include all structures that were or would be
excess by January 1, 2000, along with a plan for their demolition
or disposal by that date.

MRM 9: Evaluation of Non-training Audiovisual Materials , dated
May 22, 1997. The Assistant Secretary of Defense for Public
Affairs was to undertake a survey within 60 days of policies
governing audiovisual materials in DOD.

MRM 10: Redesigning DOD Source Acceptance Policies and Procedures
, dated May 29, 1997. This MRM tasked the Under Secretary of
Defense (Acquisition & Technology) to conduct a comprehensive
reassessment of DOD's source acceptance policies and procedures
and review existing stock items designated for source acceptance
to ascertain whether or not they merited that designation.

MRM 11: Adoption of Commercial Identifiers in DOD Business Systems
by January 1, 2000, dated June 16, 1997. This was a proposal to
consider incorporating commercial identification numbers for DOD
business entities and contractors to replace the DOD Activity
Address Code and Commercial and Government Entity codes. It
requested the Under Secretary of Defense (Logistics) to develop by
August 1, 1997, a plan to accomplish these changes.

MRM 12: Expanding Use of Prime Vendor Control Instruments , dated
June 17, 1997. The Director of the Defense Logistics Agency (DLA),
in coordination with each of the military departments, was to
develop a regional implementation blueprint for the DLA prime
vendor contracting program for facilities maintenance supplies and
services. The blueprint

Appendix I Management Reform Memoranda

Page 65 GAO/NSIAD-99-87 Defense Reform Initiative

was to identify the critical events and site designations for
regional implementation within 12 months and nationwide
availability by the middle of fiscal year 1999.

MRM 13: Adopting Standard Commercial Products for Registration
Files , dated June 20, 1997. A task force was formed to develop a
DOD-wide plan to adopt standardized commercial data products for
registration and addressing application in business systems. A
blueprint of the plan was to be delivered by August 1, 1997.

MRM 14: Reengineering Permanent Change of Station (PCS) and
Inactive Reserve Travel, dated June 23, 1997. It extended the
temporary duty travel reengineering effort to cover permanent
change of station travel and travel of inactive reserves. The
Director of the Travel Reengineering Office was to develop a
blueprint and deliver it by July 21, 1997.

MRM 15: Reengineering Defense Transportation Documentation and
Financial Processes, dated July 7, 1997. It tasked the
transportation and financial communities to jointly develop a
long-term strategy to completely reengineer the Defense
transportation documentation financial process. The strategies
were to be implemented by October 1, 1997.

MRM 16: Identifying Requirements for the Design, Development and
Implementation of a DOD Public Key Infrastructure , dated August
6, 1997. A position paper identified the baseline for DOD's
transition to a paperless environment. A DOD public key
infrastructure should provide the data integrity, user
identification and authentication, user on-repudiation data
confidentiality, encryption, and digital signature services for
programs and applications that use DOD networks. The Defense
Information Systems Agency (DISA) was to obtain input to be used
for a public key infrastructure and Digital Signature Symposium.

MRM 17: Reducing the Number of Committees , dated May 6, 1997. The
Director for Administration and Management was tasked to review
DOD committees with a view to identify those that may be
consolidated or eliminated and submit a report by October 1, 1997.

Page 66 GAO/NSIAD-99-87 Defense Reform Initiative

Appendix II

Defense Reform Initiative Directives Appe ndi x I I

DRID 1: Personnel Downsizing Plans, dated November 21, 1997. These
plans reduce the OSD staff by one-third over the 18-month period
beginning in November 1997.

DRID 2: New Defense Security Service, dated November 25, 1997. The
DOD Polygraph Institute, the Personnel Security Research Center,
and the DOD Security Institute will be merged into the Defense
Investigative Service.

DRID 3: Defense Technical Information Center (DTIC) , dated
November 25, 1997. This transfers DTIC from DLA to Defense
Information Systems Agency. In addition, Defense Information
Systems Agency (DISA) will study DTIC functions to identify those
that could be competed with the private sector.

DRID 4: Defense Privacy Office, dated November 25, 1997. The
Defense Privacy Office is to be transferred to the Washington
Headquarters Services.

DRID 5: Directorate for Freedom of Information and Security Review
, dated November 25, 1997. This directorate is transferred from
the Assistant Secretary of Defense (Public Affairs) to the
Washington Headquarters Services.

DRID 6: Appointment of the Team to Create the Defense Threat
Reduction and Treaty Compliance Agency, dated December 3, 1997.
This DRID directs the merger of seven organizations to create the
Defense Threat Reduction and Treaty Compliance Agency.

DRID 7: Overseas Military Banking Program, dated December 5, 1997.
Responsibility for the day-to-day operations of the DOD Overseas
Military Banking Program is transferred from the Office of the
Under Secretary of Defense (Comptroller) to the Defense Finance
and Accounting Service (DFAS). DFAS will study the feasibility of
moving these operations closer to self-sufficiency and
outsourcing.

DRID 8: Reducing the Number of Committees, dated December 10,
1997. OSD, the Joint Chiefs of Staff, service secretariats, and
service staffs will make a second effort to identify DOD
committees for elimination or consolidation.

Appendix II Defense Reform Initiative Directives

Page 67 GAO/NSIAD-99-87 Defense Reform Initiative

DRID 9: Privatizing Utility Systems , dated December 10, 1997. The
military services will develop a plan for privatizing all their
utility systems (electric, water, waste water, and natural gas) by
January 1, 2000, except those needed for unique security reasons
or when privatization is uneconomical.

DRID 10: Establishment of a Task Force on Implementing Competition
and Infrastructure Initiatives , dated December 19, 1997. This
task force oversees the implementation of DRI.

DRID 11: Reorganization of DOD Space Management Responsibilities ,
dated December 19, 1997. A coordinated proposal will be prepared
to make recommendations for a new streamlined approach to the
management and oversight of Defense and intelligence for space
activities.

DRID 12: Transfer Humanitarian Assistance and Demining Programs to
the Defense Security Assistance Agency, dated December 22, 1997.
This DRID consolidates program management and resources for
humanitarian assistance and demining under a single program
manager.

DRID 13: Defense Management Council Charter, dated December 22,
1997. The Council serves as the primary vehicle for ensuring that
the initiatives of the DRI Report are carried out and for
identifying major reforms still needed.

DRID 14: Establishment of the TRICARE Management Support Activity
, dated January 5, 1998. This activity is a merger of the TRICARE
Support Office, the Defense Medical Programs Activity, and the
integration of the health management program functions located in
the Office of the Assistant Secretary of Defense for Health
Affairs.

DRID 15: Establishment of the Office of the Secretary of Defense
Human Resources Transition Program, dated January 5, 1998. This
office will help staff avoid involuntary separations resulting
from reductions in the DRI. The program will include voluntary
separation incentive pay and voluntary early retirement programs
as well as a transition assistance center.

DRID 16: Transfer of the Nuclear Command and Control System
Function and Support Staff to the U.S. Strategic Command , dated
January 5, 1998.

DRID 17: Appointment of the Team to Develop a Blueprint to Merge
Command, Control, Communications, and Computing Functions and the
Development and Acquisition of Intelligence, Surveillance and

Appendix II Defense Reform Initiative Directives

Page 68 GAO/NSIAD-99-87 Defense Reform Initiative

Reconnaissance Systems (C4 and ISR Systems) into the Office of the
Under Secretary of Defense for Acquisition and Technology, dated
January 5, 1998.

DRID 18: Feasibility of Competing Functions Involved in National
Stockpile Sales, dated January 5, 1998. DLA will initiate a review
of the functions involved in National Stockpile Sales and report
to the Under Secretary of Defense (Acquisitions and Technology) as
to the feasibility of competing these functions.

DRID 19: Transfer of the Defense Property Accountability System to
DLA , dated January 14, 1998. Responsibility for the oversight,
control, and management of the day-to-day operations of the
Defense Property Accountability System is transferred from DFAS to
DLA.

DRID 20: Review of Inherently Government Functions , dated January
16, 1998. DOD components will identify functions and positions
that are inherently governmental in nature and functions that
should be subject to competition with the private sector. The DRID
includes the following milestones:

 identification of inherently governmental positions and
functions, commercial activities exempt from the Office of
Management Budget (OMB) Circular A-76 competition, and commercial
activities that should be competed by October 31, 1998;  joint
review of the inventories by selected Under Secretaries of Defense

with DOD components and appropriate OSD offices by November 30,
1998;  review by the Defense Management Council by December 1998;
compilation into the fiscal year 1998 Commercial Activities
Inventory by

December 1998;  submittal to the Secretary of Defense by December
1998; and  submittal to the Congress by January 1999.

DRID 21: Formation of the Defense Energy Support Center, dated
January 16, 1998. The Defense Fuel Supply Center is redesignated
the Defense Energy Support Center and its duties are expanded to
include the consolidation of the Department's regional energy
effort.

DRID 22: Transfer Out of Counter-drug Personnel to the DOD
Components , dated January 16, 1998. This DRID transfers personnel
from the

Appendix II Defense Reform Initiative Directives

Page 69 GAO/NSIAD-99-87 Defense Reform Initiative

Counter-drug Central Transfer Account to the appropriate DOD
component's operational element.

DRID 23: Defense Agency Performance Contracts , dated January 26,
1998. Annual performance contracts between the Deputy Secretary of
Defense and the directors of selected DOD agencies, field
activities, and principal support activities are to be
established. These contracts will include the quantity of each
product or service the agency plans to provide; measures of
customer satisfaction; the planned costs of goods and services;
improvements in agency productivity; planned steps to correct
deficiencies; areas the agency plans to contract; and goals to
measure cost, manpower, and overhead efficiencies.

DRID 24: Planning for Defense Reform Initiative Organizational
Realignments, dated January 26, 1998. Gaining and losing DOD
components are required to coordinate these realignments, and each
receiving organization is to plan and conduct the actions
necessary to receive the incoming functions and personnel.

DRID 25: DOD Plan for Integration of the National Guard and
Reserve Component Into Domestic Weapons of Mass Destruction
Terrorism Response, dated January 26, 1998. The Secretary of the
Army will be responsible for this program.

DRID 26: Establishment of a Defense Management Council Task Force
for Defense Reform Initiative Communications , dated January 26,
1998. The Council will coordinate DOD efforts to communicate
information about the DRI and other related issues.

DRID 27: DOD Computer Forensics Laboratory and Training Program ,
dated February 10, 1998. The lab will be responsible for
counterintelligence and for criminal and fraud computer evidence
processing, analysis, and diagnostics.

DRID 28: Devolvement of the Chemical Weapons Demilitarization
Function, dated February 12, 1998. This function is transferred
from the Under Secretary of Defense for Acquisition and Technology
to the Secretary of the Army.

DRID 29: Joint Activities Study, dated February 25, 1998. A study
will be made to determine whether a number of joint activities can
be transferred to the Commanders in Chiefs.

*** End of document. ***