Defense Management: Challenges Facing DOD in Implementing Defense Reform
Initiatives (Testimony, 03/13/98, GAO/T-NSIAD/AIMD-98-122).

GAO discussed its work on the Department of Defense's (DOD) latest
reform initiatives, focusing on: (1) risks associated with reducing
budgets before savings are achieved; (2) challenges associated with
implementing DOD's various business process reengineering initiatives;
(3) opportunities to capitalize on consolidation and regionalization
opportunities; and (4) underlying management problems that need to be
addressed in implementing the reform initiatives.

GAO noted that: (1) DOD's plans to reduce outyear budgets before the
magnitude of savings is clearly known are not without risks; (2) this
risk is that operating units and field commanders will not have
sufficient funds to meet their readiness needs; (3) past reform
initiatives, like the Defense Management Review of the early 1990s,
started with much the same hope and promise of the Defense Reform
Initiative (DRI); (4) however, for a number of reasons, they were not
able to sustain themselves and fully achieve hoped for results; (5) in
many cases, DOD reduced its operations and maintenance budgets up front,
in anticipation that the savings would be realized; (6) when these
savings did not materialize as quickly or to the extent expected, two
things happened; (7) either money was deferred from other parts of the
defense budget to pay for shortfalls in operations and maintenance
accounts or support functions were unfunded; (8) GAO sees the same type
of risk with the DRI; (9) many of the DRI business process reengineering
initiatives must overcome significant challenges if they are to be
implemented in a timely, efficient, and effective manner; (10) while DOD
expects these initiatives to save an unspecified amount of money, it is
also counting on them to bring world-class business processes to DOD and
improve the quality of service provided to defense customers; (11) GAO's
overall impression is that the initiatives have the potential to save
significant amounts of money and improve the quality of service they
provide; (12) however, in some cases, DOD either faces significant
implementation challenges or is not thinking broadly enough in
implementing the reform; (13) significant opportunities exist to achieve
savings from consolidating, restructuring, and regionalizing
initiatives; (14) however, GAO's past work on these initiatives shows
that DOD has not been able to fully capitalize on the potential offered
by such consolidations; and (15) achieving success in the DRIs requires
DOD to address the underlying causes of its systemic management
problems.

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

 REPORTNUM:  T-NSIAD/AIMD-98-122
     TITLE:  Defense Management: Challenges Facing DOD in Implementing 
             Defense Reform Initiatives
      DATE:  03/13/98
   SUBJECT:  Management information systems
             Defense budgets
             Military downsizing
             Agency missions
             Reengineering (management)
             Defense cost control
             Budget cuts
             Combat readiness
             Reductions in force
             Defense capabilities
IDENTIFIER:  DOD Defense Management Review
             DOD Quadrennial Defense Review
             Navy Regional Maintenance Program
             
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Cover
================================================================ COVER


Before the Subcommittee on Military Readiness, Committee on National
Security, House of Representatives

For Release on Delivery
Expected at
10:00 a.m., EST
Friday,
March 13, 1998

DEFENSE MANAGEMENT - CHALLENGES
FACING DOD IN IMPLEMENTING DEFENSE
REFORM INITIATIVES

Statement of David R.  Warren, Director, Defense Management Issues,
National Security and International Affairs Division

GAO/T-NSIAD/AIMD-98-122

GAO/NSIAD/AIMD-98-122T

Defense Management

(709331)


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

  BRAC - base realignment and closures
  CAMIS - commercial activities management and information system
  CIM - Corporate Information Management
  DFAS - Defense Finance and Accounting Service
  DISA - Defense Information Systems Agency
  DLA - Defense Logistics Agency
  DMR - Defense Management Review
  DOD - Department of Defense
  DOE - Department of Energy
  DPPS - Defense Procurement Payment System
  DRI - Defense Reform Initiative
  EDA - Electronic Document Access
  EDI - Electronic Data Interchange
  EDM - Electronic Document Management
  GPRA - x
  IMPAC - International Merchants Purchase Authorization Card
  MOCAS - Mechanization of Contract Administration Services
  NASA - National Aeronautics and Space Administration
  NIPRNET - Non-Classified Interactive Processor Router Network
  OMB - Office of Management and Budget
  QDR - Quadrennial Defense Review
  RDT&E - research, development, test, and evaluation
  RM - Regional Maintenance
  TAV - total asset visibility
  SPS - Standard Procurement System

============================================================ Chapter 0

Mr.  Chairman and Members of the Subcommittee: 

I am pleased to be here today to present our observations, based on
past and ongoing work, on the Department of Defense's (DOD) latest
reform initiatives.  These initiatives are described in the Defense
Reform Initiative (DRI) report, which was issued by DOD in November
1997.  DOD is attempting to bring about a revolution in its business
and support operations by identifying and adopting the best business
practices from the private sector.  Specifically, it is proposing to

  -- reengineer many of its business processes;

  -- consolidate and reorganize DOD's headquarters elements and
     defense agencies, including the Office of the Secretary of
     Defense;

  -- increase the use of the Office of Management and Budget (OMB)
     A-76 process to compete DOD's commercial activities; and

  -- conduct two additional rounds of base realignment and closures
     (BRAC). 

These actions are intended to reduce the cost of DOD's business and
support activities so that operations and maintenance funds can be
freed up to support weapons modernization and readiness needs. 

In announcing this hearing, you expressed concern about DOD's record
of executing programs designed to achieve infrastructure savings and
the potential impact on readiness accounts if current reform
initiatives falter in execution.  In that context, my comments today
will focus on the (1) risks associated with reducing budgets before
savings are achieved, (2) challenges associated with implementing
DOD's various business process reengineering initiatives, (3)
opportunities to capitalize on consolidation and regionalization
opportunities, and (4) underlying management problems that need to be
addressed in implementing the reform initiatives.  Before discussing
my specific observations, I would like to briefly summarize my key
points. 


   RESULTS IN BRIEF
---------------------------------------------------------- Chapter 0:1

The task facing DOD as it tries to implement reform initiatives is
not easy.  However, it is one we strongly support.  Our work
continues to show that significant opportunities remain to further
streamline operations, consolidate functions, eliminate duplication
of effort, and improve efficiency in DOD's business activities. 
These opportunities must be fully embraced if DOD is to achieve the
level of savings it needs to meet other priorities such as weapon
system modernization and readiness within expected budgets.  The
following are some key points we believe the Congress and DOD should
take into consideration as DOD assesses DRI implementation and
expected results. 

First, DOD's plans to reduce out-year budgets before the magnitude of
savings are clearly known is not without risk.  This risk is that
operating units and field commanders will not have sufficient funds
to meet their readiness needs.  Past reform initiatives, like the
Defense Management Review (DMR) of the early 1990s, started with much
the same hope and promise as the DRI.  However, for a number of
reasons, which I describe below, they were not able to sustain
themselves and fully achieve hoped for results.  In many cases, DOD
reduced its operations and maintenance budgets up-front, in
anticipation that the savings would be realized.  When these savings
did not materialize as quickly or to the extent expected, one of two
things happened.  Either money was moved from other parts of the
defense budget to pay for shortfalls in operations and maintenance
accounts or support functions went underfunded.  We see the same type
of risk with the DRI.  For example, most savings from the DRI are
expected to come from future competitions using OMB's A-76 process
and from two additional BRAC rounds.  In addition, DOD is once again
proposing to reduce operations and maintenance funds in out-years
budgets to capture the expected savings.  Yet, our past work shows
that A-76 competitions and BRAC rounds have produced savings, but
they have not been as great or materialized as quickly at DOD
initially estimated. 

Second, many of the DRI business process reengineering initiatives
must overcome significant challenges if they are to be implemented in
a timely, efficient, and effective manner.  While DOD expects these
initiatives to save an unspecified amount of money, it is also
counting on them to bring world-class business processes to DOD and
improve the quality of service provided to defense customers.  Our
overall impression is that the initiatives have the potential to save
significant amounts of money and improve the quality of service they
provide.  However, in some cases, DOD either faces significant
implementation challenges or is not thinking broadly enough in
implementing the reform.  For example, DOD has made significant
progress in implementing the prime vendor program for medical and
food supplies, but these account for only two percent of the 4
million consumable items managed by the Defense Logistics Agency
(DLA).  Implementing this program for hardware items, which make up
97 percent of DLA's consumable items, has not been as easy. 
Resistance to change, particularly from the military services who
must use the prime vendor program, has kept the program from
expanding as quickly as DOD planned. 

Third, significant opportunities exist to achieve savings from DRI
consolidation, restructuring, and regionalization initiatives. 
However, our past work shows that DOD has not been able to fully
capitalize on the potential offered by these initiatives .  For
example, we recently reported on the Navy's efforts to streamline and
consolidate its maintenance programs for fleet ships and aircraft. 
While we found that the Navy had made substantial progress, the
consolidations and related savings had not materialized as expected. 
Because the Navy had already made reductions to spending plans in
anticipation of these savings, we reported that the overall material
readiness of ships and aircraft could be negatively affected.  For
example, while the Navy had been able to absorb the reductions in the
short term by fixing specific problems rather than performing
scheduled depot-level overhauls, Navy officials were concerned about
the long-term impacts of this approach. 

Lastly, achieving success in the DRIs requires DOD to address the
underlying causes of its systemic management problems, which we have
previously reported.  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 needs to ensure that implementation plans
for each level of the organization include goals, performance
measures, and time frames for completing corrective actions; identify
organizations and individuals accountable for accomplishing specific
goals; and fully comply with legislative requirements of the Chief
Financial Officers Act, the Government Performance and Results Act,
the Paperwork Reduction Act, and the Clinger-Cohen Act. 


   BACKGROUND
---------------------------------------------------------- Chapter 0:2

DOD's latest efforts to reform operations and processes were spelled
out in the Secretary's DRI report, which was released on November 10,
1997.  The report was the result of recommendations made in the
Report of the Quadrennial Defense Review (QDR)\1 The QDR report noted
that while DOD had reduced active duty personnel by 32 percent
between 1989 and 1997, it had only reduced the number of people
performing infrastructure functions by 28 percent.  The report called
for significant additional reductions in military and civilian
personnel.  Reductions called for by the QDR and other DOD planning
efforts would have the effect of reducing military and DOD civilian
personnel end strength levels by an additional 59,000 and 130,000
positions, respectively, below their fiscal year 1998 levels. 

The Secretary noted in his DRI report that the military forces and
the defense industry have made great strides in adjusting to a
dynamic new world but much of the rest of the defense establishment
remains "frozen in Cold War structures and practices." For this
reason, he pointed out that there is a real danger that the planned
revolution in military affairs will quickly "outrun" the ability of
logistics, personnel, medical, and other systems to support it. 
Accordingly, the Secretary called for what has been characterized as
a revolution in business affairs and included in the DRI report, a
number of reengineering initiatives aimed at adopting modern business
practices and attempting to achieve world-class standards of
performance.  These initiatives include DOD's efforts to

  -- reduce the administrative cost and burden of approving temporary
     duty travel, filing for reimbursement, and receiving payment;

  -- expand its use of prime vendors to buy, store, and distribute
     DOD's consumable inventories;

  -- develop a total asset visibility capability so that it can
     better manage its inventory;

  -- change its household goods transportation process to provide
     better, cheaper service for the hundreds of thousands of
     military and civilian personnel that are required to move each
     year; and

  -- make its contracting and contractor payment processes
     paper-free. 

The DRI report also lays out plans to reduce excess support costs by
consolidating support agencies to achieve economies of scale.  In
addition, it calls for large numbers of A-76 outsourcing competitions
and two additional rounds of BRAC. 

An important element of this reform initiative is that the Secretary
has established the Defense Management Council to, in effect, serve
as DOD's internal board of directors.  The primary mission of this
Council, which is chaired by the Deputy Secretary of Defense and
includes many of DOD's senior managers, is to monitor progress of the
management reforms, seek new solutions and reengineering
opportunities, and assist the Secretary in overseeing the activities
of the military departments and defense agencies.  This Council, if
it operates as described, should bring a heightened awareness and
sense of importance to DOD's management reforms. 


--------------------
\1 The QDR was required by the National Defense Authorization Act for
Fiscal Year 1997; it was intended to provide an examination of
America's defense needs from 1997 to 2015, including a blueprint for
a strategy-based, balanced, and affordable defense program. 


   RISK IN REDUCING BUDGET BEFORE
   SAVINGS ARE ACHIEVED
---------------------------------------------------------- Chapter 0:3

DOD is planning to reduce out-year operations and maintenance budgets
in anticipation of the savings that will accrue from the DRIs.  Just
about all the anticipated savings identified in the DRI report,
however, are linked to future competitions under OMB Circular A-76
and two additional rounds of base closures.  Our past work has shown
that A-76 competitions and base closures produced savings, but they
may not have been as great or materialized as quickly as DOD
initially estimated.  Consequently, reducing out-year budgets before
savings are more clearly known increases the risk that operating
units and field commanders will not have sufficient funds to meet
their readiness needs.  Although DOD is currently not targeting
savings from business process reengineering initiatives for similar
out-year budget reductions, DOD will still need efficiencies from
these initiatives to meet its planned personnel reductions targets. 


      MAGNITUDE OF BRAC AND OMB-76
      SAVINGS ESTIMATES IN
      OUT-YEAR BUDGETS IS
      QUESTIONABLE
-------------------------------------------------------- Chapter 0:3.1

Most savings from DRIs are expected from additional rounds of BRAC
and public-private competitions under OMB A-76.  The Secretary of
Defense recently submitted a legislative proposal to the Congress
requesting authority for two additional BRAC rounds, one in 2001 and
another in 2005.  While DOD estimates that these two rounds will
require an estimated up-front investment of $12 billion, it believes
they will save about $14.5 billion during the base closure
implementation period.  In addition, DOD estimates that each round
will save $1.4 billion a year after the closures are completed.  Our
work has shown that savings from prior BRAC rounds are expected to be
substantial.  However, because DOD's up-front costs were higher than
initially estimated, net savings have not been realized as quickly as
expected.  In addition, DOD does not have adequate cost accounting
systems to track the cost of its operations, either before or after
the base closures.  Additionally, accounting systems track
expenditures, not savings.  Consequently, DOD has not had an
effective means of tracking changes that occur over time affecting
initial savings estimates.  As a result, questions remain about the
preciseness of DOD's BRAC savings estimates.  On a number of
occasions, we have cited the need for DOD to improve its financial
management systems and the process it uses to track and update BRAC
savings estimates. 

The DRI report also indicated that DOD planned to use the A-76
process to compete approximately 150,000 full-time equivalents over
the next 5 years and projects that it can save about $6 billion over
those 5 years and $2.5 billion each year thereafter.\2 The DRI report
notes, however, that only a portion of DOD's total personnel are in
positions currently classified as commercial activities subject to
A-76 competition.  Consequently, DOD plans to complete a review of
all its commercial activities by November 30, 1998, to determine
which are inherently governmental\3 and must be performed by
government employees and which are commercial in nature and can be
competed.  It expects that this review will identify more positions
that can be competed under the A-76 process. 

Overall, we believe that A-76 competitions can be cost-effective. 
Data indicate that savings can occur, regardless of whether the
competitions are won by the government or the private sector.  We
have raised questions, however, about whether savings will be as
great or if they will materialize as quickly as DOD projects.\4 If
they do not, one of two things could happen.  Either money will have
to be moved from other parts of the defense budget to pay for
shortfalls in operations and maintenance accounts or support
functions will be underfunded.  If the latter occurs, operating units
and field commanders will have less money to pay for their readiness
needs (e.g., aircraft and weapon system maintenance, training, flying
hours), potentially resulting in a military force that is less
prepared or ready to meet its mission requirements. 

As already noted, DOD does not have an adequate cost accounting
system to track the costs of its operations.  This affects its
ability to fully identify savings from A-76 competitions.  DOD is
working toward developing accounting systems that meet the federal
cost accounting concepts and standards issued by the Federal
Accounting Standards Advisory Board.  The concepts and standards
became effective on October 1, 1997.  As we recently reported,
however, it will likely be many years before these systems are in
place and can provide the type of information DOD needs to estimate
costs for A-76 purposes.\5 In addition, DOD is working to improve the
commercial activities management information system (CAMIS), which it
uses to track the status and results of ongoing and completed A-76
studies.  Each military service currently has a different version of
this system and the data each collects vary in content and are often
incomplete and inaccurate.  Specifically, DOD has formed a CAMIS
working group to develop a minimum set of standard data elements that
would be common to each service's system.  Until this initiative is
completed and greater efforts are made to enter complete and accurate
information into the system, DOD's information on A-76 results will
be limited in its reliability. 


--------------------
\2 DOD has subsequently revised upward the number of positions to be
studied to 220,000. 

\3 An inherently governmental activity is one that is so intimately
related to the public interest that it must be done by federal
employees.  These functions include those activities that require
either the exercise of discretion in applying government authority or
the making of value judgments in making decisions for the government. 

\4 Base Operations:  Challenges Confronting DOD as It Renews Emphasis
on Outsourcing (GAO/NSIAD-97-86, Mar.  11, 1997). 

\5 Defense Outsourcing:  Better Data Needed to Support Overhead Rates
for A-76 Studies (GAO/NSIAD-98-62, Feb.  27, 1998). 


      OUT-YEAR BUDGETS DO NOT
      TARGET SAVINGS FROM MOST
      REENGINEERING INITIATIVES
-------------------------------------------------------- Chapter 0:3.2

The DRI report does not identify specific saving goals associated
with the business process reengineering initiatives and DOD has not
targeted any related savings for out-year budget reductions. 
According to DOD's senior managers, these initiatives will certainly
result in savings but that is not their primary benefit to DOD. 
Rather, they are being counted on to improve the quality of service
provided to the warfighters and other defense business customers and
to meet personnel reduction targets that have already been planned. 
While we do not support making budget reductions in anticipation of
savings, we do believe establishing savings goals could be a useful
tool for tracking progress. 

In past reform initiatives, DOD took the savings from future year
budgets.  However, this approach caused funding shortfalls when the
estimated out-year savings were not achieved.  For example, in the
Corporate Information Management (CIM) initiative,\6 DOD had started
a number of reengineering initiatives that showed a great deal of
promise.  However, it redirected CIM to focus on system
standardization efforts in each of its business areas.  It did this
primarily to achieve savings more quickly so it could offset the
reductions that had already been taken from the budget.  As we have
reported,\7 this change not only postponed the dramatic gains that
could have been achieved through reengineering but also contributed
to the failure of the CIM program. 

Another good reason for avoiding budget reductions before savings are
more clearly known is that DOD has probably already reduced its
budget in anticipation of savings from the reengineering initiatives. 
While they are hard to track in DOD over time, many of the
reengineering projects identified in the DRI report are likely
outgrowths of previous reform efforts like DMR.  DMR, for example,
included 250 separate decisions to implement consolidations, improve
information systems, enhance management, and employ better business
practices.  These decisions were expected to yield anywhere from $62
billion to $71 billion in savings over a 5-year period and DOD's
budget was reduced up-front to capture these savings.  In reviewing
these savings estimates, we found they were not always based on cost
analyses supported by historical facts or empirical cost data.\8
During a 1993 review of the DMR, we also found it difficult to
validate and track savings to specific initiatives.\9

In addition, many reengineering or process improvement projects were
done under the CIM umbrella.  As an outgrowth of DMR, CIM was
initially expected to yield $36 billion of the DMR savings.  Reducing
the budget once again for expected savings from these type of
initiatives could, in effect, result in double counting. 


--------------------
\6 CIM was a DOD-wide effort that began in 1989 to dramatically
improve the way DOD conducted business, primarily by adopting the
best practices from the public and private sectors and developing
standard information systems to support improved business practices. 

\7 Defense IRM:  Poor Implementation of Management Controls Has Put
Migration Strategy at Risk (GAO/AIMD-98-5, Oct.  20, 1997) and
Defense Management:  Stronger Support Needed for Corporate
Information Management to Succeed (GAO/AIMD/NSIAD-94-101, Apr.  12,
1994). 

\8 Acquisition Reform:  Defense Management Report Savings Initiatives
(GAO/NSIAD-91-11, Dec.  4, 1990). 

\9 Defense Management Review (GAO/NSIAD-94-17R, Oct.  7, 1993). 


   REENGINEERING INITIATIVES SHOW
   PROMISE, BUT IMPLEMENTATION
   CHALLENGES REMAIN
---------------------------------------------------------- Chapter 0:4

We have either completed or have ongoing work associated with several
of the reengineering initiatives in the DRI report.  Overall, we are
encouraged that DOD has embraced the concept of reengineering to
streamline its business practices and processes and believe many of
the initiatives have promise.  However, these initiatives, most of
which have been ongoing for some time, still face implementation
challenges.  DOD's travel reengineering and prime vendor programs are
both good examples of areas where significant progress has been made
but opportunities still exist if organizational and cultural barriers
can be overcome. 


      TRAVEL REENGINEERING--STRONG
      POTENTIAL FOR SIGNIFICANT
      PROCESS IMPROVEMENT
-------------------------------------------------------- Chapter 0:4.1

DOD's travel reengineering project is comprehensive in scope.  First,
it involves a complete analysis and redesign of the temporary duty
travel process, from the time a traveler decides to travel until
he/she is reimbursed by DOD.  Second, it transcends all
organizational boundaries in that it involves a single process and
system that will be implemented DOD-wide.  As we understand it, there
will be no Navy, Army, or Air Force derivative.  Third, the project
received high visibility and support from top DOD management, which
helped deflect institutional roadblocks and barriers.  Finally, the
travel reengineering task force that DOD established took several
actions to improve the likelihood of success.  These included
surveying the private sector to determine the best industry travel
practices, considering the views of DOD travelers and other
stakeholders in designing the new process, establishing base line
cost and performance information from which it could measure process
and cost improvements, relying on commercial off-the-shelf software
to support the new process, conducting 27 pilots to test the new
approach, and requiring potential contractors to demonstrate their
proposed travel system as part of the contracting process. 

As shown in table 1, DOD expects the travel reengineering initiative
to result in significant processing improvements and cost savings. 
Table 1 compares baseline performance (the old process) with
preliminary pilot test results. 



                                Table 1
                
                Comparison of Baseline and Reengineered
                     Travel Processing Performance

                           Average for    Average for
                           baseline       reengineered   Percent
Performance indicator      processes      processes      reduction
-------------------------  -------------  -------------  -------------
Number of steps in the     40             21             48
process

Processing time            4.5 hours      1.7 hours      63

Processing cost            $131           $49            63

Cycle time                 11 days        6 days         48
----------------------------------------------------------------------
The pilot tests also demonstrated a 56-percent decrease in average
administrative labor costs and almost a 100-percent increase in
customer satisfaction in many of the critical indicators. 

This has not been an easy process.  DOD has had to overcome many
internal and external barriers, including legislative changes to
simplify or eliminate certain record keeping and travel certification
procedures.  The difficulty of the task is illustrated by the fact
that the reengineering initiative is in its fourth year and the new,
simplified process has still not been implemented.  DOD had intended
to award a contract in December 1997 for a single travel management
system for all of DOD.  This has been delayed until May 1998 to give
DOD time to negotiate with each of the companies that have bid on the
contract.  This will be followed by 18 additional contracts--one for
each of 18 travel regions established by DOD--to provide specific
travel services to DOD travelers.  Full implementation throughout DOD
is not expected until 2001. 

While the results of these pilot tests appear promising, DOD still
has challenges ahead.  Besides completing its contracting process,
DOD must implement the new system across a diverse set of
organizations and cultures, some of which may not be supportive.  It
must also establish controls and monitor implementation using a wide
variety of accounting systems and processes.  Such monitoring is
important so it can gauge success and look for opportunities for
further process improvements. 


      ADDITIONAL OPPORTUNITIES
      EXIST TO EXPAND THE PRIME
      VENDOR PROGRAM
-------------------------------------------------------- Chapter 0:4.2

A prime vendor is a contractor that buys inventory from a variety of
suppliers, stores it in commercial warehouses, and ships it to
customers when ordered, usually within geographical areas.  This
reduces delivery times and eliminates the need for customers to
maintain costly warehousing and distribution systems.  Since 1993,
DLA, which manages most of DOD's consumable inventory,\10 has made
progress in implementing the prime vendor program for medical and
food supplies.  For example, we estimate that the program, along with
DLA's other inventory reduction efforts in the medical area, allowed
DLA to save over $700 million between fiscal year 1991 and 1996.  In
addition, DLA believes that the program will save it as much as $1
billion in the food supply area over the next 5 years. 

The DRI goal is to use prime vendor contracts for 40 percent of all
DLA sales by fiscal year 2000.  Based on our most recent analysis,
however, this goal may be difficult to obtain because DLA has not
aggressively pursued the program for hardware supplies,\11

which account for about 97 percent of the 4 million consumable items
managed by DLA.  In addition, the services have been slow to adopt
the program into their operations. 

Moreover, we found that the current prime vendor program for hardware
items does not streamline logistics operations to the extent we have
seen in private sector programs.  For example, DLA prime vendors
merely deliver hardware items to a base or installation warehouse,
where DOD personnel still order, receive, store, and distribute
material to the retail customer.  In the private sector, these
activities also shifted to the prime vendor.  In our January 1998
report, we recommended that the Secretary of Defense take a greater
leadership role in seeing that this program is expanded throughout
DOD and fully incorporates the type of services offered in the
private sector.\12

The National Defense Authorization Act for Fiscal Year 1998 also
directed DLA to develop and submit to the Congress a schedule for
implementing the best commercial inventory practices, including the
use of prime vendors, for all consumable items.  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 this Act." We plan to monitor and report on
DLA's efforts to comply with this requirement. 

We have recently released a report required by the act in which we
reported that DOD could also expand the application of best
practices, similar to the prime vendor concept, to the management of
reparable parts\13 currently reported to be valued at more than $49
billion.\14 This would have to be done, however, within the existing
legislative framework and regulatory requirements relating to defense
logistics activities, such as OMB Circular A-76. 


--------------------
\10 Consumable inventory includes items that are generally used once
and either consumed or discarded. 

\11 Hardware supplies include six supply categories:  commercially
available electronics, construction, industrial, automotive, fuel,
and facilities maintenance. 

\12 Defense Inventory Management:  Expanding Use of Best Practices
for Hardware Items Can Reduce Logistics Costs (GAO/NSIAD-98-47, Jan. 
20, 1998). 

\13 Reparable parts are generally expensive items that can be fixed
and used again, such as hydraulic pumps, navigational computers, wing
sections, and landing gears. 

\14 Inventory Management:  DOD Can Build on Progress by Using Best
Practices for Reparable Parts (GAO/NSIAD-98-97, Feb.  27, 1998). 


      TOTAL ASSET VISIBILITY
      CONTINUES TO EXPERIENCE
      DELAYS
-------------------------------------------------------- Chapter 0:4.3

Since the 1970s, DOD has recognized that it needs better visibility
over its inventory.  This problem became more visible when DOD was
unable to identify the contents of roughly half of the 40,000
containers it shipped to support Operations Desert Shield and Desert
Storm.  However, questions about achieving total asset visibility
(TAV) still remain. 

The DRI relating to TAV is intended to provide the capability
necessary to support just-in-time logistics and improve inventory
management.  Like many of the initiatives included in the DRI report,
TAV is not new.  Rather, DOD's latest effort had its roots in an
April 1992 TAV plan.  This plan was subsequently updated and reissued
by DOD's Under Secretary of Defense for Acquisition and Technology in
May 1996.  The objective of TAV is to provide users with timely and
accurate information on the location, movement, status, and identity
of units, personnel, equipment, and supplies worldwide.  It will
depend on several large, complex information technology initiatives
(such as Joint TAV, Army TAV, Navy TAV, the Global Transportation
Network, and automated identification technology) and component
logistics information systems. 

The TAV initiative can be an important enabler for reducing DOD
inventory requirements.  However, full implementation of TAV has been
a moving target for DOD since the early 1970s, and it continues to
face critical challenges.  Our ongoing work focuses on whether DOD is
structuring TAV to improve known inventory problems, such as reducing
excess inventory, enhancing inventory management practices, and
improving data quality and timeliness.  We are also assessing how
well the military services are supporting TAV implementation and
whether DOD has adequate performance measures to determine if it will
improve inventory management. 

Although total costs have not been finalized, we have been able to
identify funding needs exceeding $600 million for TAV and its
supporting initiatives.  However, this amount does not include all
necessary programs or support/equipment.  We have also noted that the
TAV implementation date has slipped considerably, from 1995 to,
according to an official in the office of the Deputy Under Secretary
of Defense (Logistics), 2004.  We plan to report on this initiative
later this year. 

In related work, we recently issued two reports that identified
inaccuracies in key systems the Army and the Air Force use to
maintain visibility over their major equipment assets, including
their most critical war fighting equipment.  We made a number of
recommendations in these reports aimed at addressing the causes of
the inaccuracies and improving DOD's ability to manage and oversee
its assets from both a financial management and readiness
perspective.\15


--------------------
\15 Financial Management:  Accuracy of Air Force Aircraft and Missile
Data Could Be Improved (GAO/AIMD-97-141R, Aug.  15, 1997) and Army
Logistics Systems:  Opportunities to Improve the Accuracy of the
Army's Major Equipment Item System (GAO/AIMD-98-17, Jan.  23, 1998). 


      CHALLENGES REMAIN FOR
      REENGINEERING THE MOVEMENT
      OF HOUSEHOLD GOODS
-------------------------------------------------------- Chapter 0:4.4

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.  Yet, its system gives its
personnel some of the worst service in the nation.  The report
stated, for example, that of all DOD moves, 25 percent end up 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 is 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 its military personnel and their families
received from DOD's contracted movers; simplify the total
process--from arranging the moves to settling the claims; and base
the program on business processes characteristic of world-class
customers and suppliers. 

In a November 1996 report, we assessed two competing reengineering
proposals, one developed by DOD and the other by a transportation
industry working group.  Because the Congress was concerned that the
reengineering initiative would have a negative impact on the moving
industry, particularly small businesses, it directed DOD to work with
an industry working group to develop a mutually agreeable program to
pilot test the reengineering proposal.  Because these two groups
could not agree on an approach to the pilot project, each presented a
separate proposal.  During our work, we found that both proposals
would likely accomplish the reengineering goals but that DOD's would
likely achieve those goals to a greater extent. 

Currently, the pilot project, which is being planned by the Military
Traffic Management Command, is on hold pending completion of a bid
protest.  Another related pilot project is also being conducted by
the Army at Hunter Army Airfield, Georgia.  We are monitoring DOD's
progress on both of these pilot efforts. 


      ELECTRONIC COMMERCE AND
      PAPERLESS
      COMMUNICATIONS--MUCH WORK
      REMAINS TO BE DONE
-------------------------------------------------------- Chapter 0:4.5

According to the DRI report, DOD is looking to electronic commerce to
drastically reduce the amount of paper it produces, receives,
processes, and stores and to bring much needed efficiencies to its
business practices.  Electronic commerce embraces many technologies,
including electronic data interchange, electronic mail, computer
bulletin boards, and electronic funds transfer.  The DRI report
states that, by January 1, 2000, all aspects of the contracting
process for major weapon systems will be paper-free. 

To achieve this goal and maximize its potential, much work must be
done.  As the DRI report points out, few aspects of current business
practices and systems used by DOD are integrated.  Overall, DOD has
150 accounting systems, 76 procurement writing systems, numerous
logistics systems, and one major contract administration and payment
system, all of which process contract data.  Generally, these systems
pass data to one another through paper processes rather than
electronically.  To address this condition, business practices,
supporting processes and systems, and electronic linkages need to be
examined.  These include practices and processes for such functions
as determining requirements, preparing requisitions and
solicitations, writing contracts, accepting delivery of goods and
services, tracking inventory, processing invoices, disbursing funds,
and posting transactions to accounting records as well as determining
how and what data will be electronically shared.  This will not be an
easy task. 

The DRI electronic commerce and paperless communication initiatives
involve a number of ongoing projects.  Some of these projects began
as acquisition reform measures, others were initiated to improve
financial management operations and problem disbursements, and others
were initiated to simply take advantage of existing and emerging
technologies to improve operational efficiencies and save money. 
(See app.  I for a brief description of the electronic and paperless
programs included in this initiative.) The DRI report does not
explain the relationships among these initiatives nor does it attempt
to quantify the costs and benefits of the initiatives. 

Meeting the DRI goal of paper-free processing by the year 2000 will
be a challenge, given DOD's inability to bring radical change to its
processes in the past and the fact that many of the paperless
communication efforts are not scheduled to be completed until after
2000.  Efforts could be further complicated because each military
service and defense agency typically changed only the processes and
systems it controlled.  Often, this approach eliminated the potential
to significantly improve a process that cuts across several agencies. 
To address these types of issues and to centralize the management of
DOD's electronic commerce initiatives, DOD recently created the Joint
Electronic Commerce Program Office.  This Office will be managed and
staffed with DLA and Defense Information Systems Agency (DISA)
personnel. 


   MILITARY SERVICES AND DEFENSE
   AGENCIES NEED TO CAPITALIZE ON
   CONSOLIDATION AND
   REGIONALIZATION OPPORTUNITIES
---------------------------------------------------------- Chapter 0:5

The DRI report includes several military service and support agency
consolidation, restructuring, and regionalization initiatives that
are intended to make DOD activities more efficient and support DOD's
planned personnel reductions.  Overall, we support these initiatives
but, based on our past and ongoing work, believe their potential has
not yet been realized.  As with the reengineering initiatives, most
of these initiatives have been going on for several years but still
face implementation challenges. 


      FUTURE PLANS TO ADDRESS
      EXCESS CAPACITY IN RESEARCH,
      DEVELOPMENT, TEST, AND
      EVALUATION LABORATORIES ARE
      UNCLEAR
-------------------------------------------------------- Chapter 0:5.1

Each of the military services operate (1) research and development
laboratories to develop new or enhance existing military technology
and (2) test and evaluation centers to demonstrate and validate the
capabilities of these technologies.  DOD's research, development,
test, and evaluation (RDT&E) facilities employ about 100,000 people
in 67 federally owned facilities located primarily in the continental
United States.  For fiscal year 1997, the DOD budget for these
laboratories totaled just over $37 billion. 

Our most recent work, completed in January 1998,\16 pointed out that
DOD's RDT&E infrastructure continues to have excess capacity--an
estimated 35 percent in its laboratories and an estimated 52 percent
in its test and evaluation centers in the air vehicles, electronic
combat, and armaments/weapons areas.  This condition exists even
though DOD will have reduced funding, personnel, and force structure
and closed 62 RDT&E sites and activities at host sites as part of the
previous BRAC process. 

The focus of our recent work was primarily on how best practices
might be used to reduce excess RDT&E capacity in DOD, the Department
of Energy (DOE), and the National Aeronautics and Space
Administration (NASA).  These agencies represent about 72 percent of
all federal investment in research and development and own most of
the RDT&E infrastructure.  During this work, we identified five
critical elements that led to the successful downsizing of unneeded
laboratory infrastructure at the Boeing Company's Information, Space,
& Defense Systems Group and the Defence Research Agency within the
British Ministry of Defence.  These elements were:  (1) a "crisis"
that served as a catalyst to spark action; (2) an independent
authority to overcome parochialism and political pressures that, if
left unchallenged, would have impeded decision-making; (3) core RDT&E
missions focused to support the organization's overall goals and
strategies; (4) the infrastructure needed to support the overall
goals and strategies clearly defined; and (5) accurate, reliable, and
comparable data that captured total infrastructure cost and
utilization rates for each RDT&E activity.  According to officials
managing these restructurings, their success depended on using all
five of the elements together. 

Our report also discusses the actions that DOD has taken to address
its excess RDT&E infrastructure.  For example, after full
implementation of previous BRAC recommendations, DOD and the Congress
realized that the RDT&E infrastructure was still too large. 
Consequently, the National Defense Authorization Act for Fiscal Year
1996 (sec.  277), directed the Secretary of Defense to develop a
5-year plan to consolidate and restructure DOD's RDT&E facilities for
the 21st century.  The Secretary was to identify the administrative
and legislative actions needed to consolidate RDT&E facilities into
as few as practical and possible by October 1, 2005.  The Secretary
responded with a plan and developed a legislative package entitled
Defense Research, Development, Test, and Evaluation, Vision 21,
Reduction, Restructuring, and Revitalization Act of 1997 (commonly
referred to as Vision 21).  However, while the legislative package
was being reviewed for interagency coordination, officials from OMB
told DOD to include a provision for an independent commission, since
DOD has historically been unable to reduce significantly its RDT&E
infrastructure.  This commission--similar to previous BRAC
commissions--would make the final realignment and closure
recommendations to the Congress. 

After the QDR was completed in May 1997, DOD decided not to submit
the Vision 21 legislative package to the Congress, opting instead to
include RDT&E infrastructure consolidations and reductions in any
future BRAC rounds.  DOD also emphasized that significant reductions
could only be achieved under a BRAC-like authority. 

With Vision 21 on hold and future BRAC legislation uncertain, it is
unclear at this time to what extent DOD will attempt to consolidate
and restructure its RDT&E infrastructure and how it might proceed. 
The DRI report briefly discusses the RDT&E issue but provides no
further information on how DOD will deal with infrastructure
reduction.  It states that each military department will review its
RDT&E facilities to identify restructuring opportunities.  As we
stated in our report, we believe the extent to which DOD's Vision 21
effort proceeds may be largely dependent on continuing congressional
support for reductions.  Moreover, DOD agreed with our conclusion
that an independent BRAC-like authority, such as that provided by the
Vision 21 legislative package, is needed to reduce DOD's RDT&E
infrastructure. 


--------------------
\16 Best Practices:  Elements Critical to Successfully Reducing
Unneeded RDT&E Infrastructure (GAO/NSIAD/RCED-98-23, Jan.  8, 1998). 


      NAVY REGIONAL MAINTENANCE
      PROGRAM MAY NOT MEET ITS
      GOALS
-------------------------------------------------------- Chapter 0:5.2

For fiscal year 1996, the Navy applied more than $8.5 billion of its
resources to maintenance programs in support of fleet ships and
aircraft.  In response to force structure reductions since the 1980s
and subsequent defense planning guidance to reduce excess maintenance
infrastructure, the Chief of Naval Operations, early in 1993, tasked
the commanders of the Atlantic and Pacific Fleets to develop a
strategy for streamlining and consolidating their ship and aircraft
maintenance functions.  This led to the Navy establishing the
Regional Maintenance (RM) program in March 1994.  In addition to
reducing infrastructure and saving money, the RM program is designed
to improve maintenance processes, integrate supply support and
maintenance functions, and provide compatible data systems for the
different maintenance functions.  The program was to be implemented
in three overlapping phases during fiscal years 1995-99 and was
expected to save substantial amounts of money.  In its 1995 program
review, for example, the Navy decreased its planned operations and
maintenance budgets for fiscal years 1995-99 by about $1.28 billion
in anticipation of such savings. 

As of November 1997, the Navy had focused its efforts on establishing
a management structure and process for realigning and reducing its
maintenance infrastructure at eight Navy regions.  It has also
developed RM business plans, including initiatives and estimates of
savings to be achieved.  These estimates predict that the Navy will
save about $944 million for 102 projects to be implemented between
fiscal
years 1994-2001. 

In a recent report on the RM program,\17 we reported that the Navy
had made substantial progress in establishing a structured RM program
but savings had not materialized as anticipated.  Further, the
accuracy of savings that had been claimed by the Navy were
questionable because they are not tracked and verified. 
Consequently, the Navy's actual savings may be far less than $944
million and may not be achieved as soon as expected.  Because
reductions had already been made to spending plans in anticipation of
these savings, we reported that maintenance programs, the overall
material readiness of ships and aircraft, or future fleet readiness
could be negatively affected.  For example, Navy officials told us
they have thus far been able to absorb the reductions with no impact
on readiness by fixing specific problems rather than performing
scheduled depot-level overhauls.  They were concerned, however, that
this approach might adversely affect the condition of ships over the
long term. 

Nevertheless, we reported that the Navy could still achieve
significant savings by moving more quickly to implement the savings
initiatives that had been identified and, where appropriate,
implement other initiatives that could yield savings without
affecting readiness.  To do this, however, the Navy had to overcome
parochial and institutional resistance to the RM program's
objectives.  These include resistance to efforts that might eliminate
organizations, reduce jobs, and/or reduce a command's or an
organization's control over resources.  Other barriers that also had
to be addressed were (1) the lack of management visibility over all
maintenance-related costs; (2) multiple, unconnected management
information systems that do not provide adequate data for regional
maintenance planning and decision-making; and (3) significant
differences in the number of shore duty intermediate-level
maintenance positions needed to support the Navy's sea-to-shore
rotation program and the number of personnel needed to perform the
work.  Although the Navy has established RM program working groups
and committees to address these issues, continued high-level
commitment, cooperation, and coordination from the Chief of Naval
Operations, the fleet, and type and systems commanders will be
required to ensure that regional initiatives reach fruition and
achieve the savings projected. 


--------------------
\17 Navy Regional Maintenance:  Substantial Opportunities Exist to
Build on Infrastructure Streamlining Progress (GAO/NSIAD-98-4, Nov. 
13, 1997). 


      THE FINANCE AND ACCOUNTING
      INFRASTRUCTURE--POTENTIAL
      FOR FURTHER REDUCTIONS
-------------------------------------------------------- Chapter 0:5.3

The Defense Finance and Accounting Service (DFAS) was established in
1991 to consolidate and streamline DOD's finance and accounting
operations.  In May 1994, after several false starts, DOD announced
that DFAS would begin consolidating the finance and accounting
infrastructure in fiscal year 1995.  At that time, the plan was to
reduce the number of sites where finance and accounting activities
were conducted from over 330 to 26.  The 26 sites included the 5
existing large finance centers (Columbus, Cleveland, Denver,
Indianapolis, and Kansas City) and 21 new sites called operating
locations.  As part of this consolidation, DFAS expected to reduce
its staffing levels from about 27,000 to 23,000 people.  As of
September 30, 1997, DFAS told us it had reduced staffing to about
21,900 people and opened 18 of the planned 21 operating locations.\18

We have issued several reports that questioned the need for 21
operating locations.\19

Our primary concern was that DOD used a flawed process to identify
the size and location of its consolidated operations.  Among other
things, we reported that the planned infrastructure was larger than
necessary, primarily because DOD had not considered the impact that
future business improvements would have on the finance and accounting
workload.  As these business improvements are adopted, we argued that
DFAS will have to consolidate its activities once again.  We also
pointed out that an earlier DFAS analysis had concluded that the
existing five finance centers and six operating locations was the
optimum structure for conducting finance and accounting operations. 

A recent DFAS analysis has concluded that the finance and accounting
infrastructure does, in fact, need to be further consolidated.  This
analysis, which assessed each finance and accounting function carried
out at operating locations (such as vendor pay, civilian pay, travel
pay, and accounting), showed that DFAS will be able to reduce the
number of personnel from about 21,400 in fiscal year 1998 to about
15,350 by the end of fiscal year 2003.  These reductions would be
realized, in part, by technology initiatives underway at DFAS and, if
they occur, would leave DFAS with about 38 percent excess facility
capacity. 

The analysis did not translate this excess capacity into a specific
number of locations that should be eliminated.  Nevertheless, the DRI
report stated that DFAS would continue its consolidation initiatives
by eliminating 8 of its 26 finance and accounting facilities.  DFAS
is currently developing criteria to help it determine which locations
should be eliminated.  Once these criteria are approved, which is
expected by May 1998, DFAS plans to take from 3 to 6 months to
further study its infrastructure needs and select the sites that will
be closed.  At this point, DFAS does not expect to close more than
eight facilities. 


--------------------
\18 One of the 18 operating locations (Memphis, Tennessee) is under
the control of the US Army Corps of Engineers and supports the Corps'
accounting and finance operations. 

\19 DOD Infrastructure:  DOD's Planned Finance and Accounting
Structure 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). 


      DEFENSE INFORMATION SYSTEMS
      AGENCY--STATUS OF
      CONSOLIDATING ITS
      MEGACENTERS
-------------------------------------------------------- Chapter 0:5.4

The DRI report calls for the Defense Information Systems Agency
(DISA) to reduce its infrastructure from 16 to 6 large processing
facilities.  This initiative is a continuation of DOD efforts that
began in 1990.  Since that time, DISA was created and eventually
consolidated many of DOD's computer operations by moving workload and
equipment from 194 computer centers to 16 DISA megacenters.  These
actions were taken to better meet DOD's information processing needs
at lower costs.  The DISA megacenters operate as part of the defense
working capital fund and bill their customers for the processing
support they provide.  We should note, Mr.  Chairman, that the
military services and defense agencies also operate many processing
centers and, like DISA, have also consolidated some of their
information processing facilities. 

Our previous work on information processing center consolidations
pointed out that although DOD had recognized the need to continue to
reduce the cost of its computer center operations, it had not
established an effective framework for making these decisions.\20
Such a framework would help DOD determine the number of processing
centers needed, the way to consolidate the various computer
operations, and the numbers and skill mix of staff needed to operate
the consolidated centers.  We believed this framework or plan was
needed because our work documented that, although additional
efficiencies could be realized, it was not clear whether these would
be best achieved by further consolidations or outsourcing.  DOD
partially agreed with our point, stating that it would comply with
the Clinger-Cohen Act\21 and develop a framework to determine whether
processing centers should remain in-house or be considered for
outsourcing studies. 

The Defense Megacenter Business Strategy, dated October 1997, states
that DISA's plan to reduce the 16 megacenters to 6 could result in
annual savings of $202 million starting in fiscal year 2003. 
Moreover, the strategy estimates that total savings over a 10-year
period (fiscal year 1998 through 2007) will be approximately $1.5
billion.  We have not done any work to examine this strategy or
substantiate these savings.  If these savings occur, however, they
should help DISA reduce its infrastructure costs and, thereby, result
in lower prices to its customers.  At your request Mr.  Chairman, we
are reviewing how DISA establishes the prices it charges its
customers.  In the future, we intend to review the cost of the
consolidation effort and the impact it is having on customer service. 


--------------------
\20 Defense IRM:  Investments at Risk for DOD Computer Centers
(GAO/AIMD-97-39, Apr.4, 1997). 

\21 The Clinger-Cohen Act of 1996 (P.L.  104-106) requires that
federal agencies establish performance measures that measure how well
their information technology supports their missions and programs and
that evaluations be made of the results achieved from its information
technology investments. 


   IMPLEMENTING DRI REQUIRES DOD
   TO ADDRESS THE UNDERLYING
   CAUSES OF ITS MANAGEMENT
   PROBLEMS
---------------------------------------------------------- Chapter 0:6

As we have reviewed DOD programs and management initiatives over the
years, we have made hundreds of recommendations to help DOD correct
its problems.  To its credit, DOD has taken actions to address many
of these recommendations and has made some progress in implementing
change throughout all areas of the Department.  For example, in
response to our recommendations, DOD implemented certain commercial
practices in its inventory management area, such as relying on prime
vendors to provide defense customers with medical and food items. 
However, even though this and other actions are very important, DOD
has not yet addressed many of the underlying causes that have
previously kept it from effectively implementing management reforms
across the department.  We identified these causes in our 1997
High-Risk Series Reports involving DOD, and I would like to discuss
them here because I think they are applicable to the long-term
success of the DRIs.  These underlying causes include the following: 

  -- Cultural barriers and parochialism limit opportunities for
     change.  Cultural resistance to change and service parochialism
     have contributed to the difficulty of implementing corrective
     actions to improve DOD's financial, infrastructure, inventory,
     and acquisition systems.  Particularly problematic are
     corrective actions that require the development and use of
     common systems and processes across military service and
     organizational boundaries.  Each of the services, for example,
     has its own way of doing business, its own budget and
     programmatic authority, and its own parochial interests in
     maintaining the status quo.  Even if 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 wide-spread
     support throughout the services and defense agencies. 

  -- Incentives for seeking and implementing change are lacking.  DOD
     managers have few incentives to improve DOD's financial,
     acquisition, and infrastructure management approaches.  For
     example, 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.  We found this
     particularly evident in large weapon acquisition and information
     system development programs where overselling resulted in
     programs being started, funded, and eventually fielded.  The
     fact that a given program costs more than estimated, takes
     longer to complete, and does not generate results or perform as
     promised is secondary to implementing the program. 

  -- Management data are deficient.  DOD decisionmakers are severely
     affected by the lack of comprehensive and reliable data for
     measuring program costs and results and making well-informed
     decisions.  DOD, for example, has acknowledged fundamental
     problems with its ability to accumulate reliable cost data.  DOD
     does not have accurate cost data for almost all its assets, such
     as inventories, equipment, aircraft, and missiles.  In addition,
     DOD cannot accumulate reliable information on its business
     activities' costs or its critical operations, such as the cost
     associated with maintaining its weapons systems in a high state
     of readiness, or costs related to its contingency operations. 
     This will to be a serious problem in implementing any of the DRI
     reform initiatives because DOD will lack the data it needs to
     estimate baseline costs and track project implementation. 

  -- Clear, results-oriented goals and performance measures are
     lacking in some cases.  DOD's strategic goals and objectives are
     not linked to those of the military services and defense
     agencies, and DOD's guidance tends to lack specificity.  Without
     this type of clear, hierarchically linked goals and performance
     measures, DOD managers lack straightforward road maps showing
     how their work contributes to attaining DOD's strategic goals. 
     This increases the risk that these managers will operate
     autonomously rather than collectively.  This is important in the
     DRI environment because each of the military services and
     defense agencies must assume part of the responsibility for
     meeting DOD's infrastructure and personnel reduction targets. 
     They must also be responsible for monitoring the impacts of the
     reductions in terms of readiness and the ability to meet their
     fundamental mission requirements.  Without these type of
     performance measures and goals, it is possible that personnel
     reductions and reduced operations and maintenance budgets will
     have either positive or negative impacts that are never fully
     understood. 

  -- Management accountability and follow through have been
     inconsistent.  Even when DOD develops organization goals and
     performance measures, it does not routinely link them to
     specific organizational units or individuals that have
     sufficient flexibility, discretion, and authority to accomplish
     the desired results.  These linkages are important to fix
     accountability at both the organizational and managerial levels. 
     Such accountability is particularly important at DOD because our
     past work and experience have shown that the DOD's top managers
     do not have a proactive, consistent, and continuing role in
     building capacity, creating incentives, and integrating daily
     operations.  In 1994, for example, we reported that the median
     tenure of top political appointees in the Office of the
     Secretary of Defense was 1.7 years.\22 We also found that mean
     vacancy periods for top positions in the Departments of the Air
     Force and the Navy were 9 and 11 months, respectively.  As a
     result, turnover among DOD political appointees has hindered
     long-term planning and follow-through activities. 


--------------------
\22 Political Appointees:  Turnover Rates in Executive Schedule
Positions Requiring Senate Confirmation (GAO/GGD-94-115FS, Apr.12,
1994). 


      IMPLEMENTATION PLANS ARE
      NEEDED
-------------------------------------------------------- Chapter 0:6.1

To attack these underlying causes, DOD needs to ensure that its
implementation plans at all organizational levels establish
results-oriented goals, performance measures, and time frames for
completing corrective actions; identify organizations and individuals
that are responsible for accomplishing specific goals; and provide
sufficient information for the Defense Management Council to monitor
progress.  In developing these implementation plans, DOD should
comply with the legislative requirements of the Chief Financial
Officers Act, the Government Performance and Results Act, the
Paperwork Reduction Act, and the Clinger-Cohen Act.  These acts
provide important criteria for ensuring that DOD and other agencies
focus their resources on the highest priority programs and develop
sufficient management and financial information to know whether the
programs are meeting their objectives. 


-------------------------------------------------------- Chapter 0:6.2

Mr.  Chairman, in closing let me reiterate GAO's strong support for
the Secretary's reform initiatives.  Concerns that I have raised are
based on our experience in examining some of the areas undergoing
reform.  Our intent is to indicate that too much should not be
expected too soon.  This is particularly the case as it relates to
the historical pattern of claiming savings or reducing personnel
levels prematurely, before the magnitude of savings are more fully
known.  Consequently, it will be important for DOD to carefully track
implementation of these initiatives and make resource and other
management decisions as necessary to avoid unintended adverse impacts
on support and readiness activities. 

This concludes my prepared comments.  I will be glad to answer any
questions that you or members of the Subcommittee might have. 


ELECTRONIC COMMERCE AND PAPERLESS
COMMUNICATIONS INITIATIVES
=========================================================== Appendix I

The Defense Reform Initiatives (DRI) report states that, by January
1, 2000, all aspects of the contracting process for major weapon
systems will be paper-free.  Electronic commerce, however, is not
new.  In October 1993, a presidential memorandum established a
governmentwide goal of streamlining acquisition through the use of
electronic commerce.  Ninety-five percent of all government purchases
under $100,000 are expected to be made through electronic commerce by
the year 2000. 

The following initiatives, which are described in our recent
report,\1 can help the Department of Defense (DOD) reduce the amount
of paper used in procurement and contract payment processes.  It is
not clear from the DRI report, however, how these initiatives will
collectively eliminate the paper that is passed among the many DOD
systems and it is not clear if, and to what extent, savings and
productivity will be realized. 


--------------------
\1 Financial Management:  Seven DOD Initiatives That Affect the
Contract Payment Process (GAO/AIMD-98-40, Jan.  30, 1998). 


   ELECTRONIC DOCUMENT MANAGEMENT
--------------------------------------------------------- Appendix I:1

The Electronic Document Management (EDM) is a technology initiative
intended to convert paper copies of DOD contract payment documents to
electronic images at the Defense Finance and Accounting Service
(DFAS) Columbus Center.  All paper documents received by the Center,
such as contracts, invoices and receiving reports, will be scanned
and converted to electronic images--similar to photographs--and
stored in an EDM database at the Center.  Once stored, these images
can be retrieved and viewed by Center personnel.  While the EDM
program will help eliminate the need to handle paper documents after
they are received and scanned, it will not reduce the amount of paper
being sent to Columbus.  Moreover, they cannot be electronically
input into other systems.  Center personnel must still manually enter
the contract data into other systems such as contract payment and
accounting systems.  EDM is being developed under a 5-year contract
awarded in September 1994.  The program is expected to be completed
by the end of fiscal year 1999.  While the contract covers EDM
applications for other DOD functions, the contract pay portion is
expected to cost $33 million. 


   ELECTRONIC DOCUMENT ACCESS
--------------------------------------------------------- Appendix I:2

The Electronic Document Access (EDA) provides DOD users with
electronic images of contracts, contract modifications, and related
documents.  Electronic document files created by the DOD acquisition
community are stored in an EDA data base.  Once stored, these
documents can be accessed and viewed on DOD's computer network, the
Non-Classified Interactive Processor Router Network (NIPRNET).  The
expanded use of EDA is expected to significantly reduce the amount of
time DOD spends mailing and distributing paper documents and
eliminate document loss and mailing delays.  The initiative began in
April 1996, and it is scheduled for completion in December 1998. 
EDA, which is being funded by the EDM initiative, is expected to cost
about $2.7 million.  As of December 1997, over 100,000 contracts were
available in the EDA database.  EDA will not eliminate all paper
documents needed in the contract payment process.  Documents such as
receiving reports and invoices are not included in the EDA database
and will have to be made available electronically by other
initiatives.  In addition, as with EDM, Center personnel must still
manually enter contract data from the electronic images into contract
payment and accounting systems. 


   ELECTRONIC DATA INTERCHANGE
--------------------------------------------------------- Appendix I:3

The Electronic Data Interchange (EDI) allows the computer-to-computer
exchange of routine business information by requiring standardized
data formats.  The military services and the Defense Logistics Agency
(DLA) are using EDI to support their procurement processes.  They
have about 76 nonstandard procurement systems generating contractual
documents and have begun working with nine of the largest systems to
provide the capability to convert and transmit their data in EDI
formats.  Likewise, DFAS is using EDI to support its procurement and
payment processes.  For EDI to work effectively, however, all of
these systems must be able to electronically exchange data and ensure
that the data conform to standard data formats for documents such as
contracts, contract modifications, and invoices.  As of September 30,
1997, about 80 DOD contractors were approved to use EDI to transmit
invoices to DOD's primary contract payment system.  However, only
about 50 contractors were actually transmitting invoices using EDI. 
We do not have complete costs for the EDI initiative.  However, we
have documented that DFAS alone plans to spend $47.1 million to
develop and implement EDI for its operations between fiscal year 1995
and 1999. 


   STANDARD PROCUREMENT SYSTEM
--------------------------------------------------------- Appendix I:4

The Standard Procurement System (SPS) will be an automated
procurement information system for preparing procurement contracts
and supporting contract administration.  As planned, it will replace
DOD's manual procurement systems and the 76 unique automated
procurement systems that are used to prepare contracts.  SPS is also
expected to standardize procurement business practices and data
elements throughout DOD and provide users timely, accurate and
integrated contract information.  SPS will use EDI capability to
share data with other systems.  As part of the SPS design, contract
and contract payment data will be entered once--at the source of the
information--and will be stored in a "shared data warehouse." The SPS
initiative began in January 1994.  It is being managed by DLA. 
Initial SPS implementation began in May 1997.  SPS development and
implementation are expected to be completed by September 30, 2001, at
a cost of about $295 million. 


   DEFENSE PROCUREMENT PAYMENT
   SYSTEM
--------------------------------------------------------- Appendix I:5

The Defense Procurement Payment System (DPPS) is intended to be a
single standard DOD system for calculating contract payments and
posting the payment information to accounting records.  This system,
along with SPS, is to replace the current contract payment
system--Mechanization of Contract Administration Services (MOCAS). 
DPPS is expected to (1) provide a single system which DFAS can use to
validate funds availability; (2) reduce DFAS' reliance on hard copy
documents; and (3) eliminate cumbersome manual processes for
reconciling contract, payment, and accounting records.  Like SPS,
DPPS will use EDI capability to share data with other systems.  The
DPPS initiative began in September 1995.  It is being managed by DFAS
and is estimated to cost $114 million.  DPPS implementation is
scheduled to be completed by April 15, 2002. 


   ELECTRONIC MALLS
--------------------------------------------------------- Appendix I:6

Simply stated, electronic malls are electronic versions of suppliers'
catalogs that are available through the internet.  These malls will
eventually allow DOD customers to access a variety of electronic
ordering systems or "stores".  The stores usually specialize in
commodity groups such as industrial products, office supply products,
food, or textiles.  DLA and each military service are developing an
electronic mall for the inventory items they manage.  DOD plans for
users to eventually be able to move among the various electronic
malls with relative ease.  This capability does not yet exist.  By
April 1998, DLA's electronic mall is expected to offer more than 4
million items DLA manages as well as several hundred thousand
commercial items in vendor catalogs to DOD customers.  DLA's
electronic mall is expected to provide the following information: 
descriptions of the products, weapon systems supported, types of
payments accepted, ordering procedures, contractors' names, and
contract numbers.  According to DLA, electronic malls blend the
benefits offered by the internet, government purchase cards, and the
prime vendor program.  This includes easy access, easy purchasing
procedures, and readily available items at competitive prices. 


   GOVERNMENT PURCHASE CARD
--------------------------------------------------------- Appendix I:7

A government purchase card is essentially a credit card for small
procurements (generally micropurchases under $2,500) that allows the
government to cut the red tape normally associated with the
procurement process.  Using the card, for example, generally
eliminates the need for procurement requests, receiving reports, and
invoices.  It also reduces the number of disbursements because a
single payment is made to the card company rather than to each
vendor.  In fiscal year 1997, DOD's purchases using the card totaled
$321 million.  This total involved about 567,000 transactions by
about 115,000 card holders.  The Army is leading other DOD components
in use of the card.  During fiscal year 1997, it made about 257,000
transactions totaling $147 million, which was about 45 percent and 46
percent of DOD totals, respectively.  Increased use of the purchase
card by the military services and defense agencies has the potential
to reduce both workloads and staffing levels.  The Army estimated
that use of the card would reduce the cost of a typical procurement
action from about $130 to about $30.  Likewise, use of the card will
reduce DFAS' vendor pay workload and staffing. 

Until recently, only one type of purchase card was available to DOD
components--the International Merchants Purchase Authorization Card
(IMPAC)--a visa credit card.  In February, however, the General
Services Administration awarded contracts to six credit card
companies to provide credit cards to government agencies.  DOD, like
other federal agencies, will be able to negotiate with the
contractors for the types of cards and services they want.  In
addition, under the contracts, DOD can negotiate special incentives,
such as rebates. 




RELATED GAO PRODUCTS
============================================================ Chapter 1

Base Operations:  DOD's Use of Single Contracts for Multiple Support
Services (GAO/NSIAD-98-82, Feb.  27, 1998). 

Defense Outsourcing:  Better Data Needed to Support Overhead Rates
for A-76 Studies (GAO/NSIAD-98-62, Feb.  27, 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). 

1997 Defense Reform Bill:  Observations on H.R.  1778
(GAO/T-NSIAD-97-187, June 17, 1997). 

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

DOD High-Risk Areas:  Eliminating Underlying Causes Will Avoid
Billions of Dollars in Waste (GAO/T-NSIAD/AIMD-97-143, May 1, 1997). 

Defense Acquisition Organizations:  Linking Workforce Reductions With
Better Program Outcomes (GAO/T-NSIAD-97-140, Apr.  8, 1997). 

Defense Budget:  Observations on Infrastructure Activities
(GAO/NSIAD-97-127BR, Apr.  4, 1997). 

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

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

Defense Logistics:  Much of the Inventory Exceeds Current Needs
(GAO/NSIAD-97-71, Feb.  28, 1997). 

Military Bases:  Cost to Maintain Inactive Ammunition Plants and
Closed Bases Could Be Reduced (GAO/NSIAD-97-56, Feb.  20, 1997). 

High-Risk Series:  Defense Financial Management (GAO/HR-97-3, Feb. 
1997). 

High-Risk Series:  Contract Management (GAO/HR-97-4, Feb.  1997). 

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

High-Risk Series:  Defense Infrastructure (GAO/HR-97-7, Feb.  1997). 

Managing Technology:  Best Practices Can Improve Performance and
Produce Results (GAO/T-AIMD-97-38, Jan.  31, 1997). 

Air Force Depot Maintenance:  Privatization-in-Place Plans Are Costly
While Excess Capacity Exists (GAO/NSIAD-97-13, Dec.  31, 1996). 

Defense IRM:  Strategy Needed for Logistics Information Technology
Improvement Efforts (GAO/AIMD-97-6, Nov.  14, 1996). 

Acquisition Reform:  Implementation of Title V of the Federal
Acquisition Streamlining Act of 1994 (GAO/NSIAD-97-22BR, Oct.  31,
1996). 

Army Depot Maintenance:  Privatization Without Further Downsizing
Increases Costly Excess Capacity (GAO/NSIAD-96-201, Sept.  18, 1996). 

1997 DOD Budget:  Potential Reductions to Operation and Maintenance
Program (GAO/NSIAD-96-220, Sept.  18, 1996). 

Defense Acquisition Infrastructure:  Changes in RDT&E Laboratories
and Centers (GAO/NSIAD-96-221BR, Sept.  13, 1996). 

Best Practices:  Commercial Quality Assurance Practices Offer
Improvements for DOD (GAO/NSIAD-96-162, Aug.  26, 1996). 

Navy Financial Management:  Improved Management of Operating
Materials and Supplies Could Yield Significant Savings
(GAO/AIMD-96-94, Aug.  16, 1996). 

Inventory Management:  Adopting Best Practices Could Enhance Navy
Efforts to Achieve Efficiencies and Savings (GAO/NSIAD-96-156, July
12, 1996). 

Defense Infrastructure:  Costs Projected to Increase Between 1997 and
2001 (GAO/NSIAD-96-174, May 31, 1996). 

Military Bases:  Opportunities for Savings in Installation Support
Costs Are Being Missed (GAO/NSIAD-96-108, Apr.  23, 1996). 

Acquisition Reform:  Efforts to Reduce the Cost to Manage and Oversee
DOD Contracts (GAO/NSIAD-96-106, Apr.  18, 1996). 

Defense Depot Maintenance:  Privatization and the Debate Over the
Public-Private Mix (GAO/T-NSIAD-96-146, Apr.  16, 1996). 

Military Bases:  Closure and Realignment Savings Are Significant, but
Not Easily Quantified (GAO/NSIAD-96-67, Apr.  8, 1996). 

Defense Infrastructure:  Budget Estimates for 1996-2001 Offer Little
Savings for Modernization (GAO/NSIAD-96-131, Apr.  4, 1996). 

Managing for Results:  Achieving GPRA's Objectives Require Strong
Congressional Role (GAO/T-GGD-96-79, Mar.  6, 1996). 

Defense Transportation:  Streamlining of the U.S.  Transportation
Command Is Needed (GAO/NSIAD-96-60, Feb.  22, 1996). 

Best Management Practices:  Reengineering the Air Force's Logistics
System Can Yield Substantial Savings (GAO/NSIAD-96-5, Feb.  21,
1996). 

Managing for Results:  Critical Actions for Measuring Performance
(GAO/T-GGD/AIMD-95-187, June 20, 1995). 

Financial Management:  Challenges Confronting DOD's Reform
Initiatives (GAO/T-AIMD-95-146, May 23, 1995). 

Military Bases:  Analysis of DOD's 1995 Process and Recommendations
for Closure and Realignment (GAO/NSIAD-95-133, Apr.  14, 1995). 

*** End of document. ***