Major Management Challenges and Program Risks: Department of Defense
(Letter Report, 01/01/99, GAO/OCG-99-4).

As part of its Performance and Accountability Series, GAO provided
information on the major management challenges and program risks facing
the Department of Defense.

GAO noted that: (1) DOD continues to struggle to overcome the many
problems brought about by decades of neglect and to fully institute
sound financial management practices; (2) these problems range from
being unable to properly account for billions of dollars in assets to
being unable to produce reliable and timely information needed to make
sound resource decisions; (3) information management and technology
issues are key DOD management challenges; (4) a primary short-term
concern centers on the implementation of the year 2000 conversions of
date-sensitive information on DOD's computer systems; (5) also,
information security for computer systems poses concerns, since
malicious attacks on these systems are an increasing threat to the
nation's security; (6) effectively managing the weapon systems
acquisition process continues to be a concern for DOD; (7) although DOD
has increased its procurement budget, it consistently pays more and
takes longer than planned to develop systems that do not perform as
anticipated; (8) DOD spends over $100 billion a year contracting for
goods and services; (9) over the last few years, DOD has made several
broad-based changes to its acquisition and contracting processes to
improve DOD-contractor relationships and rules; (10) DOD has given
attention to acquisition reform initiatives, but GAO continues to
identify risks in DOD's contracting activity, including areas such as
erroneous, fraudulent, and improper payments to contractors, payment of
higher prices for commercial spare parts than necessary, and the award
and administration of DOD health care contracts; (11) although DOD has
substantially downsized its force structure over the past 7 to 10 years,
it has not reduced operations and support costs commensurately because
the services are reluctant to consolidate activities that span service
lines and reduce capacity as necessary; (12) DOD's inventory management
practices continue to be ineffective and inefficient and are not
well-suited to meet DOD's new missions and warfighting strategies; (13)
DOD's personnel programs to recruit, train, and retain a high-quality
active-duty enlisted workforce have not received the management
attention needed to ensure their successful operation; (14) to address
the management and performance problems GAO has cited, DOD has taken
actions in the high risk and other areas and has made progress in
improving some of them; and (15) DOD has had some success in addressing
its inventory management problems, is working to reform its weapon
systems acquisition process, and has recognized the need for
infrastructure reductions.

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

 REPORTNUM:  OCG-99-4
     TITLE:  Major Management Challenges and Program Risks: Department 
             of Defense
      DATE:  01/01/99
   SUBJECT:  Accountability
             Defense cost control
             Computer security
             Defense procurement
             Risk management
             Financial management
             Military inventories
             Information resources management
             Defense capabilities
             Management information systems
IDENTIFIER:  DOD Future Years Defense Program
             Joint Surveillance Target Attack Radar System
             DOD TRICARE Program
             F/A-18E/F Aircraft
             SDI Theater High Altitude Area Defense System
             Y2K
             Performance and Accountability Series 1999
             
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Cover
================================================================ COVER


Performance and Accountability Series

January 1999

MAJOR MANAGEMENT CHALLENGES AND
PROGRAM RISKS - DEPARTMENT OF
DEFENSE

GAO/OCG-99-4

DOD Challenges


Abbreviations
=============================================================== ABBREV

  BRAC - base realignment and closure
  DFAS - Defense Finance and Accounting Service
  DLA - Defense Logistics Agency
  DOD - Department of Defense
  DRI - Defense Reform Initiative
  IG - Inspector General
  OMB - Office of Management and Budget
  QDR - Quadrennial Defense Review
  TRICARE - x

Letter
=============================================================== LETTER



January 1999

The President of the Senate
The Speaker of the House of Representatives

This report addresses the major performance and management challenges
confronting the Department of Defense (DOD).  Taken together, these
challenges, if not addressed, can adversely affect the Department's
operational effectiveness.  The report also addresses corrective
actions that DOD has taken or initiated on these issues-- including
DOD's blueprint for a strategy-based, balanced, and affordable
defense program as outlined in the May 1997 Report of the Quadrennial
Defense Review and the reforms described in its November 1997 Defense
Reform Initiative Report--and further actions that are needed.  For
many years, we have reported significant management problems at DOD. 
These problems can be categorized into two areas:  (1) systemic
management challenges dealing with financial management, information
management, weapon systems acquisition, and contract management; and
(2) program management challenges dealing with infrastructure,
inventory management, and personnel.  These problems cut across DOD's
program areas. 

DOD has implemented a number of Departmentwide reform initiatives
that are intended to improve its financial management, information
management, and weapon systems acquisition processes along with other
key business practices.  Despite DOD's military successes, many of
DOD's programs and operations are still vulnerable to fraud, waste,
abuse, and mismanagement, and need improvement.  Overcoming these
challenges requires DOD to address their underlying causes, such as
cultural barriers and service parochialism that limit opportunities
for change and--in some cases--the lack of clear, results-oriented
goals and performance measures.  Successfully addressing these
challenges can improve the efficiency of DOD's operations and yield
fiscal dividends that DOD could use to meet important priorities,
such as military readiness and modernization needs.  Many of the
management challenges, which we reported in 1995 and 1997, place the
integrity and accountability of DOD's programs at high risk. 

This report is part of a special series entitled the Performance and
Accountability Series:  Major Management Challenges and Program
Risks.  The series contains separate reports on 20 agencies--one on
each of the cabinet departments and on most major independent
agencies as well as the U.  S.  Postal Service.  The series also
includes a governmentwide report that draws from the agency-specific
reports to identify the performance and management challenges
requiring attention across the federal government.  As a companion
volume to this series, GAO is issuing an update to those government
operations and programs that its work has identified as "high risk"
because of their greater vulnerabilities to waste, fraud, abuse, and
mismanagement.  High-risk government operations are also identified
and discussed in detail in the appropriate performance and
accountability series agency reports. 

The performance and accountability series was done at the request of
the Majority Leader of the House of Representatives, Dick Armey; the
Chairman of the House Government Reform Committee, Dan Burton; the
Chairman of the House Budget Committee, John Kasich; the Chairman of
the Senate Committee on Governmental Affairs, Fred Thompson; the
Chairman of the Senate Budget Committee, Pete Domenici; and Senator
Larry Craig.  The series was subsequently cosponsored by the Ranking
Minority Member of the House Government Reform Committee, Henry A. 
Waxman; the Ranking Minority Member, Subcommittee on Government
Management, Information and Technology, House Government Reform
Committee, Dennis J.  Kucinich; Senator Joseph I.  Lieberman; and
Senator Carl Levin. 

Copies of this report series are being sent to the President, the
congressional leadership, all other Members of the Congress, the
Director of the Office of Management and Budget, the Secretary of
Defense, and the heads of other major departments and agencies. 

David M.  Walker
Comptroller General of
the United States


OVERVIEW
============================================================ Chapter 0

Managing and overseeing over $1 trillion in assets and a budget of
over $250 billion annually, or about one-half of the government's
discretionary funding, is an enormous task.  As the United States
begins the new millennium as the world's sole superpower, it
continues to lead the world with superior military forces.  The
effectiveness of U.S.  forces is well evidenced by experiences in the
Persian Gulf and Bosnia.  Also, the Department of Defense (DOD) has
implemented a number of Departmentwide reform initiatives that are
intended to improve its financial management, information management,
and defense weapon systems acquisition processes and other key
business practices.  However, DOD still faces challenges with many of
its key performance and management processes. 


   THE CHALLENGES
---------------------------------------------------------- Chapter 0:1

Despite DOD's successes, many of DOD's programs and operations are
still vulnerable to fraud, waste, abuse, and mismanagement.  The
Congress has held oversight hearings and enacted specific legislative
initiatives to improve the economy and efficiency of DOD's operations
and the Department has acted on congressional direction and
suggestions for improvement.  However, as noted in our report and
reports of DOD's Inspector General (IG), many of DOD's key management
processes need improvement.  Successfully addressing these challenges
can yield fiscal dividends that the Department could use to meet
priorities such as readiness and modernization needs.  Summaries of
key systemic management process and program challenges that need to
be addressed follow. 


      SYSTEMIC MANAGEMENT
      CHALLENGES
-------------------------------------------------------- Chapter 0:1.1

  -- DOD continues to struggle to overcome the many problems brought
     about by decades of neglect and to fully institute sound
     financial management practices.  These problems range from being
     unable to properly account for billions of dollars in assets to
     being unable to produce reliable and timely information needed
     to make sound resource decisions. 

  -- Information management and technology issues are key DOD
     management challenges.  A primary short-term concern centers on
     the implementation of the Year 2000 conversions of
     date-sensitive information on DOD's computer systems.  Also,
     information security for computer systems poses concerns, since
     malicious attacks on these systems are an increasing threat to
     our nation's security. 

  -- Effectively managing the weapon systems acquisition process
     continues to be a concern for DOD.  Although DOD has increased
     its procurement budget, it consistently pays more and takes
     longer than planned to develop systems that do not perform as
     anticipated. 

  -- DOD spends over $100 billion a year contracting for goods and
     services.  Over the last few years, DOD has made several
     broad-based changes to its acquisition and contracting processes
     to improve DOD-contractor relationships and rules.  DOD has
     given attention to acquisition reform initiatives, but we
     continue to identify risks in DOD's contracting activity,
     including areas such as erroneous, fraudulent, and improper
     payments to contractors; payment of higher prices for commercial
     spare parts than necessary; and the award and administration of
     DOD health care contracts. 


      PROGRAM MANAGEMENT
      CHALLENGES
-------------------------------------------------------- Chapter 0:1.2

  -- Although DOD has substantially downsized its force structure
     over the past 7 to 10 years, it has not reduced operations and
     support costs commensurately because the services are reluctant
     to consolidate activities that span service lines and reduce
     capacity as necessary. 

  -- DOD's inventory management practices continue to be ineffective
     and inefficient and are not well-suited to meet DOD's new
     missions and warfighting strategies.  As a result, DOD spends
     more than necessary to procure inventory, yet items are not
     available when needed. 

  -- DOD's personnel programs to recruit, train, and retain a
     high-quality active-duty enlisted workforce have not received
     the management attention needed to ensure their successful
     operation.  The military services recruit tens of thousands of
     new enlistees each year who fail to complete their contracts. 


   PROGRESS AND NEXT STEPS
---------------------------------------------------------- Chapter 0:2

To address the management and performance problems we have cited, DOD
has taken actions in the high risk and other areas and has made
progress in improving some of them.  DOD has had some success in
addressing its inventory management problems, is working to reform
its weapon systems acquisition process, and has recognized the need
for infrastructure reductions.  Although DOD's past and current
efforts have resulted in progress in improving its operations,
persistent and long-standing problems still exist.  Overcoming these
challenges requires DOD to address the underlying causes of these
problems, such as cultural barriers and service parochialism that
limit opportunities for change and the lack of clear,
results-oriented goals and performance measures, in some cases. 

To address these problems, DOD must have an effective overall
strategic plan for the agency and individual implementation plans for
each level of the organization that, among other things, include
goals, performance measures, and time frames for completing
corrective actions.  The Government Performance and Results Act of
1993 provides the framework for resolving high risk and other
programs and for providing greater accountability in DOD's programs
and operations.  DOD, however, has not fully embraced the underlying
principles in the Results Act. 

Our review of DOD's strategic plan and its February 1998 performance
plan identified weaknesses in (1) establishing results-oriented
performance goals with explicit strategies and time frames for
achieving them and (2) addressing what DOD has done or plans to do to
resolve its persistent management problems.  In our opinion, DOD
needs to work closely with the Congress now to develop performance
goals and measures.  Addressing these areas would provide
congressional decisionmakers and DOD the information necessary to
ensure that DOD's plans are well thought out for resolving ongoing
problems, achieving its goals and objectives, and becoming more
results oriented, as expected by the Results Act. 


MAJOR PERFORMANCE AND MANAGEMENT
ISSUES
============================================================ Chapter 1

To provide for national security, DOD has a budget that exceeds $250
billion, which is
15 percent of the federal budget and an estimated 3.2 percent of the
U.S.  gross domestic product.  DOD maintains a force of 1.4 million
active duty military personnel, 886,000 military reserve personnel,
and 770,000 civilian personnel.  In addition to the Army, the Navy,
the Air Force, the Marine Corps, the Office of the Secretary of
Defense, and the Joint Chiefs of Staff, DOD has 24 defense agencies
such as the Defense Logistics Agency and the Defense Special Weapons
Agency.  With 10 active Army divisions, 3 Marine expeditionary
forces,
13 active Air Force fighter wings, 202 bombers, 11 active aircraft
carriers, 10 active naval air wings, 12 amphibious ready groups,
73 attack submarines, 128 surface combatant ships, and reserve units
and other equipment, and with 200,000 of its troops overseas, DOD
maintains worldwide influence. 

This report summarizes our recent findings and recommendations to
address the challenges DOD faces.  These challenges can be grouped
into two categories:  (1) systemic problems with management processes
related to plans, finances, information, acquisition, and contracts
and (2) specific problems related to infrastructure, inventory, and
personnel programs.  This report also indicates, where applicable,
how DOD has responded to recommendations in the Secretary of
Defense's November 1997 Defense Reform Initiative (DRI) Report.  The
Defense Reform Initiative, intended to improve business practices
throughout DOD, complements the National Partnership for Reinventing
Government.\1


--------------------
\1 The National Partnership for Reinventing Government (formerly the
National Performance Review) was created by President Clinton in
March 1993 to reform the way the federal government works.  Its
mission is to create a government that works better, costs less, and
gets results that Americans care about. 


   SYSTEMIC MANAGEMENT CHALLENGES
---------------------------------------------------------- Chapter 1:1


      SERIOUS FINANCIAL MANAGEMENT
      WEAKNESSES PERSIST
-------------------------------------------------------- Chapter 1:1.1

Long-standing weaknesses in DOD's financial management operations
continue to result in wasted resources, to undermine DOD's ability to
manage an estimated $250 billion budget and $1 trillion in assets,
and to limit the reliability of the financial information provided to
the Congress.  Since 1995, we have monitored DOD's efforts as it has
struggled to resolve the many problems brought about by decades of
neglect and inability to fully institute sound financial management
practices.  The most recent audits of DOD's financial statements--for
fiscal year 1997--resulted in the identification of the following
serious deficiencies across the full spectrum of DOD's recordkeeping
and control systems. 

  -- DOD has not properly accounted for and reported billions of
     dollars of property, equipment, inventory, and supplies. 
     Auditors found material weaknesses in the systems and processes
     DOD relied on to maintain accountability and to control
     virtually every category of physical assets, including military
     equipment; general property, plant, and equipment;
     government-furnished property held by contractors; and
     inventories.  For example, recorded information on the number
     and location of several military equipment items--such as F-4
     engines and service craft--was not reliable, on-hand quantities
     of inventories differed by 23 percent from inventory records at
     selected major storage locations, and over $9 billion in known
     military operating materials and supplies were not reported. 
     These weaknesses impair DOD's ability to (1) know the location
     and condition of all its assets, including those used for
     deployment; (2) safeguard assets from physical deterioration,
     theft, or loss; (3) prevent the purchase of assets already on
     hand; and (4) determine the full costs of the programs that use
     these assets. 

  -- DOD has not estimated and reported on material environmental and
     disposal liabilities.  While DOD reported nearly $40 billion in
     estimated environmental cleanup and disposal liabilities for
     fiscal
     year 1997, its reports excluded costs associated with military
     weapon systems or training ranges--these undisclosed liabilities
     are likely to be an additional tens of billions of dollars. 

  -- DOD has not determined its liability associated with the future
     cost of post-retirement health benefits for military employees. 
     DOD used unaudited budget information, instead of the required
     actual cost data, to calculate its reported $218 billion
     estimated liability.  In addition, DOD did not accumulate
     current or complete historical claims data to support its
     calculation.  These problems significantly impair DOD's ability
     to determine the full cost of its current operations or the
     extent of its actual liabilities. 

  -- DOD has not accurately reported the net costs of its operations
     and has acknowledged its fundamental problems in accumulating
     reliable cost information.  For example, DOD's 1998 Annual
     Report to the President and the Congress cited the lack of a
     widespread, robust cost-accounting system as the single largest
     impediment to controlling and managing weapon system life cycle
     costs. 

  -- DOD has not properly accounted for billions of dollars of basic
     transactions.  For example, DOD was unable to reconcile at least
     $4 billion in differences between checks issued by DOD and
     reported to the Department of the Treasury.  In addition, DOD
     reported an estimated $22 billion in disbursements that it was
     unable to match with corresponding obligations.  Until these
     problems are corrected, DOD's status of funds reports do not
     properly reflect all transactions.  As we recently reported,
     Navy records show that as of September 30, 1997, obligations for
     9 canceled and 20 expired appropriations may have exceeded the
     available budget authority by a total of $290 million. 

  -- DOD has not ensured that all disbursements were properly
     recorded and reconciled.  Over the years, we and DOD auditors
     have reported that DOD's payment processes and systems have
     serious internal control weaknesses that have resulted in
     numerous erroneous and in some cases fraudulent payments.  For
     example, we recently reported that weak controls led to two
     fraud cases involving nearly $1 million in embezzled Air Force
     vendor payments and that similar control weaknesses continue to
     leave Air Force funds vulnerable to additional fraudulent and
     improper vendor payments. 

In addition, to achieve the wide-ranging reforms necessary to address
its long-standing financial management deficiencies, we have made
numerous recommendations to DOD regarding its need to upgrade the
skills of its financial personnel and successfully overcome serious
design flaws in its financial systems.  Until DOD deals with these
two key issues, resolution of its financial management problems is
unlikely. 

Fixing its financial management problems represents a major challenge
because of the size and complexity of DOD's operations and the
discipline needed to comply with existing and new, more comprehensive
accounting and reporting requirements.  DOD's vast financial
operations involve about 32,000 financial management personnel.  Our
survey of over 1,400 key DOD financial managers--individuals often
serving in comptroller, deputy comptroller, or budget officer
positions--showed that over half (53 percent) had received no
financial or accounting-related training during 1995 and 1996.  These
personnel will be challenged to lead DOD's efforts to produce
reliable financial data that build upon existing requirements to
incorporate recent, more comprehensive accounting standards and
federal financial management systems requirements throughout a large
and complex organization with acknowledged difficult financial
deficiencies. 

Until DOD has developed integrated financial management systems, its
operations will continue to be burdened with costly, error-prone
systems without financial controls to ensure that DOD's assets are
safeguarded, its resources appropriately accounted for, or the cost
of its activities are accurately measured.  Concerns continue over
whether DOD (1) has comprehensively identified all the systems it
relies on to carry out its financial management operations; (2)
corrected weaknesses that would allow both hackers and hundreds of
thousands of legitimate users with valid access privileges to modify,
steal, inappropriately disclose, and destroy sensitive DOD data; and
(3) effectively documented how it conducts its financial management
operations now and plans to in the future.  Effectively documenting
the Department's concept of its financial operations is a
particularly critical step because of the organizational complexity
of DOD's financial management activities. 

Given the seriousness and long-standing nature of these weaknesses in
DOD's financial management operations, we are continuing to monitor
this area as part of our high-risk program.  Taken together, the
material deficiencies in DOD's financial operations represent the
single largest obstacle that must be effectively addressed to obtain
an unqualified opinion on the entire U.S.  government's consolidated
financial statements.  These weaknesses must be effectively addressed
if DOD is to put into place the disciplined financial practices
needed to produce credible financial information not only for
financial statements but also for support of operational and
budgetary decisionmaking and maintaining effective accountability
over DOD's vast resources. 

DOD has many well-intentioned planned and ongoing financial
management reform and improvement efforts.  DOD is developing a
detailed action plan, in collaboration with the Office of Management
and Budget, GAO, and the DOD audit community, to identify short-term
initiatives to address the Department's financial reporting
deficiencies.  Furthermore, the National Defense Authorization Act of
1998 requires DOD to develop a broad-based plan for improving its
financial management operations and specified a number of financial
management areas that DOD was to address.  In response, in late
October 1998, DOD issued its first Biennial Financial Management
Improvement Plan. 

In presenting the Biennial Plan, the Secretary of Defense stated that
it included almost all aspects of financial management in the
Department and established the Department's strategy for managing its
financial management operations.  The plan sets out the Department's
first-ever attempt to describe the overall concept of its future
financial management operations.  The plan is intended to encompass
both DOD's financial systems and the program feeder systems that
originate and provide an estimated 80 percent of the data processed
in the Department's financial systems.  While DOD's plan represents
an important step in improving the Department's financial management
operations, the plan needs to be supplemented with additional
elements in order to put in place the structure needed to address all
of the needed aspects of long-term financial management performance
improvement. 


      KEY CONTACT
-------------------------------------------------------- Chapter 1:1.2

Lisa G.  Jacobson, Director
Defense Audits
Accounting and Information Management
 Division
(202) 512-9095
[email protected]


      INFORMATION MANAGEMENT AND
      TECHNOLOGY ISSUES POSE MAJOR
      CONCERNS
-------------------------------------------------------- Chapter 1:1.3

DOD relies extensively on computer systems to carry out its
operations related to intelligence, surveillance, and security;
sophisticated weaponry; and routine business and financial management
functions.  This reliance will only grow as the Department moves to
modernize and respond to technological advances that are changing the
traditional concepts of warfighting through improved intelligence and
improved command and control.  Maintaining and modernizing this
support in an efficient and secure manner across a department as
large and diverse as DOD is an enormous challenge. 

DOD faces a number of very serious management challenges to ensure
that technology-driven processes and business systems provide an
adequate level of service and an appropriate rate of return on
investments.  The most immediate challenge facing the Department is
ensuring that its key mission and business functions continue to
operate after the year 2000.  Other issues, while not tied to
immovable deadlines, are also important to the Department's ability
to provide cost-effective, accurate information and services.  These
issues involve information security and management of DOD's
information technology investment process. 


         PROGRESS ON YEAR 2000
         CONVERSION IS SLOW
------------------------------------------------------ Chapter 1:1.3.1

The Department of Defense relies on computer systems for virtually
all its operations, including strategic and tactical operations,
sophisticated weaponry, intelligence, surveillance and security
efforts, and more routine business functions such as payroll and
logistics.  The Year 2000 problem results from the inability of
computer systems to correctly interpret recorded dates when only two
digits are used to indicate the year, such as "98" for "1998."
Federal agencies are making significant efforts to correct the
problems, and, in February 1997, we designated the Year 2000
conversion problem as a governmentwide high-risk area.  For an
organization as large as DOD--with over 1.5 million computers, 28,000
systems, and 10,000 networks--addressing the Year 2000 problem is a
formidable task. 

DOD has an enormous effort underway to remediate its mission-critical
systems and ensure that its key operational missions will continue to
function after the century date change.  That effort is at risk.  We
have issued 10 reports and the DOD IG and audit agencies have issued
130 reports that continue to question the Department's management of
its Year 2000 program.  For example: 

  -- The Department lacks reliable, timely information on program
     status. 

  -- Component reports on systems compliance are often inaccurate. 

  -- Contingency plans (developed in the event of system failure) are
     frequently not executable. 

  -- Inconsistent guidance has led to false starts and uncoordinated
     efforts. 

In order to address these issues, we recommended in April 1998 that
the Department establish a strong department-level program office to
oversee the Year 2000 program, clearly define criteria for
prioritizing systems for repair, and establish better reporting
mechanisms.\2 Our concerns about the Department's ability to meet its
critical operational missions led to a requirement in the House
Conference Report accompanying the current fiscal year appropriations
(H.  Rept.  105-746) that DOD--as part of its training exercises
program--develop a plan for evaluating Year 2000 compliance in a
variety of training exercises.  DOD is to

     "evaluate, in an operational environment, the extent to which
     information technology and national security systems involved in
     those exercises will successfully operate during the actual year
     2000, including the ability of those systems to access and
     transmit information from point of origin to point of
     termination."

Collectively, the Department's weaknesses in developing a strong
management process seriously endangers its chances of successfully
meeting the Year 2000 deadline and meeting the requirements detailed
previously.  The Department needs to improve its management oversight
to minimize the risk of failure to its mission-critical systems and
the operations they support. 

To its credit, DOD's senior management has concurred with all of our
recommendations and has taken an increasingly active, highly visible
interest in taking corrective action.  The Department has been
similarly responsive to the DOD IG recommendations.  The senior
management team--led by the Deputy Secretary--meets on a regular
basis to assess program direction and take action based on that
assessment. 

Nevertheless, the Department remains behind schedule in completing
its systems remediation and is still grappling with the program
management issues described above.  As a result, the Office of
Management and Budget (OMB), in its November 15, 1998, report on
federal agencies' progress on Year 2000 conversion, has placed the
Department on its "Tier 1" list--those agencies "where there is
insufficient evidence of adequate progress."


--------------------
\2 Defense Computers:  Year 2000 Computer Problems Threaten DOD
Operations (GAO/AIMD-98-72, Apr.  30, 1998). 


         ENSURING NEEDED
         CAPABILITIES REQUIRES
         EFFECTIVE MANAGEMENT OF
         INFORMATION TECHNOLOGY
         PROJECTS
------------------------------------------------------ Chapter 1:1.3.2

To promote improvements in the selection and control of information
technology projects, the Clinger-Cohen Act of 1996 requires federal
agencies to have processes and information in place to help ensure
that such projects are (1) being implemented at acceptable costs,
within reasonable and expected time frames and (2) contributing to
tangible, observable improvements in mission performance.  DOD has
taken steps to implement these requirements.  However, it faces a
major challenge in implementing real change in its current
organizational structure and culture, which impedes oversight and
coordination of information resources from a Departmentwide
perspective.  Accordingly, we are continuing to designate DOD's
information technology project management efforts as high risk.  In
previous reports, these efforts were referred to as the "Corporate
Information Management Initiative," a term that we are discontinuing
because it is no longer widely used in DOD. 

A prime example of DOD's poor management of information technology is
its $18-billion system migration effort to replace almost 2,000
duplicative and inefficient systems throughout the Department.  One
functional area of the migration effort, which we reported on in
1996, spent over $700 million pursuing a substantially flawed
effort--which was later abandoned--without rigorous Department-level
oversight.  In October 1997, we reported that such management
problems persisted and that the Department had little assurance that
the migration systems being developed would help achieve DOD's
technology goals. 

Effective information technology project planning and oversight are
especially important as DOD moves to coordinate its thousands of
decentralized command, control, communications, intelligence,
surveillance, and reconnaissance systems in order to ensure
information superiority over our nation's enemies.  To this end, we
made a number of recommendations that would establish and enforce
processes to thoroughly examine alternatives and develop business
cases before investing in migration systems.  Further, we recommended
that system investments be consistent with the Department's technical
standards and that controls and performance measures be established
to allow management "visibility" over system development efforts. 
The Department generally agreed with these recommendations and is now
finalizing a plan that will show how it intends to meet with the
requirements of the Clinger-Cohen Act. 


         INFORMATION SECURITY IS A
         MAJOR CONCERN
------------------------------------------------------ Chapter 1:1.3.3

Securing DOD's vast array of networked computers is a major
challenge.  Defense's computer systems are particularly susceptible
to attack through connections on the Internet, which Defense uses to
enhance communication and information sharing.  In May 1996, we
reported that attacks on Defense computer systems were a serious and
growing threat.\3 The exact number of attacks could not be readily
determined because tests showed that only a small portion were
actually detected and reported.  However, the Defense Information
Systems Agency estimated that attacks numbered in the hundreds of
thousands per year and were successful 65 percent of the time and
that the number of attacks was doubling each year.  At a minimum,
these attacks are a multimillion-dollar nuisance to DOD.  At worst,
they are a serious threat to national security. 

According to Defense officials, attackers have obtained and corrupted
sensitive information:  they have stolen, modified, and destroyed
both data and software.  They have installed unwanted files and "back
doors" that circumvent normal system protection and allow attackers
unauthorized future access.  They have shut down and crashed entire
systems and networks, denying service to users who depend on
automated systems to help meet critical missions.  Numerous DOD
functions have been adversely affected, including weapons and
supercomputer research, logistics, finance, procurement, personnel
management, military health, and payroll.  In March 1998, DOD
announced that it had recently identified a new series of organized
intrusions, indicating that such events continue to be a problem. 

The same weaknesses that allow attacks from outsiders could also be
exploited by authorized users to commit fraud or other improper or
malicious acts.  In fact, knowledgeable insiders with malicious
intentions can be a more serious threat to many operations, since
they are more likely to know of system weaknesses and of ways to
disguise inappropriate actions. 

Audit reports have identified a broad array of problems.  One of the
most fundamental issues, which we reported on in August 1998, is that
DOD has not completed development of an architecture, or blueprint,
for its command, control, and communications systems.\4

Without such an architecture, DOD will find it difficult to ensure
that these systems, which are essential to DOD's long-term plans for
ensuring information superiority, are adequately protected.  Other
reports have identified specific control weaknesses in existing
systems that increase the risks of damage from intrusions as well as
from malicious acts and inadvertent mistakes by authorized users. 
For example, in April 1998, we testified that, based on our fiscal
year 1997 financial statement audit work, DOD's computer controls did
not provide adequate protection of significant financial applications
involving personnel, payroll, disbursements, and inventory
information.\5 In September 1997, we reported that DOD had not
adequately (1) controlled the ability of computer programmers to make
changes to systems supporting the Military Retirement Trust Fund, (2)
controlled access to sensitive information on pension fund
participants, or (3) developed or tested a comprehensive disaster
recovery plan for the sites that process Fund data.  These weaknesses
expose sensitive data maintained by these systems to unnecessary risk
of disclosure, and should a disaster occur, there is no assurance
that the operations supported by these facilities could be restored
in a timely manner.\6 Similarly, in October 1997, the DOD IG reported
serious authentication and access control weaknesses associated with
a system that in fiscal year 1996 maintained contract administration
and payment data on a reported 387,000 contracts valued at over $810
billion.\7 Weaknesses in other areas, too sensitive to be reported
publicly, pose risks of more serious consequences. 

Reports to DOD have included numerous recommendations related to
specific control weaknesses as well as the need to establish a
defined systems architecture and a comprehensive program for improved
information security management.  DOD is taking a variety of steps to
address these problems and is establishing the Departmentwide
Information Assurance Program to improve and better coordinate the
information security-related activities of the military services and
other DOD components.  A sustained effort will be needed to ensure
that these efforts are successful. 


--------------------
\3 Information Security:  Computer Attacks at Department of Defense
Pose Increasing Risks (GAO/AIMD-96-84, May 22, 1996). 

\4 Defense Information Superiority:  Progress Made, but Significant
Challenges Remain (GAO/NSIAD/AIMD-98-257, Aug.  31, 1998). 

\5 Department of Defense:  Financial Audits Highlight Continuing
Challenges to Correct Serious Financial Management Problems
(GAO/T-AIMD/NSIAD-98-158, Apr.  16, 1998). 

\6 Financial Management:  Review of the Military Retirement Trust
Fund's Actuarial Model and Related Computer Controls
(GAO/AIMD-97-128, Sept.  9, 1997). 

\7 General and Application Controls Over the Mechanization of
Contract Administration Services System, DODIG, Report Number 98-007,
Oct.  9, 1997. 


      KEY CONTACT
-------------------------------------------------------- Chapter 1:1.4

Jack L.  Brock, Jr., Director
Governmentwide and Defense Information
 Systems
Accounting and Information Management
 Division
(202) 512-6240
[email protected]


      WEAPON SYSTEMS ACQUISITION
      PROBLEMS PERSIST
-------------------------------------------------------- Chapter 1:1.5

DOD spends about $85 billion annually to research, develop, and
acquire weapon systems.  Although DOD has many acquisition reform
initiatives in process, pervasive problems persist regarding (1)
questionable requirements and solutions that are not the most
cost-effective available; (2) unrealistic cost, schedule, and
performance estimates; (3) questionable program affordability; and
(4) the use of high-risk acquisition strategies.  We have reported
that weapon systems acquisition is a high-risk area, and it remains
on our high-risk list. 


         REQUIREMENTS ARE
         QUESTIONABLE AND NOT
         COST-EFFECTIVE
------------------------------------------------------ Chapter 1:1.5.1

DOD acquisition policies require analyses of missions, mission needs,
costs, and weapon system alternatives to ensure that cost-effective
solutions are matched to valid needs before substantial resources are
committed to a particular program.  An important objective is to
minimize overlap and duplication among weapon systems that perform
the same or similar missions.  We have found that while the services
conduct considerable analyses in justifying major acquisitions, these
analyses can be narrowly focused, without full consideration of
alternative solutions, including the joint acquisition of systems
with the other services.  In addition, because DOD does not routinely
develop information on joint mission needs and aggregate
capabilities, it has little assurance that decisions to buy, modify,
or retire systems are sound.  We continue to uncover and report on
questionable mission needs and on systems that are not the most
cost-effective solution to a mission need.  For example: 

  -- DOD could have met its strategic airlift requirements and
     achieved a significant life cycle cost savings by buying fewer
     C-17s than planned;

  -- by increasing the total annual buy of Blackhawk helicopter
     derivatives for Marine Corps and other requirements, DOD could
     save over $700 million in research and development and
     procurement costs;

  -- the Army's procurement quantities for the Longbow Hellfire
     missile were significantly overstated;

  -- DOD's plan to lease satellite communications from commercial
     providers rather than replace the Defense Satellite
     Communications System in 2003 may not be cost-effective; and

  -- the Air Force and the Navy used inconsistent data to calculate
     the number of joint aircraft training systems needed for primary
     pilot training. 


         UNREALISTIC COST,
         SCHEDULE, AND PERFORMANCE
         ESTIMATES
------------------------------------------------------ Chapter 1:1.5.2

In our high-risk reports, we noted that the desire of program
sponsors to keep cost estimates as low as possible and to present
attractive milestone schedules had encouraged the use of unreasonable
assumptions about the pace and magnitude of the technical effort,
material costs, production rates, savings from competition, and other
factors.  We continue to find and report on overly optimistic program
projections and execessive risks in light of the current budget and
security environment.  For example: 

  -- In restructuring the F-22 program, it is doubtful that the Air
     Force can offset the $13-billion projected increase in
     production costs because many of the cost-cutting initiatives it
     identified were not well defined;

  -- F/A-18E/F development and production costs are likely to be
     greater than projected by the Navy;

  -- the Navy Area Theater Ballistic Missile Defense Program has
     experienced schedule slips, and further slips are possible
     because of its highly optimistic schedule for conducting
     operational tests;

  -- despite many years in development, the V-22 had yet to achieve
     program stability in terms of cost or aircraft design;

  -- B-2 costs may be understated if the Air Force plans to correct
     deficiencies identified during testing, including the
     acquisition of shelters for use in forward operating locations
     to preserve the features that make the aircraft difficult to
     detect, and to provide the originally planned performance; and

  -- the projected cost of the Navy's New Attack Submarine has grown
     and will increase further due to the level of technical and
     schedule risks in the program. 


         QUESTIONABLE PROGRAM
         AFFORDABILITY
------------------------------------------------------ Chapter 1:1.5.3

Each year for the past several years, we have reported that DOD's
Future Years Defense Program could not be executed with available
funds.  We concluded that DOD's tendency to overestimate the funding
that would be available in the future, coupled with the tendency to
underestimate program costs, had resulted in the advent of more
programs than could be executed as planned.  When DOD finally faced
funding reality, it often reduced, delayed, and/or stretched out
programs, substantially increasing the cost of each system.  In
addition to the higher unit costs caused by program stretchouts,
another affordability issue is DOD's potential inability to address
valid requirements when available resources are consumed on
questionable priorities.  We continue to find and report on numerous
problems with DOD's budgeting and spending practices for weapon
system acquisitions.  For example: 

  -- In analyzing the 1998 Future Years Defense Program, we found
     that funding for infrastructure activities was projected to
     increase, while procurement funding was projected to be lower
     than anticipated.  Nonetheless, DOD is pursuing a number of
     major system acquisition programs on the assumption that
     infrastructure savings will materialize. 

  -- DOD's ambitious aircraft modernization program is neither
     realistic nor justified given current and projected budgetary
     constraints. 

  -- Despite the current budgetary constraints, DOD plans to double
     its spending on guided weapons over the next 10 years. 

  -- Although the Navy has not yet explained how they relate to
     current national defense strategy, its plans to modernize its
     surface combatant force hinge on optimistic budget assumptions. 


         HIGH-RISK ACQUISITION
         STRATEGIES
------------------------------------------------------ Chapter 1:1.5.4

In our previous high-risk reports, we stated that high-risk
acquisition strategies, such as the acquisition of weapons based on
optimistic assumptions about the maturity and availability of
enabling technologies, were being based on the need to meet the
threat and to reduce acquisition costs.  We have also reported on the
high-risk practice of beginning production of a weapon system before
development, testing, and evaluation are complete.  When a highly
concurrent strategy is used, critical decisions are made without
adequate information about a weapon's demonstrated operational
effectiveness, reliability, logistic supportability, and readiness
for production.  Also, rushing into production before critical tests
have been successfully completed has resulted in the purchase of
systems that do not perform as intended.  These premature purchases
have resulted in lower-than-expected availability of systems for
operations and have quite often led to expensive modifications.  In
today's national security environment, proceeding with low-rate
production without demonstrating that the system will work as
intended should rarely be necessary.  Nevertheless, DOD still begins
production of many major and nonmajor weapons without first providing
that the systems will meet critical performance requirements, as
indicated in the following examples: 

  -- DOD's approval of the Joint Surveillance Target Attack Radar
     System's full-rate production was premature and risky because
     the system's operational effectiveness and suitability for
     combat were not yet demonstrated and plans to address
     deficiencies and reduce program costs were not completed;

  -- the plan to develop and deploy a National Missile Defense System
     in only 6 years is fraught with risks, including possible
     schedule slippages and technical problems stemming from limited
     testing;

  -- the Army's acquisition plan for the Theater High Altitude Area
     Defense Program calls for significant production of deployment
     hardware almost 2 years before beginning independent operational
     testing to assess the system's operational effectiveness;

  -- although already in low-rate production, serious deficiencies
     found in developmental testing raise questions about the
     F/A-18E/F's operational performance; and

  -- testing delays are expected to limit the information available
     to support the Air Force's plans to start F-22 production. 


         ACQUISITION REFORM AND
         THE PROSPECTS FOR CHANGE
------------------------------------------------------ Chapter 1:1.5.5

Acquisition reforms under way by DOD have a sound basis and have the
potential for improving the outcomes of weapons systems.  Commercial
practices for gaining knowledge and assessing risks can also help
produce better outcomes on DOD acquisitions.  DOD's leadership is
genuinely committed to making a difference in the status quo. 
However, lasting improvements in the outcomes of acquisition programs
will not be realized unless the incentives that drive behaviors in
the acquisition process are changed. 

The competition for funding when a program is launched encourages
aspiring DOD program managers to include performance features and
design characteristics that rely on immature technologies.  In this
environment, risks in the form of ambitious technology advancements
and tight cost and schedule estimates are accepted as necessary for a
successful launch.  Problems or indications that the estimates are
decaying do not help sustain programs in later years, and thus
admission of them is implicitly discouraged.  There are few rewards
for discovering and recognizing potential problems early in program
development. 

Acquisition reforms and commercial practices can help produce better
outcomes on DOD acquisitions if they help a program succeed in its
environment.  For lasting reform, the incentives of the weapon
acquisition process must be realigned with desired program outcomes. 
Changing these incentives--that is, redefining program success--will
take the efforts of the Congress as well as DOD and the services.  A
major step in this direction is redefining the point for launching
programs as the point at which technology development ends and
product development begins.  Making the launch point later in the
acquisition cycle is consistent with the practices of leading
commercial firms and can relieve some of the pressure for programs to
overpromise on performance and resource estimates.  Once a program is
under way, the Congress and DOD must make it acceptable for program
managers to identify unknowns as high risks so that they can be
aggressively worked on earlier in development. 


      KEY CONTACT
-------------------------------------------------------- Chapter 1:1.6

Louis J.  Rodrigues, Director
Defense Acquisition Issues
National Security and
 International Affairs Division
(202) 512-4841
[email protected]


      IMPROVED PROCESSES AND
      CONTROLS KEY TO REDUCING
      CONTRACT RISK
-------------------------------------------------------- Chapter 1:1.7

DOD spends in excess of $100 billion a year contracting for goods and
services.  Since 1995, we have reported DOD contract management as a
high-risk area, and it remains on our list of high-risk areas.  Over
the last few years, several broad-based changes have been made to DOD
acquisition and contracting processes to improve the way DOD relates
to its contractors and the rules governing their relationships.  And
the changes are by no means complete.  Acquisition reform, with its
emphasis on widespread reengineering of fundamental processes,
continues to receive attention at the highest levels in DOD. 

Our work, and that of the DOD IG, continue to identify risks in DOD
contracting activity.  For example, DOD continues to experience
problems with erroneous, fraudulent, and improper payments to its
contractors; paying higher prices for commercial spare parts than
necessary; and awarding and administering its health care contracts. 


         FIXING DOD'S HIGH-RISK
         PAYMENT SYSTEMS IS
         IMPERATIVE
------------------------------------------------------ Chapter 1:1.7.1

The need for DOD to achieve effective control over its payment
process remains an imperative.  If it does not, DOD continues to risk
erroneously paying contractors millions of dollars and perpetuating
other financial management and accounting control problems.  While
DOD is taking steps to improve its payment process and controls, it
will likely take an extended period of time to get its payment
problems under control. 

DOD receives about a billion dollars a year in checks from defense
contractors.  While some of these are the result of contract changes
that result in reduced prices, others represent errors by DOD's
payment center.  DOD is conducting a demonstration program to
evaluate the feasibility of using private contractors to identify
overpayments made to vendors.  Through this process, known as
recovery auditing, the contractor has identified about $19 million in
overpayments.  DOD is examining opportunities to expand the use of
recovery auditing, which we believe offers potential to identify
overpayments. 

In addition to erroneous payments, weak systems and internal controls
can leave DOD vulnerable to fraud and improper payments.  Our
September 1998 report discussed two cases of fraud that resulted from
a weak internal control environment.\8 The lack of segregation of
duties and other control weaknesses, such as weak controls over
remittance addresses, created an environment in which employees were
given broad authority and the capability, without compensating
controls, to perform functions that should have been performed by
separate individuals under proper supervision.  For example, as of
mid-June 1998, over 1,800 Defense Finance and Accounting Service
(DFAS) and Air Force employees had a level of access to the vendor
payment system that allowed them to enter contract and payment
information and remittance addresses needed to create payment
vouchers.  No one individual should control all key aspects of a
transaction or event without appropriate compensating controls. 
Moreover, we found that the automated vendor payment system was
vulnerable to penetration by unauthorized users due to weaknesses in
computer security, including inadequate password controls. 

Further, DFAS lacked procedures to ensure that it could properly
document the date that Air Force vendor invoices were received for
payment and that goods and services were received.  These are
critical dates for ensuring timely vendor payments and the avoidance
of interest under the Prompt Payment Act. 

In addition, we found that DFAS and the Air Force lacked
documentation to determine what payments had been made on two Bolling
Air Force Base office automation contracts (let in 1986 and 1992). 
Further, due to incomplete and inaccurate property records, we were
unable to determine whether the Air Force received the goods and
services paid for under these contracts. 


--------------------
\8 Financial Management:  Improvements Needed in Air Force Vendor
Payments Systems and Controls (GAO/AIMD-98-274, Sept.  28, 1998). 


         CHALLENGES IN ADJUSTING
         TO COMMERCIAL CONTRACT
         PRICING PRACTICES
------------------------------------------------------ Chapter 1:1.7.2

In recent years, DOD has significantly changed the way it acquires
goods and services by removing what were considered barriers to
efficient and effective use of the commercial marketplace.  A major
focus of these changes is the adoption of commercial buying
practices.  For example, for an increasing number of contracts for
sole-source spare parts, DOD is transitioning from a cost-based
pricing environment, in which contractor costs are the basis to
negotiate prices, to a market-based or commercial pricing environment
in which factors other than cost, such as pricing data, are the
principal means used to determine the reasonableness of prices. 
While the level of commercial contracting remains relatively small
compared to total DOD procurement, it is likely to increase
substantially in the coming years. 

We and the DOD IG have found that DOD needs to strengthen the quality
of its price analyses.  For example, the IG found that DOD had not
formulated good procurement and management strategies for commercial
parts in the acquisition reform environment.  As a result, DOD was
paying higher prices for commercial spare parts than necessary.  Our
work also identified cases in which limited analysis of commercially
offered prices resulted in significantly higher prices than
previously paid.  DOD is taking steps to improve its workforce
training in commercial buying and pricing.  How well DOD's shrinking
acquisition workforce will adjust to the increasing commercial
pricing environment remains to be seen; it continues to be an area of
high contract risk. 


         CONTRACTS FOR DOD HEALTH
         CARE MANAGEMENT FACE
         RISKS
------------------------------------------------------ Chapter 1:1.7.3

DOD's implementation of health care management programs, particularly
the TRICARE Program, further illustrates DOD's difficulty in managing
contracts.  TRICARE was established during a period of military
downsizing and budget concerns to contain costs and maintain access
to and the quality of health care for DOD's 8.2 million
beneficiaries.  However, TRICARE's implementation, entailing the
award of seven competitively bid, 5-year contracts, has been fraught
with problems.  All seven contracts, totaling about $15 billion, were
protested.  As a result, DOD and the competitors incurred added
costs, and the program was significantly delayed.  Three of the
protests were sustained, resulting in further delays. 

Also, we identified problems with the change order process, including
the protracted settlement of the orders.  As of November 1998, over
350 change orders to the TRICARE contracts had not been settled.  As
a result of this experience, DOD set out to develop and introduce
during next year's new round of contracts a more simplified
procurement approach.  The approach is to be less prescriptive than
the current contracts, relying on bidders, for example, to propose
their most cost-effective, proven care practices.  But, because the
new solicitation approach will be less prescriptive, DOD's evaluation
of proposals will be made more subjective and perhaps more difficult. 
Such challenges have prompted DOD instead to seek 2-year extensions
of the current contracts while it continues to refine its new
approach. 

Whether DOD can successfully develop and launch the new method, and
whether what it designs will reduce the current volume of contract
changes or control health care costs remains to be seen. 



      KEY CONTACTS
-------------------------------------------------------- Chapter 1:1.8

Louis J.  Rodrigues, Director
Defense Acquisitions Issues
National Security and International
 Affairs Division
(202) 512-4841
[email protected]

Stephen P.  Backhus, Director
Veterans' Affairs and Military Health
 Care Issues
Health, Education, and Human Services
 Division
(202) 512-7111
[email protected]


   PROGRAM MANAGEMENT CHALLENGES
---------------------------------------------------------- Chapter 1:2


      DEFENSE INFRASTRUCTURE CAN
      BE BETTER STREAMLINED
-------------------------------------------------------- Chapter 1:2.1

DOD officials have cited the importance of using resources for the
highest priority operational and investment needs rather than
maintaining unneeded property, facilities, and overhead.  However,
DOD has found that infrastructure reductions are difficult and
painful because achieving significant cost savings requires up-front
investments, the closure of installations, and the elimination of
military and civilian jobs.  DOD's ability to reduce infrastructure
has been affected by service parochialism, a cultural resistance to
change, and congressional and public concern about the effects and
impartiality of decisions.  For fiscal year 1998, DOD estimated that
about $147 billion, or 58 percent of its budget, would still be
needed for infrastructure requirements, which included installation
support, training, medical care, logistics, force management,
acquisition infrastructure, and personnel.  In February 1997, we
identified defense infrastructure as a high-risk area, and it remains
on our high-risk list. 

The Secretary of Defense's November 1997 DRI Report emphasizes the
need to reduce excess Cold War infrastructure to free up resources
for force modernization.  Specific initiatives cited in the report
included privatizing military housing and utility systems,
emphasizing demolition of excess buildings, consolidating and
regionalizing many defense support agencies, and requesting
legislative authority to conduct two additional base realignment and
closure (BRAC) rounds.  The Secretary noted that DOD continued to be
weighed down by facilities that are too extensive for its needs, more
expensive than it can afford, and detrimental to the efficiency and
effectiveness of the nation's armed forces.  Likewise, he noted that
DOD must do a better job of managing facility assets on its remaining
bases.  In responding to section 2824 of the Fiscal Year 1998 Defense
Authorization Act, DOD emphasized the problem of continuing excess
infrastructure in its April 1998 report to the Congress concerning
BRAC issues.  More recently, in our November 1998 report on Army
industrial facilities, we noted the continuing existence of
significant excess capacity in the Army's maintenance depots and
manufacturing arsenals. 

While the defense reform initiatives are steps in the right direction
and have brought high-level attention to the need for infrastructure
reductions, collectively they do not provide a comprehensive
long-range plan for facilities infrastructure.  We have cited the
need for such a plan but have noted that DOD's past plans were not
focused on long-term comprehensive strategies for facilities
revitalization, replacement, and maintenance and were not tied to
measurable goals to be accomplished over specified time frames or
linked to funding. 

The need for improved planning for facilities infrastructure is
underscored by the requirements of the Government Performance and
Results Act of 1993.  Improved infrastructure planning can help
agency components and programs to develop outcome-oriented goals and
performance measures that are linked to and support agencywide goals. 

While we have not completed an in-depth analysis of all the
categories of infrastructure, we have identified numerous areas in
which infrastructure activities can be eliminated, streamlined, or
reengineered to be made more efficient.  Significant efficiencies
could be achieved in the areas of acquisition infrastructure, central
logistics, installation support, central training, force management,
and medical facilities and services. 


      KEY CONTACT
-------------------------------------------------------- Chapter 1:2.2

David R.  Warren, Director
Defense Management Issues
National Security and
 International Affairs Division
(202) 512-8412
[email protected]


      INVENTORY MANAGEMENT
      PROBLEMS PERSIST IN DOD
-------------------------------------------------------- Chapter 1:2.3

In 1990, we identified DOD's management of secondary inventories
(spare and repair parts, clothing, medical supplies, and other items
to support the operating forces) as a high-risk area because levels
of inventory were too high and management systems and procedures were
ineffective.  While some improvements have been made, these general
conditions still exist; this area still remains on our high-risk
list. 

DOD has had inventory management problems for decades.  In the short
term, DOD still needs to emphasize the efficient operation of its
existing inventory systems.  In the long term, DOD must establish
goals, objectives, and milestones for changing its culture and
adopting new management tools and practices.  Cultural changes, by
their nature, are slowly achieved, and DOD's key initiatives to
improving inventory management have progressed slowly.  Unless DOD
takes more aggressive actions to correct systemic problems, its
inventory management problems will continue into the next century. 

Adequate inventory oversight has yet to be achieved.  In 1995, we
reported that DOD's strategic plans for logistics called for
improving asset visibility in such areas as in-transit assets, retail
level stocks, and automated systems.\9 DOD was to completely
implement asset visibility plans by 1996, later changed that date to
2001, and now will not completely implement its current plan until
2004.  The lack of adequate visibility over operating materials and
supplies substantially increases the risk that millions of dollars
will be spent unnecessarily.  For example, the Navy's fiscal year
1996 financial statements did not include information on $7.8 billion
in inventories on board ships and at Marine Corps activities. 

DOD has not taken sufficient steps to ensure the accuracy of
inventory requirements to preclude the acquisition of unneeded items. 
For example, in April 1998 we reported that the Navy did not always
have valid requirements to support inventory purchases.  The Navy
could have eliminated about $13 million of planned program
requirements for 68 of 200 items we reviewed because the requirements
were also included in the reorder-level requirement.  While we could
not precisely quantify the overall extent of the problem, this double
counting could be indicative of a larger problem because the Navy has
a total of about $3.3 billion of planned program requirements that
affect purchase decisions.  The Navy could also have done a better
job of canceling contracts for excess inventory.  A major reason for
not canceling more purchases was that the Navy adds "protection
levels" representing as much as
2 years of usage before considering cancellation, and it cancels only
the amount of the purchases that exceeds the protection levels. 

The vulnerability of in-transit inventory to waste, fraud, and abuse
is another area of concern.  In February 1998, we reported that DOD
did not have receipts for about
60 percent of its 21 million shipments to end users in fiscal year
1997.  Later work shows that, over the last 3 years, the Navy alone
reportedly wrote off as lost over $3 billion in in-transit inventory. 
The vulnerability to waste, fraud, and abuse also extends to DOD's
disposal of surplus property.  In October 1997, we reported that DOD
destroyed and sold as scrap some usable aircraft parts in new or
repairable condition that could have been sold intact at higher than
scrap prices.  In contrast, in August 1998, we reported that DOD
inadvertently sold surplus parts with military technology intact.  In
these cases, management controls were insufficient to preclude these
conditions. 


--------------------
\9 Asset visibility is intended to provide defense personnel with
timely and accurate information on the location, movement, status,
and identity of units, personnel, equipment, and supplies across all
DOD components. 


         APPLYING BEST MANAGEMENT
         PRACTICES TO DEFENSE
         INVENTORY MANAGEMENT
------------------------------------------------------ Chapter 1:2.3.1

Recently, the Congress enacted legislation requiring the Defense
Logistics Agency (DLA) and the services to develop and submit
schedules for implementing best commercial practices in its
acquisition and distribution of inventory items.  The legislation
calls for the implementation of best practice initiatives to be
completed within the next 3 years in the case of DLA and 5 years for
the services.  We are required to examine these schedules and report
on the extent to which the services have complied with their
legislative mandate and DLA and the services are implementing these
initiatives. 

DOD recognizes potential opportunities in adopting best practices. 
The Secretary of Defense's DRI, for example, seeks to reengineer DOD
support activities and business practices by incorporating many
business practices that private sector companies have used to become
leaner, more agile, and highly successful.  The initiative calls for
adopting modern business practices to achieve world-class standards
of performance in DOD operations.  The Secretary of Defense stated
that reforming DOD support activities is imperative to free up funds
to help pay for high priorities such as weapons modernization. 

Since 1991, we have issued 11 reports that identify significant
opportunities for DOD to test and adopt, where feasible, best
inventory management practices used in the private sector to improve
logistics operations and lower costs.  These reports have compared
DOD and private sector logistics practices for inventory managed by
DLA and each of the military departments.  The business practices we
recommended in our past reports have, for the most part, been used in
the private sector to enable customers to order supplies as they are
needed and receive them within hours.  This practice reduces overall
supply system costs, eliminates large inventories, and enables
companies to reduce or eliminate the ordering of supplies that may
not be needed or become obsolete.  To achieve similar inventory
reductions, infrastructure savings, and improved customer service, we
have recommended that DOD expand its current initiatives to their
fullest extent and include tasks such as ordering, storing, and
distributing supplies to the customer. 

We have also reported that some commercial airlines have cut costs
and improved customer service by streamlining their overall logistics
operations.  The most successful improvements took a supply-chain
management approach, which included using highly accurate information
systems to track and control inventory; employing various methods to
speed the flow of parts through the logistics pipeline; shifting
certain inventory tasks to suppliers; and having third parties handle
parts repair, storage, and distribution functions.  Adopting
practices similar to these could help DOD's repair pipelines become
faster and more responsive to its customers' needs. 


      KEY CONTACT
-------------------------------------------------------- Chapter 1:2.4

David R.  Warren, Director
Defense Management Issues
National Security and
 International Affairs Division
(202) 512-8412
[email protected]


      MILITARY PERSONNEL ISSUES
      NEED ATTENTION
-------------------------------------------------------- Chapter 1:2.5

DOD's recruiting and retention of a high-quality work force need top
management attention.  Our body of work in this area indicates that
DOD faces an especially significant challenge in retaining the
hundreds of thousands of new recruits it enlists each year.  While
each new enlistee signs a contract ranging from 2 to 6 years, most
first-term contracts are for 4 years.  Despite this contractual
obligation, we found that between fiscal year 1982 and 1993,
31.7 percent of all enlistees did not complete their first terms of
service:  11 percent of enlistees were separated during their first
6 months and 20.7 percent between their
7th and 48th month.  First-term attrition is costly:  DOD estimates
that the services' recruiting and training investment in each
enlistee during the first term is an average of $35,532.  Using DOD's
lower recruiting and training cost estimates for fiscal year 1993
(ranging from $19,143 to $24,885), we calculated that the services
spent $1.3 billion on the 72,670 enlistees who entered the services
in fiscal year 1993 and departed prematurely.  Because these
enlistees were separated early, the services did not get a full
return on their investment. 

Reexamining the roles of all persons involved in recruiting and
retaining enlistees is in keeping with the intent of the Results Act,
which requires agencies to clearly define their missions, to set
goals, and to link activities and resources to those goals. 
Recruiting and retaining well-qualified military personnel are among
the goals included in DOD's strategic plan required under the Act. 

In the first of a series of reports on recruiting and attrition, we
analyzed the reasons for enlistees' early separation during their
first
6 months of service, when most are undergoing or have just finished
basic training.  During that review, we found that thousands of
enlistees were separated because the services had not adequately
screened them prior to enlistment.  For example, about 83 percent of
the 25,000 who entered the services in fiscal year 1994 and were
discharged in their first 6 months had been assigned separation codes
indicating that they (1) were medically unqualified for military
service, (2) had character or behavior disorders, (3) had
fraudulently or erroneously entered the military, or (4) failed to
meet minimum performance criteria.  The services' screening processes
for past medical history were particularly lax, and the Navy and the
Marine Corps waited until recruits had arrived at basic training
before testing them for drugs.  Finally, recruiters did not have
adequate incentives to ensure that their recruits were qualified. 

In a follow-on report, we examined the services' recruiting processes
in more detail, including their methods of selecting recruiters,
screening recruits and preparing them for basic training, and
measuring and rewarding recruiter performance.  During this review,
we found that the services did not have effective procedures for
selecting the best candidates for recruiting duty and that monthly
goals created disincentives for recruiters to ensure that all their
recruits were fully qualified. 

Finally, in a third review, we analyzed why 21 percent of the
enlistees who entered the services in fiscal year 1993 were separated
early between their 7th and 48th month of service.  We found that
over 70 percent of the men in this group were separated for
misconduct, medical conditions, performance problems, or drug use. 
Over 71 percent of the women in this group were separated for
pregnancy, medical problems, misconduct, performance problems, or
parenthood.  While the services were concerned about attrition, they
had not provided guidance on what actions could be taken to deal with
identified problems or what accommodations could be made to retain
certain categories of enlistees who might be rehabilitated.  Though
our analysis of separation codes provided a rough approximation of
reasons for separation, these codes were not sufficient to capture
exactly why separations were occurring.  Interviews with 254
first-term enlistees showed that underlying quality-of-life issues
may lie at the root of many separations.  These issues include a
perceived erosion of medical and retirement benefits, advancement
opportunities, and pay, coupled with long hours and difficult and
frequent deployments. 

To address these problems, we recommended that DOD and the services
(1) resolve problems in their use of separation codes to better
analyze attrition; (2) improve their recruiter incentive systems by
tying these systems to recruits' successful completion of basic
training; (3) improve medical screening of recruits and move all drug
testing to the recruit processing stations; (4) identify specific
groups of enlistees that might be targeted for remedial action
through more counseling, optional testing, alternative job choices,
or remedial training; and (5) better use existing quality-of-life
surveys to identify what initiatives might be undertaken to reduce
the attrition of first-term personnel. 

DOD is now responding to all of our recommendations.  It has formed a
joint service working group to address recommendations in our report
on 6-month attrition, which were incorporated into the National
Defense Authorization Act for Fiscal Year 1998.  DOD has also agreed
to prepare a report by October 1999 documenting service initiatives
related to the recommendations in our report on 7- to 48-month
attrition.  Reducing attrition rates will be complex and difficult. 
However, considering the high cost of recruiting and training the
thousands of enlistees who do not complete their first terms of
service, the payoff of reducing attrition will be significant, since
savings could then be channeled to other defense priorities. 


      KEY CONTACT
-------------------------------------------------------- Chapter 1:2.6

Mark E.  Gebicke, Director
Military Operations and Capabilities Issues
National Security and
 International Affairs Division
(202) 512-5140
[email protected]


   ADDRESSING THE CHALLENGES
---------------------------------------------------------- Chapter 1:3

To address the management and performance problems we have cited, DOD
has taken actions in the high risk and other areas and has made
progress in improving some of them.  DOD has had some success in
addressing its inventory management problems, is working to reform
its weapon system acquisition process, and has recognized the need
for infrastructure reductions.  For example, in May 1997, the
Secretary of Defense issued the Report of the Quadrennial Defense
Review (QDR), required by the National Defense Authorization Act for
Fiscal Year 1997, which examines America's defense needs from 1997 to
2015, including issuing a blueprint for a strategy-based, balanced,
and affordable defense program.  In addition, DOD's latest efforts to
reform operations and processes are contained in the Secretary's DRI
Report, in which DOD proposed to revolutionize its business and
support operations by identifying and adopting best business
practices from the private sector. 

Although DOD's past and current efforts have resulted in progress in
improving its operations, persistent and long-standing problems still
exist.  Overcoming these challenges requires DOD to address the
underlying causes of these problems.  These causes include (1)
cultural barriers and service parochialism that limit opportunities
for change; (2) the lack of incentives for seeking and implementing
change; (3) the lack of comprehensive and reliable management data
for making decisions and measuring program costs and performance; (4)
the lack of clear, results-oriented goals and performance measures,
in some cases; and (5) inconsistent management accountability and
follow-through. 

To address these problems, DOD must have an effective overall
strategic plan for the agency and individual implementation plans for
each level of the organization that, among other things, include
goals, performance measures, and time frames for completing
corrective actions; and identify organizations and individuals
accountable for accomplishing specific goals.  Together with the
legislative requirements of the Chief Financial Officers Act, the
Paperwork Reduction Act, and the Clinger-Cohen Act, the Results Act
provides the framework for resolving high risk and other problems and
for providing greater accountability in DOD's programs and
operations. 

DOD, however, has not fully embraced the underlying principles in the
Results Act.  The Secretary of Defense has stated that the May 1997
Quadrennial Defense Review will serve as DOD's overall strategic
planning document and is intended to fulfill the requirements of the
Results Act.  Our review of DOD's strategic plan and its February
1998 performance plan disclosed many areas where improvements could
be made.  The principal shortcomings in DOD's plan center on
weaknesses in (1) establishing results-oriented performance goals
with explicit strategies and time frames for achieving them and (2)
addressing what DOD has done or plans to do to resolve its persistent
management problems.  In our opinion, DOD needs to work closely with
the Congress now to develop performance goals and measures. 
Addressing these areas would provide congressional decisionmakers and
DOD the information necessary to ensure that DOD's plans are well
thought out for resolving ongoing problems, achieving its goals and
objectives, and becoming more results oriented, as expected by the
Results Act. 


RELATED GAO PRODUCTS
============================================================ Chapter 2


   FINANCIAL MANAGEMENT
---------------------------------------------------------- Chapter 2:1

Financial Management:  Improvements Needed in Air Force Vendor
Payment Systems and Controls (GAO/AIMD-98-274,
Sept.  28, 1998). 

Financial Management:  Training of DOD Financial Managers Could Be
Enhanced (GAO/AIMD-98-126, June 24, 1998). 

Department of Defense:  Financial Audits Highlight Continuing
Challenges to Correct Serious Financial Management Problems
(GAO/AIMD/NSIAD-98-158, Apr.  16, 1998). 

CFO Act Financial Audits:  Programmatic and Budgetary Implications of
Navy Financial Data Deficiencies (GAO/AIMD-98-56, Mar.  16, 1998). 

Financial Management:  DOD Inventory of Financial Management Systems
Is Incomplete (GAO/AIMD-97-29, Jan.  31, 1997). 


   INFORMATION MANAGEMENT AND
   TECHNOLOGY
---------------------------------------------------------- Chapter 2:2

Information Security:  Serious Weaknesses Place Critical Federal
Operations and Assets at Risk (GAO/AIMD-98-92, Sept.  23, 1998). 

Defense Information Superiority:  Progress Made, but Significant
Challenges Remain (GAO/NSIAD/AIMD-98-257, Aug.  31, 1998). 

Defense Computers:  Year 2000 Computer Problems Threaten DOD
Operations (GAO/AIMD-98-72, Apr.  30, 1998). 

Defense Computers:  Air Force Needs to Strengthen Year 2000 Oversight
(GAO/AIMD-98-35, Jan.  16, 1998). 


   WEAPON SYSTEMS ACQUISITION
   MANAGEMENT
---------------------------------------------------------- Chapter 2:3

Future Years Defense Program:  Substantial Risks Remain in DOD's
1999-2003 Plan (GAO/NSIAD-98-204, July 31, 1998). 

Navy Aviation:  F/A-18E/F Development and Production Issues
(GAO/NSIAD-98-61, Mar.  13, 1998). 

Best Practices:  Successful Application to Weapon Acquisitions
Requires Changes in DOD's Environment (GAO/NSIAD-98-56, Feb.  24,
1998). 

National Missile Defense:  Schedule and Technical Risks Represent
Significant Development Challenges (GAO/NSIAD-98-28, Dec.  12, 1997). 



   CONTRACT MANAGEMENT
---------------------------------------------------------- Chapter 2:4

Financial Management:  Improvements Needed in Air Force Vendor
Payment Systems and Control (GAO/AIMD-98-274,
Sept.  28, 1998). 

DOD Procurement Fraud:  Fraud by an Air Force Contracting Official
(GAO/OSI-98-15,
Sept.  23, 1998). 

Defense Health Care:  Operational Difficulties and System
Uncertainties Pose Continuing Challenges for TRICARE
(GAO/T-HEHS-98-100, Feb.  26, 1998). 

Defense Health Care:  Despite TRICARE Procurement Improvements,
Problems Remain (GAO/HEHS-95-142, Aug.  3, 1995). 


   DEFENSE INFRASTRUCTURE
---------------------------------------------------------- Chapter 2:5

Army Industrial Facilities:  Workforce Requirements and Related
Issues Affecting Depots and Arsenals (GAO/NSIAD-99-31, Nov.  30,
1998). 

Military Bases:  Review of DOD's 1998 Report on Base Realignment and
Closure (GAO/NSIAD-99-17, Nov.  13, 1998). 

Defense Infrastructure:  Challenges Facing DOD in Implementing Reform
Initiatives (GAO/T-NSIAD-98-115, Mar.  18, 1998). 

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

Future Years Defense Program:  DOD's 1998 Plan Has Substantial Risk
in Execution (GAO/NSIAD-98-26, Oct.  23, 1997). 


   INVENTORY MANAGEMENT
---------------------------------------------------------- Chapter 2:6

Fraud, Waste, and Abuse:  The Cost of Mismanagement
(GAO/AIMD-98-265R, Sept.  14, 1998). 

Inventory Management:  More Information Needed to Assess DLA's Best
Practice Initiatives (GAO/NSIAD-98-218, Sept.  2, 1998). 

Defense Inventory:  Action Needed to Avoid Inappropriate Sales of
Surplus Parts (GAO/NSIAD-98-182, Aug.  3, 1998). 

Navy Inventory Management:  Improvements Needed to Prevent Excess
Purchases (GAO/NSIAD-98-86, Apr.  30, 1998). 

High-Risk Series:  Defense Inventory Management (GAO/HR-97-5, Feb. 
1997). 



   PERSONNEL MANAGEMENT
---------------------------------------------------------- Chapter 2:7

Military Attrition:  Better Data, Coupled With Policy Changes, Could
Help the Services Reduce Early Separations (GAO/NSIAD-98-213, Sept. 
15, 1998). 

Military Attrition:  DOD Needs to Better Analyze Reasons for
Separation and Improve Recruiting Systems (GAO/T-NSIAD-98-117, Mar. 
12, 1998). 

Military Recruiting:  DOD Could Improve Its Recruiter Selection and
Incentive Systems (GAO/NSIAD-98-58, Jan.  30, 1998). 

Military Attrition:  Better Screening of Enlisted Personnel Could
Save Millions of Dollars (GAO/T-NSIAD-97-120, Mar.  13, 1997). 

Military Attrition:  DOD Could Save Millions by Better Screening
Enlisted Personnel (GAO/NSIAD-97-39, Jan.  6, 1997). 


   STRATEGIC AND PERFORMANCE PLANS
---------------------------------------------------------- Chapter 2:8

Results Act:  DOD's Annual Performance Plan for Fiscal Year 1999
(GAO/NSIAD-98-188R, June 5, 1998). 

The Results Act:  Observations on DOD's Draft Strategic Plan
(GAO/NSIAD-97-219R, Aug.  5, 1997). 

DOD's GPRA Implementation (GAO/NSIAD/GGD-97-65R, Jan.  31, 1997). 


PERFORMANCE AND ACCOUNTABILITY
SERIES
============================================================ Chapter 3

Major Management Challenges and Program Risks:  A Governmentwide
Perspective (GAO/OCG-99-1)

Major Management Challenges and Program Risks:  Department of
Agriculture (GAO/OCG-99-2)

Major Management Challenges and Program Risks:  Department of
Commerce (GAO/OCG-99-3)

Major Management Challenges and Program Risks:  Department of Defense
(GAO/OCG-99-4)

Major Management Challenges and Program Risks:  Department of
Education (GAO/OCG-99-5)

Major Management Challenges and Program Risks:  Department of Energy
(GAO/OCG-99-6)

Major Management Challenges and Program Risks:  Department of Health
and Human Services (GAO/OCG-99-7)

Major Management Challenges and Program Risks:  Department of Housing
and Urban Development (GAO/OCG-99-8)

Major Management Challenges and Program Risks:  Department of the
Interior (GAO/OCG-99-9)

Major Management Challenges and Program Risks:  Department of Justice
(GAO/OCG-99-10)

Major Management Challenges and Program Risks:  Department of Labor
(GAO/OCG-99-11)

Major Management Challenges and Program Risks:  Department of State
(GAO/OCG-99-12)

Major Management Challenges and Program Risks:  Department of
Transportation (GAO/OCG-99-13)

Major Management Challenges and Program Risks:  Department of the
Treasury (GAO/OCG-99-14)

Major Management Challenges and Program Risks:  Department of
Veterans Affairs (GAO/OCG-99-15)

Major Management Challenges and Program Risks:  Agency for
International Development (GAO/OCG-99-16)

Major Management Challenges and Program Risks:  Environmental
Protection Agency (GAO/OCG-99-17)

Major Management Challenges and Program Risks:  National Aeronautics
and Space Administration (GAO/OCG-99-18)

Major Management Challenges and Program Risks:  Nuclear Regulatory
Commission (GAO/OCG-99-19)

Major Management Challenges and Program Risks:  Social Security
Administration (GAO/OCG-99-20)

Major Management Challenges and Program Risks:  U.S.  Postal Service
(GAO/OCG-99-21)

High-Risk Series:  An Update (GAO/HR-99-1)



The entire series of 21 performance and accountability reports and
the high-risk series update can be ordered by using the order number
GAO/OCG-99-22SET. 


*** End of document. ***