Department of Defense
Further Actions Are Needed to Effectively Address Business Management Problems and Overcome Key Business Transformation Challenges Gao ID: GAO-05-140T November 18, 2004In March 2004, GAO testified before the Subcommittee on Readiness and Management Support, Senate Committee on Armed Services on the impact and causes of financial and related business weaknesses on the Department of Defense's (DOD) operations and the status of DOD reform efforts. GAO's reports continue to show that fundamental problems with DOD's financial management and related business operations result in substantial waste and inefficiency, adversely impact mission performance, and result in a lack of adequate transparency and appropriate accountability across all major business areas. Over the years, DOD leaders have initiated a number of efforts to address these weaknesses and transform the department. For years, GAO has reported that DOD is challenged in its efforts to effect fundamental financial and business management reform, and GAO's ongoing work continues to raise serious questions about DOD's chances of success. The Subcommittee asked GAO to provide a current status report on DOD's progress to date and suggestions for improvement. Specifically, GAO was asked to provide (1) an overview of the impact and causes of weaknesses in DOD's business operations, (2) the status of DOD reform efforts, (3) the impact of recent legislation pertaining to DOD's transformation and financial improvement initiatives, and (4) suggestions for improving DOD's efforts to improve the reliability of its financial information.
Although senior DOD leaders have shown commitment to transformation as evidenced by key initiatives such as human capital reform, the Business Management Modernization Program, and the Financial Improvement Initiative, little tangible evidence of improvement has been seen in DOD's business operations. Overhauling the business operations of one of the largest and most complex organizations in the world represents a huge management challenge, especially given the increased demands on our military forces. However, this challenge can be met if DOD employs key elements, such as a comprehensive and integrated business transformation plan. Six DOD program areas are on GAO's high-risk list, and the department shares responsibility for three other governmentwide high-risk areas. Substantial weaknesses in DOD business operations adversely affect its ability to provide timely, reliable management information for DOD and Congress to use in making informed decisions. Further, the lack of adequate transparency and appropriate accountability across all of DOD's major business areas results in billions of dollars annually in wasted resources in a time of increasing fiscal challenges. Four underlying causes impede reform: (1) lack of clear and sustained leadership for overall business transformation efforts, (2) cultural resistance to change, (3) lack of meaningful metrics and ongoing monitoring, and (4) inadequate incentives and accountability mechanisms. To address these issues, GAO reiterates the key elements to successful reform that are embodied in our prior recommendations and two suggestions for legislative action. First, GAO suggests that a senior management position be established to provide strong and sustained leadership over all major transformation efforts. Second, GAO proposes that business systems modernization money be appropriated to designated approval authorities responsible and accountable for system investments within DOD business areas. Absent this unified responsibility, authority, accountability, and control of funding, the current transformation efforts are likely to fail.
GAO-05-140T, Department of Defense: Further Actions Are Needed to Effectively Address Business Management Problems and Overcome Key Business Transformation Challenges
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Testimony:
Before the Subcommittee on Readiness and Management Support, Committee
on Armed Services, U.S. Senate:
For Release on Delivery Expected at 3:30 p.m. EST Thursday, November
18, 2004:
DEPARTMENT OF DEFENSE:
Further Actions Are Needed to Effectively Address Business Management
Problems and Overcome Key Business Transformation Challenges:
Statement of David M. Walker, Comptroller General of the United States:
GAO-05-140T:
GAO Highlights:
Highlights of GAO-05-140T, a report to the Subcommittee on Readiness
and Management Support, Committee on Armed Services, U.S. Senate:
Why GAO Did This Study:
In March 2004, GAO testified before this Subcommittee on the impact and
causes of financial and related business weaknesses on the Department
of Defense‘s (DOD) operations and the status of DOD reform efforts.
GAO‘s reports continue to show that fundamental problems with DOD‘s
financial management and related business operations result in
substantial waste and inefficiency, adversely impact mission
performance, and result in a lack of adequate transparency and
appropriate accountability across all major business areas. Over the
years, DOD leaders have initiated a number of efforts to address these
weaknesses and transform the department. For years, GAO has reported
that DOD is challenged in its efforts to effect fundamental financial
and business management reform, and GAO‘s ongoing work continues to
raise serious questions about DOD‘s chances of success. The
Subcommittee asked GAO to provide a current status report on DOD‘s
progress to date and suggestions for improvement. Specifically, GAO was
asked to provide (1) an overview of the impact and causes of weaknesses
in DOD‘s business operations, (2) the status of DOD reform efforts,
(3) the impact of recent legislation pertaining to DOD‘s transformation
and financial improvement initiatives, and (4) suggestions for
improving DOD‘s efforts to improve the reliability of its financial
information.
What GAO Found:
Although senior DOD leaders have shown commitment to transformation as
evidenced by key initiatives such as human capital reform, the Business
Management Modernization Program, and the Financial Improvement
Initiative, little tangible evidence of improvement has been seen in
DOD‘s business operations. Overhauling the business operations of one
of the largest and most complex organizations in the world represents a
huge management challenge, especially given the increased demands on
our military forces. However, this challenge can be met if DOD employs
key elements, such as a comprehensive and integrated business
transformation plan. Six DOD program areas are on GAO‘s high-risk list,
and the department shares responsibility for three other governmentwide
high-risk areas. Substantial weaknesses in DOD business operations
adversely affect its ability to provide timely, reliable management
information for DOD and Congress to use in making informed decisions.
Further, the lack of adequate transparency and appropriate
accountability across all of DOD‘s major business areas results in
billions of dollars annually in wasted resources in a time of
increasing fiscal challenges.
Examples of the Impact of Business Management Problems at DOD:
Business area affected: Military pay;
Problem identified and its impact: 782 of the 829 mobilized Army
National Guard and Reserve soldiers from 14 case study units GAO
investigated had pay problems. These problems distracted soldiers from
their missions, imposed financial hardships on their families, and had
a negative impact on retention.
Business area affected: Logistics;
Problem identified and its impact: Asset visibility and other
logistical support problems hampered mission readiness during Operation
Iraqi Freedom, including cannibalization of vehicles for parts and
duplication of requisitions.
Business area affected: Travel;
Problem identified and its impact: Ineffective controls over DOD‘s
centrally billed travel accounts led to millions of dollars wasted on
unused airline tickets, reimbursements to travelers for improper or
fraudulent ticket claims, and issuance of tickets based on invalid
travel orders.
Business area affected: Program planning;
Problem identified and its impact: Overly optimistic planning
assumptions used to estimate DOD‘s annual budget request limit
visibility of projected costs. As a result, DOD has too many programs
for the available dollars, which often leads to program instability,
increased costs, and program termination.
Source: GAO.
Four underlying causes impede reform: (1) lack of clear and sustained
leadership for overall business transformation efforts, (2) cultural
resistance to change, (3) lack of meaningful metrics and ongoing
monitoring, and (4) inadequate incentives and accountability
mechanisms. To address these issues, GAO reiterates the key elements
to successful reform that are embodied in our prior recommendations
and two suggestions for legislative action. First, GAO suggests that a
senior management position be established to provide strong and
sustained leadership over all major transformation efforts. Second, GAO
proposes that business systems modernization money be appropriated to
designated approval authorities responsible and accountable for system
investments within DOD business areas. Absent this unified
responsibility, authority, accountability, and control of funding, the
current transformation efforts are likely to fail.
www.gao.gov/cgi-bin/getrpt?GAO-05-140T.
To view the full product, including the scope and methodology, click on
the link above. For more information, contact Gregory Kutz, (202)
512-9095 or kutzg@gao.gov.
[End of section]
Mr. Chairman and Members of the Subcommittee:
It is a pleasure to be back before this Subcommittee to discuss
financial management and overall business transformation efforts at the
Department of Defense (DOD). At the outset, I would like to thank the
Subcommittee for having this hearing and acknowledge the important role
hearings such as this one serve in addressing DOD's business
transformation challenges. DOD spends billions of dollars each year to
sustain key business operations that support our forces, including
systems and processes related to acquisition and contract management,
financial management, supply chain management, support infrastructure
management, human capital management, and other key areas. Recent and
ongoing military operations in Afghanistan and Iraq and new homeland
defense missions have led to higher demands on our forces in a time of
growing fiscal challenges for our nation. In an effort to better manage
DOD's resources, the Secretary of Defense has appropriately placed a
high priority on transforming key business processes to improve their
efficiency and effectiveness in supporting the department's military
mission. However, as our reports continue to show, fundamental problems
with DOD's financial management and related business operations
continue to result in substantial waste and inefficiency, adversely
impact mission performance, and result in a lack of adequate
transparency and appropriate accountability across all major business
areas. Of the 25 areas on GAO's governmentwide high-risk list, 6 are
DOD program areas, and the department shares responsibility for 3 other
high-risk areas that are governmentwide in scope.[Footnote 1] The
problems we continue to identify relate to human capital challenges,
ineffective internal control and processes, and duplicative and
nonintegrated business information, systems, and operations. The
seriousness of weaknesses in DOD's business operations underscores the
importance of no longer condoning the "status quo" at DOD.
Although, the Secretary and several key agency officials have shown
commitment to transformation, as evidenced by key initiatives such as
human capital reform, the Business Management Modernization Program
(BMMP), and the Financial Improvement Initiative, little tangible
evidence of significant broad-based and sustainable improvements has
been seen in DOD's business operations to date. Improvements have
generally been limited to specific business process areas, such as
DOD's purchase card program, and resulted in the incorporation of many
key elements of reform, such as increased management oversight and
monitoring and results-oriented performance measures. It is important
to note that current business transformation initiatives are not
integrated and lack many of the key elements that contributed to the
success of the narrowly defined initiatives that I will highlight
today.
For DOD to successfully transform its business operations, it will need
a comprehensive and integrated business transformation plan, people
with the skills, responsibility, and authority to implement the plan,
an effective process and related tools, such as a Business Enterprise
Architecture (BEA), [Footnote 2] and results-oriented performance
measures that link institutional, unit, and individual personnel goals
and expectations to promote accountability for results. Over the last 3
years, we have made a series of recommendations to DOD and suggested
legislative changes that, if implemented, could help DOD move forward
in establishing the means to successfully address the challenges it
faces in transforming its business operations.[Footnote 3] The
framework that we have proposed includes several key elements for
successful reform, recognizes the complexity of the challenges facing
DOD in its efforts to transform the department, and the long-term
nature of overcoming these challenges. Moreover, it recognizes that the
lack of clearly defined and sustained leadership, an enterprise
architecture to guide and direct business operational changes, cultural
resistance to change, and internal parochialism have impeded the
success of previous reform efforts. DOD has agreed with our
recommendations and launched efforts intended to implement many of
them, but progress has been slow. Unless DOD can address the underlying
causes that have contributed to the failure of previous broad-based
reform efforts, improvements will remain marginal and confined to
narrowly defined business process areas and incremental improvements in
human capital policies, business processes, internal controls, and
information technology systems.
Today, I will provide my perspectives on (1) the impact that long-
standing weaknesses continue to have on the economy, efficiency, and
effectiveness of DOD's business operations, (2) underlying causes that
have impeded the success of prior efforts, (3) keys to successful
reform, and (4) DOD business transformation efforts and interim
improvements. In addition, while statutory requirements enacted
recently as a part of the Ronald W. Reagan National Defense
Authorization Act for Fiscal Year 2005[Footnote 4] are a positive step
towards improving leadership and accountability over DOD's systems
transformation efforts, I will offer two suggestions for legislative
consideration related to sustained top-level leadership,
responsibility, and accountability that would better permit the
effective use of transition plans, processes, people, and tools and
thereby increase the likelihood of successful business transformation.
My statement is based on previous GAO reports and routine efforts to
track the status of open recommendations, as well as on our review of
the work of other Supreme Audit Institutions and DOD auditors, and
recent DOD reports and studies. Our work was performed in accordance
with generally accepted government auditing standards.
Impact of Financial Management and Related Business Process Weaknesses:
As I previously stated, and we have reported on for several years, DOD
faces a range of challenges that are complex, long-standing, pervasive,
and deeply rooted in virtually all major business operations throughout
the department. As I testified last March and as discussed in our
latest financial audit report,[Footnote 5] DOD's financial management
deficiencies, taken together, continue to represent the single largest
obstacle to achieving an unqualified (clean) audit opinion on the U.S.
government's consolidated financial statements. While it is important
to note that some DOD organizations, such as the Defense Finance
Accounting Service (DFAS),[Footnote 6] the Defense Contract Audit
Agency, and the Office of the Inspector General, have clean audit
opinions for fiscal year 2004, significant DOD components do not. To
date, none of the military services has passed the test of an
independent financial audit because of pervasive weaknesses in internal
control and processes and fundamentally flawed business systems.
Moreover, the lack of adequate transparency and appropriate
accountability across DOD's major business areas results in billions of
dollars of wasted resources annually at a time of growing fiscal
constraints.
In identifying improved financial performance as one of its five
governmentwide initiatives, the President's Management Agenda
recognized that obtaining an unqualified financial audit opinion is a
basic prescription for any well-managed organization. At the same time,
it recognized that without sound internal control and accurate and
timely financial and performance information, it is not possible to
accomplish the President's agenda and secure the best performance and
highest measure of accountability for the American people. The Joint
Financial Management Improvement Program (JFMIP)[Footnote 7]
principals have defined certain measures, in addition to receiving an
unqualified financial statement audit opinion, for achieving financial
management success. These additional measures include (1) being able to
routinely provide timely, accurate, and useful financial and
performance information, (2) having no material internal control
weaknesses or material noncompliance with laws and regulations, and (3)
meeting the requirements of the Federal Financial Management
Improvement Act of 1996 (FFMIA).[Footnote 8] Unfortunately, DOD does
not meet any of these conditions. For example, for fiscal year 2004,
the DOD Inspector General issued a disclaimer of opinion on DOD's
financial statements, citing 11 material weaknesses in internal control
and noncompliance with FFMIA requirements.
Recent audits and investigations by GAO and DOD auditors continue to
confirm the existence of pervasive weaknesses in DOD's financial
management and related business processes and systems. These problems
have (1) resulted in a lack of reliable information needed to make
sound decisions and report on the status of DOD activities, including
accountability of assets, through financial and other reports to
Congress and DOD decision makers, (2) hindered its operational
efficiency, (3) adversely affected mission performance, and (4) left
the department vulnerable to fraud, waste, and abuse, of which I have a
few examples.
* 782 of the 829 mobilized Army National Guard and Reserve soldiers
from 14 case study units we reviewed had at least one pay problem--
including overpayments, underpayments, and late payments--associated
with their mobilization. DOD's inability to provide timely and accurate
payments to these soldiers, many of whom risked their lives in
dangerous combat missions in Iraq or Afghanistan, distracted them from
their missions, imposed financial hardships on the soldiers and their
families, and has negatively impacted retention.
([Hyperlink, http://www.gao.gov/cgi-bin/getrpt?GAO-04-89], Nov. 13,
2003 and [Hyperlink, http://www.gao.gov/cgi-bin/getrpt?GAO-04-911],
Aug. 20, 2004):
* DOD incurred substantial logistical support problems as a result of
weak distribution and accountability processes and controls over
supplies and equipment shipments in support of Operation Iraqi Freedom,
similar to those encountered during the prior gulf war. These
weaknesses resulted in (1) supply shortages, (2) backlogs of materials
delivered in-theater but not delivered to the requesting activity, (3)
a discrepancy of $1.2 billion between the amount of materiel shipped
and that acknowledged by the activity as received, (4) cannibalization
of vehicles, and (5) duplicate supply requisitions.
([Hyperlink, http://www.gao.gov/cgi-bin/getrpt?GAO-04-305R], Dec. 18,
2003):
* Inadequate asset accountability also resulted in DOD's inability to
locate and remove from its inventory over 250,000 defective chemical
and biological protective garments known as Battle Dress Overgarments
(BDOs)--the predecessor of the new Joint Service Lightweight Integrated
Suit Technology (JSLIST). Subsequently, we found that DOD had sold many
of these defective suits to the public, including 379 that we purchased
in an undercover operation. In addition, DOD may have issued over 4,700
of the defective BDO suits to local law enforcement agencies. Although
local law enforcement agencies are most likely to be the first
responders to a terrorist attack, DOD failed to inform these agencies
that using these BDO suits could result in death or serious injury.
([Hyperlink, http://www.gao.gov/cgi-bin/getrpt?GAO-04-15NI], Nov. 19,
2003):
* Ineffective controls over Navy foreign military sales using blanket
purchase orders placed classified and controlled spare parts at risk of
being shipped to foreign countries that may not be eligible to receive
them. For example, we identified instances in which Navy country
managers (1) overrode the system to release classified parts under
blanket purchase orders without filing required documentation
justifying the release and (2) substituted classified parts for parts
ordered under blanket purchase orders, bypassing the control-edit
function of the system designed to check a country's eligibility to
receive the parts.
([Hyperlink, http://www.gao.gov/cgi-bin/getrpt?GAO-04-507], June 25,
2004):
* DOD and congressional decision makers lack reliable data upon which
to base sourcing decisions due to recurring weaknesses in DOD data-
gathering, reporting, and financial systems. As in the past, we have
identified significant errors and omissions in the data submitted to
Congress on the amount of each military service's depot maintenance
work outsourced or performed in-house. As a result, both DOD and
Congress lack assurances that the dollar amounts of public-private
sector workloads reported by the military services are reliable.
([Hyperlink, http://www.gao.gov/cgi-bin/getrpt?GAO-04-871], Sept. 29,
2004):
* Ineffective controls over DOD's centrally billed travel accounts led
to millions of dollars wasted on unused airline tickets, reimbursements
to travelers for improper and potentially fraudulent airline ticket
claims, and issuance of airline tickets based on invalid travel orders.
For example, we identified 58,000 airline tickets--primarily purchased
in fiscal years 2001 and 2002--with a residual value of more than $21
million that were unused and not refunded as of October 2003. On the
basis of limited airline data, we determined that since 1997, the
potential magnitude of DOD's unused tickets could be at least $115
million. ([Hyperlink, http://www.gao.gov/cgi-bin/getrpt?GAO-04-825T],
June 9, 2004 and
[Hyperlink, http://www.gao.gov/cgi-bin/getrpt?GAO-04-398], Mar. 31,
2004):
* The Navy's lack of detailed cost information hinders its ability to
monitor programs and analyze the cost of its activities. For example,
we found that the Navy lacked the detailed cost and inventory data
needed to assess its needs, evaluate spending patterns, and leverage
its telecommunications buying power. As a result, we found that at the
sites reviewed, the Navy paid for telecommunications services it no
longer required, paid too much for services it used, and paid for
potentially fraudulent or abusive long-distance charges. For instance,
we found that DOD paid over $5,000 in charges for one card that was
used to place 189 calls in one 24-hour period from 12 different cities
to 12 different countries.
([Hyperlink, http://www.gao.gov/cgi-bin/getrpt?GAO-04-671], June 14,
2004):
* DOD continues to use overly optimistic planning assumptions to
estimate its annual budget request. These assumptions are reflected in
its Future Years Defense Program (FYDP), which reports projected
spending for the current budget year and at least 4 succeeding years.
Such overly optimistic assumptions limit the visibility of costs
projected throughout the FYDP period and beyond. As a result, DOD has
too many programs for the available dollars, which often leads to
program instability, costly program stretch-outs, and program
termination. For example, in January 2003, we reported that the
estimated costs of developing eight major weapons systems had increased
from about $47 billion in fiscal year 1998 to about $72 billion by
fiscal year 2003. In addition, in September 2004 the Congressional
Budget Office projected that if the costs of weapons programs and
certain other activities continued to grow as they have historically
rather than as DOD currently projects, executing today's defense plans
would require spending an average of $498 billion a year through 2009.
Without realistic projections, Congress and DOD will not have
visibility over the full range of budget options available to achieve
defense goals.
([Hyperlink, http://www.gao.gov/cgi-bin/getrpt?GAO-03-98], Jan. 2003
and [Hyperlink, http://www.gao.gov/cgi-bin/getrpt?GAO-04-514], May 7,
2004):
* DOD did not know the size of its security clearance backlog at the
end of September 2003 and had not estimated this backlog since January
2000. Using September 2003 data, we estimated that DOD had a backlog of
roughly 360,000 investigative and adjudicative cases, but the actual
backlog size is uncertain. DOD's failure to eliminate and accurately
assess the size of its backlog may have adverse affects. For example,
delays in updating overdue clearances for personnel doing classified
work may increase national security risks and slowness in issuing new
clearances can increase the costs of doing classified government work.
([Hyperlink, http://www.gao.gov/cgi-bin/getrpt?GAO-04-344], Feb. 9,
2004):
These examples clearly demonstrate not only the severity of DOD's
current problems, but also the importance of reforming the department's
business operations to more effectively support DOD's core mission, to
improve the economy and efficiency of its operations, and to provide
for transparency and accountability to Congress and American taxpayers.
Underlying Causes of Financial and Related Business Process
Transformation Challenges:
The underlying causes of DOD's financial management and related
business process and system weaknesses are generally the same ones I
have outlined in my prior testimonies before this Subcommittee over the
last 3 years. Unfortunately, DOD has made little progress in addressing
these fundamental issues and thus is at high risk that its current
major reform initiatives will fail. For each of the problems I cited
previously, we found that one or more of these long-standing causes
were contributing factors. Over the years, the department has
undertaken many well-intended initiatives to transform business
operations departmentwide and improve the reliability of information
for decision making and reporting. However, many of these efforts
resulted in costly failures because the department did not fully
address the following four underlying causes of transformation
challenges.
Lack of Sustained Leadership and Management Accountability:
DOD has not routinely assigned accountability for performance to
specific organizations or individuals who have sufficient authority,
resource control, and continuity in their position to accomplish
desired goals. In addition, top management has not had a proactive,
consistent, and continuing role in integrating daily operations with
business transformation-related performance goals. It is imperative
that major improvement initiatives have the direct, active support and
involvement of the Secretary and Deputy Secretary of Defense to ensure
that daily activities throughout the department remain focused on
achieving shared, agencywide outcomes and success. However, sustaining
top management continuity and commitment to performance goals, long-
term planning, and follow-through that will necessarily span several
years is particularly challenging for DOD. For example, in fiscal year
2004, DOD's Comptroller, Deputy Under Secretary of Defense for
Management Reform, and Deputy Chief Financial Officer--to whom the
Secretary delegated the leadership role for key transformation
initiatives--all resigned from the department within a 5-month period.
Moreover, the department's primary transformation program--BMMP--has
had three different directors responsible for leading the program since
Secretary Rumsfeld initiated it a little over 3 years ago. Given the
importance of DOD's business transformation effort, it is imperative
that it receives sustained, focused departmentwide leadership needed to
improve the economy, efficiency, and effectiveness of DOD's business
operations. As I will discuss in more detail later, we continue to
advocate the establishment of a new executive position to provide
strong and sustained leadership to the entire spectrum of DOD business
transformation initiatives.
Cultural Resistance and Parochialism:
The department has acknowledged that it confronts decades-old problems
deeply grounded in the bureaucratic history and operating practices of
a complex, multifaceted organization. Many of DOD's current operating
practices and systems were developed piecemeal to accommodate different
organizations, each with its own policies and procedures. As we have
reported over the last 3 years,[Footnote 9] DOD has continued to use a
stovepiped approach to develop and fund its business system
investments. The existing systems environment evolved over time as DOD
components--each receives its own system funding and follows
decentralized acquisition and investment practices--developed narrowly
focused parochial solutions to their business problems. While the
Ronald W. Reagan National Defense Authorization Act for Fiscal Year
2005[Footnote 10] more clearly defines the roles and responsibilities
of business system investment approval authorities, control over the
budgeting for and execution of funding for system investment activities
remains at the component level. As I will discuss later, unless
business systems modernization money is appropriated to those who are
responsible and accountable for reform, DOD is at risk for continuing
its current stovepiped approach to developing and funding system
investments and failing to fundamentally improve its business
operations. DOD's ability to address its current "business-as-usual"
approach to business system investments is further hampered by its lack
of an effective methodology and process for obtaining a complete
picture of its current business systems environment--a condition we
first highlighted in 1997.[Footnote 11] In September 2004, DOD reported
that the department had identified over 4,000 business systems--up from
the 1,731 the department reported in October 2002. Unfortunately, due
to its lack of an effective methodology and process for identifying
business systems, including a clear definition of what constitutes a
business system, DOD continues to lack assurance that its systems
inventory is reliable. This lack of visibility over business systems in
use throughout the department hinders DOD's ability to identify and
eliminate duplicate and nonintegrated systems and transition to an
integrated systems environment.
Lack of Results-Oriented Goals and Performance Measures:
At a programmatic level, the lack of clear, comprehensive, and
integrated performance goals and measures has handicapped DOD's past
reform efforts. As a result, DOD managers lacked straightforward
roadmaps showing how their work contributed to attaining the
department's strategic goals, and they risked operating autonomously
rather than collectively. As of March 2004, DOD had formulated
departmentwide performance goals and measures and continues to refine
and align them with the outcomes described in its strategic plan--the
September 2001 Quadrennial Defense Review (QDR). The QDR outlined a new
risk management framework consisting of four dimensions of risk--force
management, operational, future challenges, and institutional--to use
in considering trade-offs among defense objectives and resource
constraints. According to DOD's Fiscal Year 2003 Annual Report to the
President and the Congress, these risk areas are to form the basis for
DOD's annual performance goals. They will be used to track performance
results and will be linked to planning and resource decisions. As of
October 2004, the department was still in the process of implementing
this approach departmentwide. However, it remains unclear how DOD will
use this approach to measure progress in achieving business reform.
As we reported in May 2004, DOD had yet to establish measurable,
results-oriented goals for BMMP.[Footnote 12] BMMP is the department's
major business transformation initiative encompassing defense
policies, processes, people, and systems that guide, perform, or
support all aspects of business management, including development and
implementation of the BEA. A key element of any major program is its
ability to establish clearly defined goals and performance measures to
monitor and report its progress to management. The lack of BMMP
performance measures has made it is difficult to evaluate and track
specific program progress, outcomes, and results, such as explicitly
defined performance measures to evaluate the architecture's quality,
content, and utility of subsequent major updates. Given that DOD had
reported total obligations for BMMP of over $203 million since
architecture development began 3 years ago, with little tangible
improvements in DOD operations, this is a serious performance
management weakness.
Further, DOD has not established measurable criteria that decision
makers must consider for its revised weapons system acquisition policy,
issued in May 2003.[Footnote 13] The revisions make major improvements
to DOD acquisition policy by adopting knowledge-based, evolutionary
practices used by successful commercial companies. However, DOD has not
provided the necessary controls to ensure such an approach is followed.
For example, the policy does not establish measures to gauge design and
manufacturing knowledge at critical junctures in the product
development process, allowing significant unknowns to be judged as
acceptable risks. Without controls in the form of measurable criteria
that decision makers must consider, DOD runs the risk of making
decisions based on overly optimistic assumptions.
Lack of Incentives for Change:
The final underlying cause of the department's long-standing inability
to carry out needed fundamental reform has been the lack of a clear
linkage of institutional, unit, and individual results-oriented goals,
performance measures, and reward mechanisms for making more than
incremental changes to existing "business-as-usual" operations,
systems, and organizational structures. Traditionally, DOD has focused
on justifying its need for more funding rather than on the outcomes its
programs have produced. DOD has historically measured its performance
by resource components, such as the amount of money spent, people
employed, or number of tasks completed. Incentives for its decision
makers to implement behavioral changes have been minimal or
nonexistent.
The lack of incentives to change is evident in the business systems
modernization area. We have identified numerous business system
modernization efforts that were not economically justified on the basis
of cost, benefits, and risk; took years longer than planned; and fell
far short of delivering planned or needed capabilities. Despite this
track record, DOD continues to invest billions in business systems
while at the same time it lacks the effective management and oversight
needed to achieve real results. Without appropriate incentives and
accountability mechanisms, as well as more centralized control of
systems modernization funding, DOD components will continue to develop
duplicative and nonintegrated systems that are inconsistent with the
Secretary's vision for reform. To effect real change, actions are
needed to (1) develop a well-defined blueprint for change, such as an
enterprise architecture, that provides a common framework of reference
for making informed system investment decisions, (2) adopt an
investment decision-making model that uses the architecture to break
down parochialism and reward behaviors that meet DOD-wide goals, (3)
establish incentives that motivate decision makers to initiate and
implement efforts that are consistent with better architecture and
program outcomes, including saying "no" or pulling the plug early on a
system or program that is failing, (4) address human capital issues,
such as the adequacy of staffing level, skills, and experience
available to achieve the institutional, unit, and individual objectives
and expectations, and (5) facilitate a congressional focus on results-
oriented management, particularly with respect to resource allocation
decisions.
Keys to Successful Reform and Current Status of Reform Efforts:
The success of DOD's current broad-based business reform initiatives is
threatened, as prior initiatives were, by DOD's continued failure to
incorporate key elements that are critical to achieve successful
reform. Any efforts at reform must include (1) a comprehensive,
integrated business transformation plan, (2) personnel with the
necessary skills, experience, responsibility, and authority to
implement the plan, (3) effective processes and related tools, such as
a BEA and business system investment decision making controls, and (4)
results-oriented performance measures that link institutional, unit,
and individual personnel goals, measures, and expectations. Today, I
would like to discuss three of those broad-based initiatives. In
addition, I will briefly highlight some of the several smaller, more
narrowly focused initiatives DOD has started in recent years that,
through incorporation of many of the key elements, have been successful
in making tangible improvements in DOD operations. Furthermore, I would
like to reiterate two suggestions for legislative consideration that I
believe are essential in order for DOD to be successful in its overall
business transformation effort.
Keys to Successful Reform:
As I have previously testified,[Footnote 14] and as illustrated by the
success of the more narrowly defined DOD initiatives I will discuss
later, there are several key elements that collectively would enable
the department to effectively address the underlying causes of its
inability to resolve its long-standing business management problems.
These elements, which we believe are key to any successful approach to
transforming the department's business operations, include:
* addressing the department's financial management and related business
operational challenges as part of a comprehensive, integrated, DOD-wide
strategic plan for business reform;
* providing for sustained, committed, and focused leadership by top
management, including but not limited to the Secretary of Defense;
* establishing resource control over business systems investments;
* establishing clear lines of responsibility, authority, and
accountability;
* incorporating results-oriented performance measures that link key
institutional, unit, and individual personnel transformation
objectives and expectations, and monitoring progress;
* addressing human capital issues, such as the adequacy of staff
levels, skills, and experience available to achieve the institutional,
unit, and individual personnel performance goals and expectations;
* providing appropriate incentives or consequences for action or
inaction;
* establishing an enterprise architecture to guide and direct business
systems modernization investments; and:
* ensuring effective oversight and monitoring.
These elements, which should not be viewed as independent actions but
rather as a set of interrelated and interdependent actions, are
reflected in the recommendations we have made to DOD over the last 3
years and are consistent with those actions discussed in the
department's April 2001 financial management transformation
report.[Footnote 15] The degree to which DOD incorporates them into its
current reform efforts--both long and short term--will be a deciding
factor in whether these efforts are successful. Thus far, the
department's progress in implementing our recommendations pertaining to
its broad-based initiatives has been slow. Further, while the new
legislation[Footnote 16] on business systems oversight directs DOD to
take action on some of these elements, we have not yet seen a
comprehensive, cohesive, and integrated strategy that details how some
of the ongoing efforts are being integrated. For example, we have not
seen how the department plans to integrate its objective of obtaining
an unqualified audit opinion in fiscal year 2007 with the
BMMP.[Footnote 17] It appears as if these two efforts are being
conducted without the degree of coordination that would generally be
expected between efforts that share similar objectives.
Human Capital Initiative:
The first broad-based administrative initiative is effective
implementation of the National Security Personnel System (NSPS). In
November 2003, Congress authorized the Secretary of Defense to
establish a new human capital management system--NSPS--for its civilian
employees, which is modern, flexible, and consistent with the merit
principles outlined by the act.[Footnote 18] This legislation requires
DOD to develop a personnel system that is consistent with many of the
practices that we have identified as elements of an effective human
capital management system, including a modern and results-oriented
performance management system. For several years, we have
reported[Footnote 19] that many of DOD's business process and control
weaknesses were attributable in part to human capital issues. For
example, GAO audits of DOD's Army Reserve and National Guard payroll
and the centrally billed travel card programs[Footnote 20] further
highlight the adverse impact that outdated and inadequate human capital
practices, such as insufficient staffing, training, and monitoring of
performance, continue to have on DOD business operations. If properly
developed and implemented, NSPS could result in significant
improvements to DOD's business operations.
I strongly support the need for modernizing federal human capital
policies both within DOD and for the entire federal government. Since
April 2003 I have testified on four different occasions, including
before this Subcommittee, on NSPS and related DOD human capital
issues.[Footnote 21] In the near future, we will issue a summary of the
forum GAO and the National Commission on the Public Service
Implementation Initiative cohosted to advance the discussion of how
human capital reform should proceed. Participants discussed whether
there should be an overall governmentwide framework for human capital
reform and, if yes, what such a framework should include. While the
forum neither sought nor achieved consensus on all of the issues
identified in the discussion, there was broad agreement that there
should be a governmentwide framework to guide human capital reform
built on a set of timeless beliefs and boundaries. Beliefs entail the
fundamental principles that should govern all approaches to human
capital reform and should not be altered or waived by agencies seeking
human capital authorities. Boundaries include the criteria and
processes that establish the checks and limitations when agencies seek
and implement human capital authorities.
A modern, effective, credible, and integrated performance management
system can help improve DOD's business operations. Specifically, such a
performance management system aligns individual performance
expectations with organizational goals and thus defines responsibility
and assures accountability for achieving them.[Footnote 22] In
addition, a performance management system can help manage and direct a
transformation process by linking performance expectations to an
employee's role in the process. Individual performance and
contributions are evaluated on competencies such as change management.
Leaders, managers, and employees who demonstrate these competencies are
rewarded for their success in contributing to the achievement of the
transformation process.
There are significant opportunities to use the performance management
system to explicitly link senior executive expectations for performance
to results-oriented goals. There is a need to hold senior executives
accountable for demonstrating competencies in leading and facilitating
change and fostering collaboration both within and across
organizational boundaries to achieve results. Setting and meeting
expectations such as these will be critical to achieving needed
transformation changes. Recently, Congress established a new
performance-based pay system for members of the Senior Executive
Service (SES) that is designed to provide a clear and direct link
between SES performance and pay. An agency can raise the pay cap for
its senior executives if the agency's performance management system
makes meaningful distinctions based on relative performance.[Footnote
23] This visible step in linking pay to the achievement of measurable
performance goals within a context of a credible human capital system
that includes adequate safeguards is helpful in constructing a results-
oriented culture.
In my March 2004 testimony on DOD's financial management and related
business management transformation efforts,[Footnote 24] I stated that
as DOD develops regulations to implement its new human capital
management system, the department needs to do the following:
* Ensure the active involvement of the Office of Personnel Management
in the development process, given the significant implications that
changes in DOD regulations may have on governmentwide human capital
policies.[Footnote 25] In this regard, the Office of Personnel
Management has assigned a senior representative to support and advise
DOD on the development of jointly prescribed NSPS regulations and the
implementation of NSPS.
* Ensure the involvement of civilian employees and unions in the design
and development of a new personnel system. The law calls for DOD to
involve employees, especially in the design of its new performance
management system. Involving employees in planning helps to develop
agency goals and objectives that incorporate insights about operations
from a front-line perspective. It can also serve to increase employees'
understanding and acceptance of organizational goals and improve
motivation and morale. In this regard, DOD has launched a new Web site
to educate its employees about the new National Security Personnel
System. In addition, DOD leadership has indicated that it has sought
input from civilian employees through town hall meetings, focus groups,
and discussions with union leaders.
* Use a phased approach to implement the system, recognizing that
different parts of the organization will have different levels of
readiness and different capabilities to implement new authorities. A
phased approach allows for learning so that appropriate adjustments and
midcourse corrections can be made before the regulations are fully
implemented departmentwide. In this regard, DOD had initially indicated
that it planned to implement its new human capital system for 300,000
civilian employees by October 1, 2004. DOD has since indicated that it
has adjusted its timelines to reflect a more cautious, deliberative
approach involving more stakeholders. DOD has now indicated that it
plans to phase in its new human capital system beginning in July 2005.
We are currently evaluating DOD's NSPS design process and look forward
to sharing our findings with Congress upon completion of our review.
Business Management Modernization Program:
While BMMP[Footnote 26] is vital to the department's efforts to
transform its business operations, DOD has not effectively addressed
many of the impediments to successful reform that I mentioned earlier,
including (1) a lack of sustained, effective, and focused leadership,
(2) a lack of results-oriented goals and performance measures, and (3)
long-standing cultural resistance and parochialism. As a result, the
program has yielded very little, if any, tangible improvements in DOD's
business operations. We have made numerous recommendations to DOD that
center on the need to incorporate the key elements to successful
reform, which I discussed previously, into the program. In May 2004 we
reported[Footnote 27] that no significant changes had been made to the
architecture since the initial version was released. Further, we
reported that DOD had not yet adopted key architecture management best
practices, such as assigning accountability and responsibility for
directing, overseeing, and approving the architecture and explicitly
defining performance metrics to evaluate the architecture's quality,
content, and utility. For these and other reasons, DOD's verification
and validation contractor concluded that this latest version of the
architecture retained most of the critical problems of the initial
version, such as how the architecture should be used by the military
services and other DOD components in making acquisition and portfolio
investment decisions. I will now expand on the problems facing BMMP.
The purpose of BMMP is to provide world-class mission support to the
war fighter through transformation of DOD's business processes and
systems. A key element of BMMP is the development and implementation of
a well-defined BEA. Properly developed and implemented, a BEA can
provide assurance that the department invests in integrated
enterprisewide business solutions and, along with effective project
management and resource controls, it can be instrumental in developing
corporatewide solutions and moving resources away from nonintegrated
business system development efforts. As we reported in July
2003,[Footnote 28] DOD had developed an initial version of BEA and had
expended tremendous effort and resources in doing so. However, we also
reported that substantial work remains before the architecture would be
sufficiently defined to have a tangible impact on improving DOD's
overall business operations. In May 2004, we reported[Footnote 29] that
after about 3 years of effort and over $203 million in reported
obligations for BMMP operations, BEA's content and DOD's approach to
investing billions of dollars annually in existing and new systems had
not changed significantly. Under a provision in the recently enacted
Ronald W. Reagan National Defense Authorization Act for fiscal year
2005,[Footnote 30] DOD must develop an enterprise architecture to cover
all defense business systems and related business functions and
activities that is sufficiently defined to effectively guide,
constrain, and permit implementation of a corporatewide solution and is
consistent with the policies and procedures established by the Office
of Management and Budget. Further, the act requires the development of
a transition plan that includes not only an acquisition strategy for
new systems, but also a listing of the termination dates of current
legacy systems that will not be part of the corporatewide solution, as
well as a listing of legacy systems that will be modified to become
part of the corporatewide solution for addressing DOD's business
management deficiencies. Transforming DOD's business operations and
making them more efficient through the elimination of nonintegrated and
noncompliant legacy systems would free up resources that could be used
to support the department's core mission, enhance readiness, and
improve the quality of life for our troops and their families.
I cannot overemphasize the degree of difficulty DOD faces in developing
and implementing a well-defined architecture to provide the foundation
that will guide its overall business transformation. The department's
business transformation depends on its ability to develop and implement
business systems that provide corporate solutions. Successful
implementation of corporate solutions through adherence to a well-
defined enterprise architecture and effective project management and
fund control would go a long way toward precluding the continued
proliferation of duplicative, stovepiped systems and reduce spending on
multiple systems that are supposed to perform the same function.
Without these things, we have continued to see[Footnote 31] that DOD is
still developing systems that are not designed to solve corporatewide
problems.
For example, the Defense Logistics Agency's (DLA) Business Systems
Modernization (BSM) and the Army's Logistics Modernization Program
(LMP), both of which were initiated prior to commencement of the BEA
effort, were not directed towards a corporate solution to the
department's long-standing weaknesses in inventory and logistics
management, such as the lack of total asset visibility. Rather, both
projects focused on their respective entity's inventory and logistics
management operations. As a result, neither project will provide asset
visibility beyond the stovepiped operation for which they were
designed. For example, BSM is only designed to provide visibility over
the items within the DLA environment--something DLA has stated already
exists within its current system environment. As a result, DOD
continues to lack the capability to identify the exact location of
items, such as defective chemical and biological protective suits, that
were distributed to end-users, such as the military services, or sold
to the public. The department would have to resort to inefficient and
ineffective data calls, as it has done in the past, to identify and
withdraw defective items from use.[Footnote 32]
Another major impediment to the successful transformation of DOD's
business systems is funds control. DOD invests billions of dollars
annually to operate, maintain, and modernize its business systems. For
fiscal year 2004, the department requested approximately $28 billion in
IT funding to support a wide range of military operations as well as
DOD business systems operations, of which DOD reported that
approximately $18.8 billion [Footnote 33]--$5.8 billion for business
systems and $13 billion for business systems infrastructure--relates to
the operation, maintenance, and modernization of the department's
reported thousands of business systems. The $18.8 billion is spread
across the military services and defense agencies, with each receiving
and controlling its own funding for IT investments. Although the
recently enacted Ronald W. Reagan National Defense Authorization Act
for fiscal year 2005 more clearly defines the roles and
responsibilities of business system investment approval authorities,
control over the budgeting for and execution of funding for system
investment activities remains at the component level. Under a provision
in the act,[Footnote 34] effective October 1, 2005, DOD must identify
each defense system for which funding is proposed in its budget,
including the identification of all funds, by appropriation, for
current services (to operate and maintain the system) and
modernization. Further, DOD may not obligate funds for a defense
business system modernization that will have a total cost in excess of
$1 million unless specific conditions called for in the act are
met.[Footnote 35] The Defense Business Systems Management Committee,
also required by the act to be established, must then approve the
designated approval authorities'[Footnote 36] certification before
funds can be obligated. Further, obligation of funds for modernization
programs without certification and approval by the Defense Business
Systems Management Committee is deemed a violation of the Anti-
Deficiency Act.[Footnote 37] Although proper implementation of this
legislation should strengthen oversight of DOD's systems modernization
efforts, it is questionable whether DOD has developed or improved its
processes and procedures to identify and control system investments
occurring at the component level. Unless DOD establishes effective
processes and controls to identify and control system investments
occurring within DOD components and overcome parochial interests when
corporatewide solutions are more appropriate, it will lack the ability
to ensure compliance with the act.
We fully recognize that developing and implementing an enterprise
architecture for an organization as large and complex as DOD is a
formidable challenge. Nevertheless, a well-defined architecture is
essential to enabling some of the elements for successful reform that I
discussed earlier. Accordingly, we remain supportive of the need for
BMMP, but are deeply concerned about the program's lack of meaningful
progress and inability to address management challenges. Accordingly,
we plan to continue working constructively with the department to
strengthen the program and will report to this Subcommittee on DOD's
progress and challenges in the spring of 2005.
Financial Improvement Initiative:
While DOD's former Comptroller started the financial improvement
initiative with the goal of obtaining an unqualified audit opinion for
fiscal year 2007 on its departmentwide financial statements, we found
that the initiative was simply a goal that lacked a clearly defined,
well-documented, and realistic plan to make the stated goal a reality.
In September 2004 we reported[Footnote 38] that DOD's financial
improvement initiative lacked several of the key elements critical to
success, including (1) a comprehensive, integrated plan, (2) results-
oriented goals and performance measures, and (3) effective oversight
and monitoring. Specifically, we found that DOD had not established a
framework to integrate the improvement efforts planned by DOD
components with broad-based DOD initiatives such as human capital and
BMMP. Rather, DOD intended to rely upon the collective efforts of DOD
components, as shown in their discrete plans, to address its financial
management deficiencies while at the same time continuing its broad-
based initiatives. However, the component plans we reviewed did not
consistently identify whether a proposed corrective action included a
manual work-around or business system enhancement or replacement.
Further, the component plans lacked sufficient information regarding
human capital needs, such as the staffing level and skills required to
implement and sustain the plans. In addition, as we have previously
reported,[Footnote 39] the department currently lacks a mechanism to
effectively identify, monitor, and oversee business system investments,
including enhancements, occurring within the department. Because of
this lack of visibility over how DOD components plan to advance their
financial management functionality, the DOD Comptroller and BMMP may
not have sufficient information to assess the feasibility of a work-
around or to review and approve all modifications to existing legacy
business systems to ensure that they (1) are sound investments, (2)
optimize mission performance and accountability, and (3) are consistent
with applicable requirements and key architectural elements in DOD's
business enterprise architecture.
In addition, our review of key individual component plans revealed that
the plans varied in levels of detail, completeness, and scope, such
that it will be difficult for DOD Comptroller staff to use the
departmental database of component plans it was developing to oversee
and monitor component efforts. We found that the component plans did
not consistently identify how staff (human capital), processes, or
business systems would be changed to implement corrective actions. Such
changes are key elements in assessing the adequacy of a component's
plan and in monitoring progress and sustainability.
Further, DOD lacked effective oversight and accountability mechanisms
to ensure that the plans are implemented and corrective actions are
sustainable. The database the department is currently using was not
integrated electronically with subordinate component plans and the
milestone dates identified in the component plans were generally based
on assertion dates prescribed by the DOD Comptroller and not on actual
estimates of effort required. Furthermore, task dependencies were not
clearly identified, including critical corrective tasks that would need
to be completed in order for the fiscal year 2007 audit opinion to be
achieved.
On the positive side, DOD had developed business rules,[Footnote 40]
which if implemented as planned, should clearly establish a process for
ensuring that corrective actions, as described in the component plans,
are implemented and validated in order to minimize the department's
risk of unsupported claims by DOD components that reported financial
information is auditable. Further, the business rules clearly recognize
that management, not the auditor, is responsible for documenting
business processes, systems, and internal control for collecting and
maintaining transaction data. In addition, DOD's involvement of its
components in developing and implementing solutions to long-standing
deficiencies in their business operations under this initiative is a
critical and positive step toward obtaining the commitment and buy-in
that has not been readily apparent in BMMP. Further, the recently
enacted Ronald W. Reagan National Defense Authorization Act for Fiscal
Year 2005[Footnote 41] has placed a limitation on continued preparation
or implementation of DOD's financial improvement initiative pending a
report to congressional defense committees containing the following:
(1) a determination that BEA and the transition plan have been
developed, as required by section 332 of the act, (2) an explanation of
the manner in which fiscal year 2005 operation and maintenance funds
will be used by DOD components to prepare or implement the midrange
financial improvement plan, and (3) an estimate of future year costs
for each DOD component to implement the plan. DOD Comptroller staff
acknowledged that their goal was ambitious, but believed that they were
in the process of laying a framework, which they believe would address
our issues, to facilitate movement towards sustainable financial
management improvements and eventually obtain an unqualified audit
opinion.
Interim Initiatives:
In contrast to its broad-based initiatives, DOD has incorporated many
of the key elements for successful reform in its interim initiatives.
As the following examples demonstrate, leadership, real incentives,
accountability, and oversight and monitoring were clearly key elements
in DOD's efforts to improve its operations. For example, the former DOD
Comptroller developed a Financial Management Balanced Scorecard that is
intended to align the financial community's strategy, goals,
objectives, and related performance measures with the departmentwide
risk management framework established as part of DOD's Quadrennial
Defense Review, and with the President's Management Agenda. To
effectively implement the balanced scorecard, the DOD Comptroller has
cascaded the performance measures down to the military services and
defense agency financial communities, along with certain specific
reporting requirements. At the departmentwide level, certain financial
metrics are selected, consolidated, and reported to the top levels of
DOD management for evaluation and comparison. These "dashboard" metrics
are intended to provide key decision makers, including Congress, with
critical performance information at a glance, in a consistent and
easily understandable format.
DFAS has been reporting the metrics cited below for several years,
which under the leadership of DFAS's Director and DOD's Comptroller,
have reported improvements including the following.
* From April 2001 to September 2004, DOD reduced its commercial pay
backlogs (payment delinquencies) by 72 percent.
* From March 2001 to September 2004, DOD reduced its payment recording
errors by 77 percent.
* From September 2001 to September 2004, DOD reduced its delinquency
rate for individually billed travel cards from 9.4 percent to 4.3
percent.
Using DFAS's metrics, management can quickly see when and where
problems are arising and can focus additional attention on those areas.
While these metrics show significant improvements from 2001 to today,
our report last year on DOD's metrics program[Footnote 42] included a
caution that, without modern integrated systems and the streamlined
processes they engender, reported progress may not be sustainable if
workload is increased.
DOD and the military services have also acted to improve their
oversight and monitoring of the department's purchase card program and
have taken actions, that when fully implemented, should effectively
address all of our 109 recommendations. For example, they issued policy
guidance on monitoring charge card activity and disciplinary actions
that will be taken against civilian or military employees who engage in
improper, fraudulent, abusive, or negligent use of a government charge
card. In addition, they substantially reduced the number of purchase
cards issued. According to the General Services Administration records,
DOD had reduced the total number of purchase cards from about 239,000
in March 2001 to about 131,875 in June 2004. These reductions have the
potential to significantly improve the management of this program.
Further, the DOD IG and the Navy have prototyped and are now expanding
a data-mining capability to screen for and identify high-risk
transactions (such as potentially fraudulent, improper, and abusive use
of purchase cards) for subsequent investigation. On April 28, 2004, the
DOD IG testified[Footnote 43] on ways the department could save money
through the prudent use of government purchase cards. The testimony
highlighted improvements made in the management of the department's
purchase card program and areas for which additional improvements are
needed. Specifically, the testimony identified actions the DOD IG had
taken to partner with the DOD purchase card program management offices
so that DOD could more proactively identify and prevent potential
fraud, waste, and mismanagement. However, more still needs to be done
because the testimony also discussed more than $12 million in
fraudulent, wasteful, or abusive purchases identified by the DOD IG.
In addition to the oversight and monitoring performed by DOD over these
business areas, we believe that consistent congressional oversight
played a major role in bringing about these improvements in DOD's
purchase and travel card programs. From 2001 through 2004, 10 separate
congressional hearings were held on DOD's purchase and travel card
programs. Numerous legislative initiatives aimed at improving DOD's
management and oversight of these programs also had a positive impact.
Most recently, the fiscal year 2005 Defense Appropriations Act[Footnote
44] reduced DOD's appropriation by $100 million to "limit excessive
growth" in DOD's travel expenses.
Another important initiative under way at the department pertains to
the quarterly financial statement review sessions held by the DOD
Comptroller, which have led to the discovery and correction of numerous
recording and reporting errors. Under the leadership of DOD's former
Comptroller, and continuing under its new leadership, DOD is working to
instill discipline into its financial reporting processes to improve
the reliability of the department's financial data. Specifically, the
DOD Comptroller requires DOD's major components to prepare quarterly
financial statements along with extensive footnotes that explain any
improper balances or significant variances from previous year quarterly
statements. All of the statements and footnotes are analyzed by
Comptroller office staff and reviewed by the Comptroller. In addition,
the midyear and end-of-year financial statements must be briefed to the
DOD Comptroller by the military service Assistant Secretary for
Financial Management or the head of the defense agency. Under DOD's
former Comptroller, GAO and the DOD IG were invited to observe several
of these briefings and noted that the practice of preparing and
explaining interim financial statements has improved the reliability of
reported information through more timely discovery and correction of
numerous recording and reporting errors. Although these meetings are
continuing under the current Comptroller, GAO and the DOD IG have not
been invited to attend.
Suggestions for Legislative Consideration:
I would like to reiterate two suggestions for legislative consideration
that I discussed in my testimony last March, which I believe could
further improve the likelihood of successful business transformation at
DOD. Most of the key elements necessary for successful transformation
could be achieved under the current legislative framework; however,
addressing sustained and focused leadership for DOD business
transformation and funding control will require additional legislation.
These suggestions include the creation of a chief management official
and the appropriation of business system investment funding to the
approval authorities responsible and accountable for business system
investments under provisions enacted by the Ronald W. Reagan National
Defense Authorization Act for Fiscal Year 2005.[Footnote 45]
Chief Operating Officer/Chief Management Official:
While the Secretary and other key DOD leaders have demonstrated their
commitment to the current business transformation efforts, in our view,
the complexity and long-term nature of these efforts requires the
development of an executive position capable of providing strong and
sustained executive leadership--over a number of years and various
administrations. The day-to-day demands placed on the Secretary, the
Deputy Secretary, and others make it difficult for these leaders to
maintain the oversight, focus, and momentum needed to resolve the
weaknesses in DOD's overall business operations. This is particularly
evident given the demands that the Iraq and Afghanistan postwar
reconstruction activities and the continuing war on terrorism have
placed on current leaders. Likewise, the breadth and complexity of the
problems preclude the under secretaries, such as the DOD Comptroller,
from asserting the necessary authority over selected players and
business areas while continuing to fulfill their other
responsibilities.
While sound strategic planning is the foundation upon which to build,
sustained and focused leadership is needed for reform to succeed. One
way to ensure sustained leadership over DOD's business transformation
efforts would be to create a full-time executive-level II position for
a chief operating officer or chief management official (COO/CMO), who
would serve as the Principal Under Secretary of Defense for
Management.[Footnote 46] This position would elevate, integrate, and
institutionalize the attention essential for addressing key stewardship
responsibilities, such as strategic planning, human capital management,
performance and financial management, acquisition and contract
management, and business systems modernization, while facilitating the
overall business transformation operations within DOD.
The COO/CMO concept is consistent with the commonly agreed-upon
governance principle that there needs to be a single point within
agencies with the perspective and responsibility--as well as authority-
-to ensure the successful implementation of functional management and
transformation efforts. Governments around the world, such as the
United Kingdom and Ireland, have established term appointed positions,
similar to the COO/CMO concept we propose, that are responsible for
advancing and continuously improving agency operations.
The DOD COO/CMO position could be filled by an individual, appointed by
the President and confirmed by the Senate, for a set term of 7 years
with the potential for reappointment. Articulating the roles and
responsibilities of the position in statute helps to create unambiguous
expectations and underscores Congress' desire to follow a professional,
nonpartisan approach to the position. In that regard, such an
individual should have a proven track record as a business process
change agent in large, complex, and diverse organizations--experience
necessary to spearhead business process transformation across the
department and serve as an integrator for the needed business
transformation efforts. In addition, this individual would enter into
an annual performance agreement with the Secretary that sets forth
measurable individual goals linked to overall organizational goals in
connection with the department's business transformation efforts.
Measurable progress towards achieving agreed-upon goals would be a
basis for determining the level of compensation earned, including any
related bonus. In addition, this individual's achievements and
compensation would be reported to Congress each year.
Funding Control over System Investments:
DOD's current systems investment process in which system funding is
controlled by DOD components has contributed to the evolution of an
overly complex and error-prone information technology environment
containing duplicative, nonintegrated, and stovepiped systems. We have
made numerous recommendations to DOD intended to improve the management
oversight and control of its business systems modernization
investments. However, as previously mentioned, progress in achieving
this control has been slow. Recent legislation,[Footnote 47]consistent
with the suggestion I made in my prior testimony, established specific
management oversight and accountability with the "owners" of the
various functional areas or domains. The legislation defined the scope
of the various business areas (e.g., acquisition, logistics, finance
and accounting) and established functional approval authority and
responsibility for management of the portfolio of business systems with
the relevant under secretary of defense for the departmental domains
and the Assistant Secretary of Defense for Networks and Information
Integration (information technology infrastructure). For example, the
Under Secretary of Defense for Acquisition, Technology, and Logistics
is now responsible and accountable for any defense business system
intended to support acquisition activities, logistics activities, or
installations and environment activities for DOD.
The legislation also requires that the responsible approval authorities
establish a hierarchy of investment review boards with DOD-wide
representation, including the military services and Defense agencies.
The boards are responsible for reviewing and approving investments to
develop, operate, maintain, and modernize business systems for their
business area portfolio, including ensuring that investments are
consistent with DOD's BEA.
Although the new legislation clearly assigns responsibility and
accountability for system modernization to designated approval
authorities, control over system investment funding remains at the DOD
component level. As a result, DOD continues to have little or no
assurance that its business systems modernization investment money is
being spent in an economical, efficient, and effective manner. Given
that DOD spends billions on business systems and related infrastructure
each year, we believe it is critical that funds for DOD business
systems be appropriated to those responsible and accountable for
business system improvements. However, implementation may require
review of the various statutory authorities for the military services
and other DOD components. Control over the funds would improve the
capacity of DOD's designated approval authorities to fulfill their
responsibilities and transparency over DOD investments, and minimize
the parochial approach to systems development that exists today. In
addition, to improve coordination and integration activities, we
suggest that all approval authorities coordinate their business system
modernization efforts with the chief management official who would
chair the Defense Business Systems Management Committee. Cognizant
business area approval authorities would also be required to report to
Congress through the chief management official and the Secretary of
Defense on applicable business systems that are not compliant with
review requirements and to include a summary justification for
noncompliance.
Conclusion:
The United States is facing large and growing long-term fiscal
pressures created by the impending retirement of the baby boom
generation, rising health care costs, increased homeland security and
defense commitments, and a reduction in federal revenues. These
pressures not only sharpen the need to look at competing claims on
existing federal budgetary resources and emerging new priorities, they
underscore the need for transparent and reliable information upon which
to base decisions at all levels within the federal government. This
includes timely, useful, and reliable financial and management
information that demonstrates what results are being achieved and what
risks are being incurred by various government programs, functions, and
activities. As I have discussed, DOD lacks the efficient and effective
financial management and related business operations, including
processes and systems, to support the war fighter, DOD management, and
Congress. With a large and growing fiscal imbalance facing our nation,
achieving tens of billions of dollars of annual savings through
successful DOD transformation is increasingly important. DOD's senior
leaders have demonstrated a commitment to transforming the department
and improving its business operations. Recent legislation pertaining to
defense business systems, enterprise architecture, accountability, and
modernization, if properly implemented, should improve oversight and
control over DOD's significant system investment activities. However,
DOD's transformation efforts and legislation to date have not
adequately addressed key underlying causes of past reform failures.
Successful transformation will require an effective transformation
plan; adequate human capital; effective processes and transformation
tools, such as a BEA; and results-oriented performance measures that
link institutional, unit, and individual personnel goals and
expectations. Reforming DOD's business operations is a monumental
challenge and many well-intentioned efforts have failed over the last
several decades. Lessons learned from these previous reform attempts
include the need for sustained and focused leadership at the highest
level, with appropriate authority over all of DOD's business
operations, as well as centralized control of all business
transformation-related funding with the designated approval
authorities assigned responsibility for transformation activities
within their specific business process areas. This leadership could be
provided through the establishment of a Chief Operating Officer/Chief
Management Official. Absent this leadership, authority, and control of
funding, the current transformation efforts are likely to fail.
I commend the Subcommittee for holding this hearing and I encourage you
to use this vehicle, on an annual basis, as a catalyst for long overdue
business transformation at DOD.
Mr. Chairman, this concludes my statement. I would be pleased to answer
any questions you or other members of the Subcommittee may have at this
time.
Contacts and Acknowledgments:
For further information about this testimony, please contact Gregory D.
Kutz at (202) 512-9095 or [Hyperlink, kutzg@gao.gov], Randolph C. Hite
at (202) 512-3439 or [Hyperlink, hiter@gao.gov], Sharon Pickup at
(202) 512-9619 or [Hyperlink, pickups@gao.gov], or Evelyn Logue at
(202) 512-3881 or [Hyperlink, loguee@gao.gov]. Other key contributors
to this testimony include Catherine Baltzell, Sandra Bell, Molly Boyle,
Peter Del Toro, Francine DelVecchio, Bill Doherty, Abe Dymond, Cynthia
Jackson, John Kelly, Neelaxi Lakhmani, Elizabeth Mead, Chris Mihm, Mai
Nguyen, John Ryan, Lisa Shames, Darby Smith, and Marilyn Wasleski.
(192149):
FOOTNOTES
[1] GAO, High-Risk Series: An Update, GAO-03-119 (Washington, D.C.:
January 2003). The nine interrelated high-risk areas that represent the
greatest challenge to DOD's development of world-class business
operations to support its forces are: contract management, financial
management, human capital management, information security, support
infrastructure management, inventory management, real property,
systems modernization, and weapon systems acquisition.
[2] A BEA is a well-defined blueprint for operational and technological
change. It generally consists of three integrated components: a
snapshot of the enterprise's current operational and technological
environment, a snapshot of its target environment, and a capital
investment roadmap for transitioning from the current to the target
environment.
[3] GAO, DOD Business Systems Modernization: Billions Continue to Be
Invested with Inadequate Management Oversight and Accountability, GAO-
04-615 (Washington, D.C.: May 27, 2004), Department of Defense: Further
Actions Needed to Establish and Implement a Framework for Successful
Financial and Business Management Transformation, GAO-04-551T
(Washington, D.C., Mar. 23, 2004), DOD Business Systems Modernization:
Important Progress Made to Develop Business Enterprise Architecture,
but Much Work Remains, GAO-03-1018 (Washington, D.C.: Sept. 19, 2003),
DOD Financial Management: Integrated Approach, Transparency, and
Incentives Are Keys to Effective Reform, GAO-02-497T (Washington, D.C.,
Mar. 6, 2002), Defense Management: New Management Reform Program Still
Evolving, GAO-03-58 (Washington, D.C.: Dec. 12, 2002), Information
Technology: Architecture Needed to Guide Modernization of DOD's
Financial Operations, GAO-01-525 (Washington, D.C.: May 17, 2001), and
DOD Financial Management: Integrated Approach, Accountability, and
Incentives Are Keys to Effective Reform, GAO-01-681T (Washington, D.C.:
May 8, 2001).
[4] Ronald W. Reagan National Defense Authorization Act for Fiscal Year
2005, Pub. L. No. 108-375, §§332, 352, 118 Stat. 1811 (Oct. 28, 2004)
(codified, in part, at 10 U.S.C. §§185, 2222).
[5] GAO, Fiscal Year 2003 U.S. Government Financial Statements:
Sustained Improvement in Federal Financial Management Is Crucial to
Addressing Our Nation's Future Fiscal Challenges, GAO-04-477T
(Washington, D.C.: Mar. 3, 2004).
[6] DFAS's financial statements and corresponding audit opinion pertain
only to the administrative functions of DFAS itself and, consequently,
do not provide any assurance as to the reliability of the accounting
processes and systems DFAS uses to provide services to other DOD
components, including the military services.
[7] JFMIP is a joint undertaking of the Office of Management and
Budget, GAO, the Department of Treasury, and the Office of Personnel
Management, working in cooperation with each other and with operating
agencies to improve financial management practices throughout the
government.
[8] Pub. L. No. 104-208, div. A., § 101 (f), title VIII, 110 stat.
3009, 3009-389 (Sept. 30, 1996).
[9] GAO-01-681T, GAO-04-551T, GAO-03-1018, and GAO, DOD Business
Systems Modernization: Limited Progress in Development of Business
Enterprise Architecture and Oversight of Information Technology
Investments, GAO-04-731R (Washington, D.C.: May 17, 2004).
[10] Pub. L. No. 108-375, §332.
[11] GAO, Financial Management: DOD Inventory of Financial Management
Systems is Incomplete, GAO/AIMD-97-29 (Washington, D.C.: Jan. 31,
1997).
[12] GAO-04-731R.
[13] GAO, Defense Acquisitions: DOD's Revised Policy Emphasizes Best
Practices, but More Controls Are Needed, GAO-04-53 (Washington, D.C.:
Nov. 10, 2003).
[14] GAO-04-551T and GAO-02-497T.
[15] Department of Defense, Transforming Department of Defense
Financial Management: A Strategy for Change, (Washington, D.C.: Apr.
13, 2001).
[16] Pub. L. No. 108-375, §332.
[17] GAO, Financial Management: Further Actions Are Needed to Establish
Framework to Guide Audit Opinion and Business Management Improvement
Efforts at DOD, GAO-04-910R (Washington, D.C.: Sept. 20, 2004).
[18] National Defense Authorization Act for Fiscal Year 2004, Pub. L.
No. 108-136, § 1101, 117 Stat. 1392, 1621 (Nov. 24, 2003) (amending
subpart I of part III of title 5, United States Code).
[19] GAO, Major Management Challenges and Program Risks: Department of
Defense, GAO-01-244 (Washington, D.C.: Jan.1, 2001).
[20] GAO, Military Pay: Army Reserve Soldiers Mobilized to Active Duty
Experienced Significant Pay Problems, GAO-04-911, (Washington, D.C.:
Aug. 20, 2004), Military Pay: Army National Guard Personnel Mobilized
to Active Duty Experienced Significant Pay Problems, GAO-04-89,
(Washington, D.C.: Nov. 13, 2003), and DOD Travel Cards: Control
Weaknesses Led to Millions in Fraud, Waste, and Improper Payments, GAO-
04-825T, (Washington, D.C.: June 9, 2004).
[21] GAO, Defense Transformation: Preliminary Observations on DOD's
Proposed Civilian Personnel Reforms, GAO-03-717T (Washington, D.C.:
April 29, 2003); Defense Transformation: DOD's Proposed Civilian
Personnel System and Governmentwide Human Capital Reform, GAO-03-741T
(Washington, D.C.: May 1, 2003); Human Capital: DOD's Civilian
Personnel Strategic Management and the Proposed National Security
Personnel System, GAO-03-493T (Washington, D.C.: May 12, 2003);
Building on DOD's Reform Effort to Foster Governmentwide Improvements,
GAO-03-851T (Washington, D.C.: June 4, 2003).
[22] GAO, Results-Oriented Cultures: Creating a Clear Linkage Between
Individual Performance and Organizational Success, GAO-03-488
(Washington, D.C.: Mar. 14, 2003).
[23] GAO, Human Capital: Senior Executive Performance Management Can Be
Significantly Strengthened to Achieve Results, GAO-04-614 (Washington,
D.C.: May 26, 2004).
[24] GAO-04-551T.
[25] GAO-03-717T.
[26] Originally named the Financial Management Modernization Program,
BMMP was chartered in July 2001 to oversee the development of the
financial management enterprise architecture. Such an architecture was
required by 10 U.S.C. §185 (b) (4) and by section 1004 of the Bob Stump
National Defense Authorization Act for Fiscal Year 2003. Pub. L. No.
107-314, §116, Stat 2458, 2629 (Dec. 2, 2002). The Ronald W. Reagan
National Defense Authorization Act for Fiscal Year 2005 now requires
DOD (through the Defense Business Systems Management Committee) to
develop a business enterprise architecture and a transition plan by
September 2005, covering all defense business systems. See 10 U.S.C. §
2222 (c).
[27] GAO-04-731R.
[28] GAO, Business Systems Modernization: Summary of GAO's Assessment
of the Department of Defense's Initial Business Enterprise
Architecture, GAO-03-877R (Washington, D.C.: July 7, 2003).
[29] GAO-04-731R.
[30] Codified at 10 U.S.C. §2222 (c)-(e).
[31] GAO-04-615.
[32] GAO, Chemical and Biological Defense: Improved Risk Assessment and
Inventory Management Are Needed, GAO-01-667 (Washington, D.C.: Sept.
28, 2001).
[33] The remaining $9 billion is for national security systems. These
systems are intelligence systems, cryptologic activities related to
national security, military command and control systems, and equipment
that is an integral part of a weapon or weapons system or is critical
to the direct fulfillment of military or intelligence missions.
[34] Codified at 10 U.S.C. §2222 (a).
[35] A key condition identified in the act includes certification by
designated approval authorities that the defense business system
modernization is (1) in compliance with the enterprise architecture,
(2) necessary to achieve critical national security capability or
address a critical requirement in an area such as safety or security or
(3) necessary to prevent a significant adverse effect on a project that
is needed to achieve an essential capability, taking into consideration
the alternative solutions for preventing such an adverse effect.
[36] Approval authorities, including the Under Secretary of Defense for
Acquisition, Technology, and Logistics; the Under Secretary of Defense
(Comptroller); the Assistant Secretary of Defense for Networks and
Information Integration and the Chief Information Officer of the
Department of Defense, and the Deputy Secretary of Defense or Under
Secretary of Defense, as designated by the Secretary of Defense, are
responsible for the review, approval, and oversight of business systems
and must establish investment review processes for systems under their
cognizance.
[37] 31 U.S.C. §1341(a)(1)(A); see 10 U.S.C § 2222(b).
[38] GAO-04-910R.
[39] GAO-04-615.
[40] Business rules are statements of fact, policy, law, regulation,
or a combination of these that drive business activities.
[41] Pub. L. No. 108-375, §352.
[42] GAO, Financial Management: DOD's Metrics Program Provides Focus
for Improving Performance, GAO-03-457, (Washington, D.C.: Mar. 28,
2003).
[43] Department of Defense, Office of the Inspector General, Statement
of David K. Steensma, Assistant Inspector General, Contract Management,
COL William J. Kelley, Program Director, Data Mining Division, Office
of the Inspector General of the Department of Defense to the Senate
Committee Governmental Affairs on How to Save the Taxpayers Money
Through Prudent Use of the Purchase Card, D-2004-076-T (Arlington, VA:
Apr. 28, 2004).
[44] Department of Defense Appropriations Act, 2005, Pub. L. No. 108-
287, §8141, 118, Stat. 951, 1003 (Aug. 5, 2004).
[45] Pub. L. No. 108-375, §332.
[46] On September 9, 2002, GAO convened a roundtable of government
leaders and management experts to discuss the chief operating officer
concept. For more information see GAO, Highlights of a GAO Roundtable:
The Chief Operating Officer Concept: A Potential Strategy to Address
Federal Governance Challenges, GAO-03-192SP (Washington, D.C.: Oct. 4,
2002) and The Chief Operating Officer Concept and its Potential Use as
a Strategy to Improve Management at the Department of Homeland
Security, GAO-04-876R (Washington, D.C.: June 28, 2004).
[47] Pub. L. No. 108-375, §332.
