Department of Defense
Further Actions Needed to Establish and Implement a Framework for Successful Financial and Business Management Transformation Gao ID: GAO-04-551T March 23, 2004In March 2002, GAO testified on the Department of Defense's (DOD) financial management problems and key elements necessary for successful reform. Although the underlying conditions remain fundamentally unchanged, within the past 2 years DOD has begun a number of initiatives intended to address previously reported problems and transform its business operations. The Subcommittee on Readiness and Management Support, Senate Committee on Armed Services, 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 of financial and related business weaknesses on DOD operations, (2) the underlying causes of DOD business transformation challenges, and (3) the status of DOD reform efforts. In addition, GAO reiterates the key elements to successful reform: (1) an integrated business transformation strategy, (2) sustained leadership and resource control, (3) clear lines of responsibility and accountability, (4) results-oriented performance, (5) appropriate incentives and consequences, (6) an enterprise architecture to guide reform efforts, and (7) effective monitoring and oversight. GAO also offers two suggestions for legislative consideration which are intended to improve the likelihood of meaningful, broad-based financial management and related business reform at DOD.
DOD's senior civilian and military leaders are committed to transforming the department and improving its business operations and have taken positive steps to begin this effort. However, overhauling the financial management and related business operations of one of the largest and most complex organizations in the world represents a huge management challenge. Six DOD program areas are on GAO's "high risk" list, and the department shares responsibility for three other governmentwide high-risk areas. DOD's substantial financial and business management weaknesses adversely affect not only its ability to produce auditable financial information, but also to provide timely, reliable information for management 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 in annual wasted resources in a time of increasing fiscal constraint. Four underlying causes impede reform: (1) lack of sustained leadership, (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 keys to successful business transformation and makes two additional suggestions for legislative action. First, GAO suggests that a senior management position be established to spearhead DOD-wide business transformation efforts. Second, GAO proposes that the leaders of DOD's functional areas, referred to as domains, receive and control the funding for system investments, as opposed to the military services. Domain leaders would be responsible for managing business system and process reform efforts within their business areas and would be accountable to the new senior management official for ensuring their efforts comply with DOD's business enterprise architecture.
GAO-04-551T, Department of Defense: Further Actions Needed to Establish and Implement a Framework for Successful Financial and Business Management Transformation
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Testimony:
Before the Subcommittee on Readiness and Management Support, Committee
on Armed Services, U.S. Senate:
United States General Accounting Office:
GAO:
For Release on Delivery Expected at 2:30 p.m. EST:
Tuesday, March 23, 2004:
DEPARTMENT OF DEFENSE:
Further Actions Needed to Establish and Implement a Framework for
Successful Financial and Business Management Transformation:
Statement of David M. Walker, Comptroller General of the United States:
GAO-04-551T:
GAO Highlights:
Highlights of GAO-04-551T, a testimony before the Subcommittee on
Readiness and Management Support, Committee on Armed Services, U.S.
Senate
Why GAO Did This Study:
In March 2002, GAO testified before this Subcommittee on the Department
of Defense‘s (DOD) financial management problems and key elements
necessary for successful reform. Although the underlying conditions
remain fundamentally unchanged, within the past 2 years DOD has begun a
number of initiatives intended to address previously reported problems
and transform its business operations. 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 of financial and related-business weaknesses
on DOD operations, (2) the underlying causes of DOD business
transformation challenges, and (3) the status of DOD reform efforts. In
addition, GAO reiterates the key elements to successful reform: (1) an
integrated business transformation strategy, (2) sustained leadership
and resource control, (3) clear lines of responsibility and
accountability, (4) results-oriented performance, (5) appropriate
incentives and consequences, (6) an enterprise architecture to guide
reform efforts, and (7) effective monitoring and oversight. GAO also
offers two suggestions for legislative consideration which are intended
to improve the likelihood of meaningful, broad-based financial
management and related business reform at DOD.
What GAO Found:
DOD‘s senior civilian and military leaders are committed to
transforming the department and improving its business operations and
have taken positive steps to begin this effort. However, overhauling
the financial management and related business operations of one of the
largest and most complex organizations in the world represents a huge
management challenge. Six DOD program areas are on GAO‘s ’high risk“
list, and the department shares responsibility for three other
governmentwide high-risk areas. DOD‘s substantial financial and
business management weaknesses adversely affect not only its ability to
produce auditable financial information, but also to provide timely,
reliable information for management 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 in annual wasted resources in a time of
increasing fiscal constraint.
Four underlying causes impede reform: (1) lack of sustained leadership,
(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 keys to
successful business transformation and makes two additional suggestions
for legislative action. First, GAO suggests that a senior management
position be established to spearhead DOD-wide business transformation
efforts. Second, GAO proposes that the leaders of DOD‘s functional
areas, referred to as domains, receive and control the funding for
system investments, as opposed to the military services. Domain leaders
would be responsible for managing business system and process reform
efforts within their business areas and would be accountable to the new
senior management official for ensuring their efforts comply with DOD‘s
business enterprise architecture.
www.gao.gov/cgi-bin/getrpt?GAO-04-551T.
To view the full product, including the scope and methodology, click on
the link above. For more information, contact Gregory Kutz at (202)
512-9095 or (kutzg@gao.gov) or Randolph Hite, (202) 512-3439
(hiter@gao.gov).
[End of section]
Mr. Chairman and Members of the Subcommittee:
It is a pleasure to be back again to discuss financial management and
related 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 providing a catalyst for business transformation at DOD.
The involvement of this Subcommittee is critical to ultimately assuring
public confidence in DOD as a steward that is accountable for its
finances. DOD's substantial long-standing financial and business
management problems adversely affect the economy, effectiveness, and
efficiency of its operations, and have resulted in a lack of adequate
transparency and appropriate accountability across all major business
areas. As a result, DOD does not have timely, reliable information for
management to use in making informed decisions. Further, as our reports
continue to show, these problems result in significant fraud, waste,
and abuse and hinder DOD's attempts to develop world-class operations
and activities to support its forces. 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 stovepiped business systems.
The seriousness of DOD's financial management weaknesses underscores
the importance of no longer condoning "status quo" business operations
at DOD.
Although the underlying operational conditions remain fundamentally
unchanged since I last testified before this Subcommittee in March
2002, DOD has taken action to begin addressing a number of these
challenges as part of its business transformation effort. Business
transformation has been a priority of Secretary Rumsfeld. For example,
DOD has been granted additional human capital flexibilities and is in
the process of developing a new personnel management system for its
civilian employees. In addition, through its Business Management
Modernization Program (BMMP), DOD is continuing its efforts to develop
and implement a business enterprise architecture and establish
effective management and control over its business system modernization
investments. To date, however, tangible evidence of improvements in DOD
business operations remains limited to specific business process areas,
such as DOD's purchase card program, where improvements have generally
resulted from increased management focus and better internal control
rather than from major modifications to automated systems. It is
important to note that some of the key elements I highlight in this
testimony as necessary for successful business transformation were
critical to the success of several narrowly defined initiatives that I
will discuss today.
Because DOD is one of the largest and most complex organizations in the
world, overhauling its financial management and related business
operations represents a huge management challenge. In fiscal year 2003,
DOD reported that its operations involved over $1 trillion in assets,
nearly $1.6 trillion in liabilities, approximately 3.3 million military
and civilian personnel, and disbursements of over $416 billion.
Moreover, execution of DOD operations spans a wide range of defense
organizations, including the military services and their respective
major commands and functional activities, numerous large defense
agencies and field activities, and various combatant and joint
operational commands that are responsible for military operations for
specific geographic regions or theaters of operations. To execute these
military operations, the department performs an assortment of
interrelated and interdependent business process areas, including
logistics management, procurement, healthcare management, and
financial management. Secretary Rumsfeld has estimated that successful
improvements to DOD's business operations could save the department 5
percent of its budget a year. Using DOD's reported fiscal year 2004
budget amounts, this percentage would equate to approximately $22
billion a year in savings.
Two years ago, I testified on the challenges DOD faces in transforming
its financial management and related business operations and systems
and I discussed several key elements necessary for reform to
succeed.[Footnote 2] If the past has taught us anything, it is that
addressing the department's serious financial and related business
process weaknesses will not be easy. For several years, we have
reported on DOD's efforts to improve the effectiveness and efficiency
of its business operations and actions needed to achieve and sustain
reform. Many of the same underlying causes, such as lack of sustained
leadership, cultural resistance to change, parochialism, and stovepiped
operations, that impeded the success of previous administrations in
addressing DOD's problems continue today. If DOD is unable to address
these underlying causes that have resulted in the failure of previous
broad-based reform efforts, improvements will remain marginal, confined
to narrowly defined business process areas and incremental improvements
in human capital policies, business processes, internal control
systems, and information technologies.
Today, I will provide my perspectives on (1) the impact that long-
standing financial management and related business process weaknesses
continue to have on DOD's business operations, (2) underlying causes
that have impeded the success of prior efforts, (3) keys to successful
reform, and (4) the status of current DOD business transformation
efforts. In addition, I will offer two suggestions for legislative
consideration, which I believe will provide the sustained top-level
leadership and accountability necessary for the overall business
transformation effort to succeed. My statement is based on previous GAO
reports as well as on our review of the work of other DOD auditors and
recent DOD reports and studies.
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 financial management and related business process
challenges that are complex, long-standing, pervasive, and deeply
rooted in virtually all business operations throughout the department.
As I recently testified and as discussed in our latest financial audit
report,[Footnote 3] DOD's financial management deficiencies, taken
together, continue to represent the single largest obstacle to
achieving an unqualified opinion on the U.S. government's consolidated
financial statements. 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.
In identifying improved financial performance as one of its five
governmentwide initiatives, the President's Management Agenda
recognized that obtaining a clean (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 4]
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). Unfortunately, DOD does not meet any
of these conditions. For example, for fiscal year 2003, 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. For example,
* 450 of the 481 mobilized Army National Guard soldiers from six GAO
case study Special Forces and Military Police units[Footnote 5] had at
least one pay problem associated with their mobilization. DOD's
inability to provide timely and accurate payments to these soldiers,
many of whom risked their lives in recent Iraq or Afghanistan missions,
distracted them from their missions, imposed financial hardships on the
soldiers and their families, and has had a negative impact on
retention. (GAO-04-89, Nov. 13, 2003):
* 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
activities, 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.
(GAO-04-305R, Dec. 18, 2003):
* Inadequate asset visibility and accountability resulted in DOD
selling new Joint Service Lightweight Integrated Suit Technology
(JSLIST)--the current chemical and biological protective garment used
by our military forces--on the internet for $3 each (coat and trousers)
while at the same time buying them for over $200 each. DOD has
acknowledged that these garments should have been restricted to DOD use
only and therefore should not have been available to the public. (GAO-
02-873T, June 25, 2002):
* Inadequate asset accountability also resulted in DOD's inability to
locate and remove over 250,000 defective Battle Dress Overgarments
(BDOs)--the predecessor of JSLIST--from its inventory. 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. (GAO-04-15NI, Nov. 19, 2003):
* Tens of millions of dollars are not being collected each year by
military treatment facilities from third-party insurers because key
information required to effectively bill and collect from third-party
insurers is often not properly collected, recorded, or used by the
military treatment facilities. (GAO-04-322R, Feb. 20, 2004):
* Our analysis of data on more than 50,000 maintenance work orders
opened during the deployments of six battle groups indicated that about
29,000 orders (58 percent) could not be completed because the needed
repair parts were not available on board ship. This condition was a
result of inaccurate ship configuration records and incomplete,
outdated, or erroneous historical parts demand data. Such problems not
only have a detrimental impact on mission readiness, they may also
increase operational costs due to delays in repairing equipment and
holding unneeded spare parts inventory. (GAO-03-887, Aug. 29, 2003):
* DOD sold excess biological laboratory equipment, including a
biological safety cabinet, a bacteriological incubator, a centrifuge,
and other items that could be used to produce biological warfare
agents. Using a fictitious company and fictitious individual
identities, we were able to purchase a large number of new and usable
equipment items over the Internet from DOD. Although the production of
biological warfare agents requires a high degree of expertise, the ease
with which these items were obtained through public sales increases the
risk that terrorists could obtain and use them to produce biological
agents that could be used against the United States. (GAO-04-81TNI,
Oct. 7, 2003):
* Based on statistical sampling, we estimated that 72 percent of the
over 68,000 premium class airline tickets DOD purchased for fiscal
years 2001 and 2002 was not properly authorized and that 73 percent was
not properly justified. During fiscal years 2001 and 2002, DOD spent
almost $124 million on premium class tickets that included at least one
leg in premium class--usually business class. Because each premium
class ticket cost the government up to thousands of dollars more than a
coach class ticket, unauthorized premium class travel resulted in
millions of dollars of unnecessary costs being incurred annually. (GAO-
04-229T, Nov. 6, 2003):
* Some DOD contractors have been abusing the federal tax system with
little or no consequence, and DOD is not collecting as much in unpaid
taxes as it could. Under the Debt Collection Improvement Act of 1996,
DOD is responsible--working with the Treasury Department--for
offsetting payments made to contractors to collect funds owed, such as
unpaid federal taxes. However, we found that DOD had collected only
$687,000 of unpaid taxes over the last 6 years. We estimated that at
least $100 million could be collected annually from DOD contractors
through effective implementation of levy and debt collection programs.
(GAO-04-95, Feb. 12, 2004):
* DOD continues to lack a complete inventory of contaminated real
property sites, which affects not only DOD's ability to assess the
potential environmental impact and to plan, estimate costs, and fund
cleanup activities, as appropriate, but also its ability to minimize
the risk of civilian exposure to unexploded ordnance. The risk of such
exposure is expected to grow with the increase in development and
recreational activities on land once used by the military for
munitions-related activities (e.g., live fire testing and training).
(GAO-04-147, Dec. 19, 2003):
* DOD's Space and Naval Warfare Systems Command working capital fund
activities used accounting entries to manipulate the amount of customer
orders for the sole purpose of reducing the actual dollar amounts
reported to Congress for work that had been ordered and funded
(obligated) by customers but not yet completed by fiscal year end. As a
result, congressional and DOD decision makers did not have the reliable
information they needed to make decisions regarding the level of
funding to be provided to working capital fund customers. (GAO-03-668,
July 1, 2003):
* Our review of fiscal year 2002 data revealed that about $1 of every
$4 in contract payment transactions in DOD's Mechanization of Contract
Administration Services (MOCAS) system was for adjustments to
previously recorded payments--$49 billion of adjustments out of $198
billion in disbursement, collection, and adjustment transactions.
According to DOD, the cost of researching and making adjustments to
accounting records was about $34 million in fiscal year 2002, primarily
to pay hundreds of DOD and contractor staff. (GAO-03-727, Aug. 8,
2003):
* DOD and congressional decision makers lack reliable data upon which
to base sourcing decisions due to weaknesses in DOD's data-gathering,
reporting, and financial systems. As in the past, we have identified
significant errors and omissions in the data submitted to Congress
regarding the amount of each military service's depot maintenance work
out-sourced or performed in-house. As a result, both DOD and Congress
lack assurances that the dollar amounts of public-private sector
workloads reported by military services are reliable. (GAO-03-1023,
Sept. 15, 2003):
* DOD's information technology (IT) budget submission to Congress for
fiscal year 2004 contained material inconsistencies, inaccuracies, or
omissions that limited its reliability. For example, we identified
discrepancies totaling about $1.6 billion between two primary parts of
the submission--the IT budget summary report and the detailed Capital
Investments Reports on each IT initiative. These problems were largely
attributable to insufficient management attention and limitations in
departmental policies and procedures, such as guidance in DOD's
Financial Management Regulations, and to shortcomings in systems that
support budget-related activities. (GAO-04-115, Dec. 19, 2003):
* Since the mid 1980s, we have reported that DOD uses overly optimistic
planning assumptions to estimate its annual budget request. These same
assumptions are reflected in its Future Years Defense Program, which
reports projected spending for the current budget year and at least 4
succeeding years. In addition, in February 2004 the Congressional
Budget Office projected that DOD's demand for resources would grow to
about $473 billion a year by fiscal year 2009. DOD's own estimate for
that same year was only $439 billion.[Footnote 6] As a result of DOD's
continuing use of optimistic assumptions, DOD has too many programs for
the available dollars, which often leads to program instability, costly
program stretch-outs, and program termination. Over the past few years,
the mismatch between programs and budgets has continued, particularly
in the area of weapons systems acquisition. 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.[Footnote 7] (GAO-03-98,
January 2003):
* DOD did not know the size of its security clearance backlog at the
end of September 2003 and had not estimated a 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.
(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 financial
management and related business operations to improve mission support
and the economy and efficiency of DOD's 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
outlined in my prior testimony before this Subcommittee 2 years ago.
For each of the problems cited in the previous section, we found that
one or more of these causes were contributing factors. Over the years,
the department has undertaken many initiatives intended to transform
its business operations departmentwide and improve the reliability of
information for decision making and reporting but has not had much
success because it has not addressed the following four underlying
causes:
* a lack of sustained top-level leadership and management
accountability for correcting problems;
* deeply embedded cultural resistance to change, including military
service parochialism and stovepiped operations;
* a lack of results-oriented goals and performance measures and
monitoring; and:
* inadequate incentives and accountability mechanisms relating to
business transformation efforts.
If not properly addressed, these root causes will likely result in the
failure of current DOD initiatives.
Lack of Sustained Leadership and Adequate Accountability:
DOD has not routinely assigned accountability for performance to
specific organizations or individuals who have sufficient authority to
accomplish desired goals. For example, under the Chief Financial
Officers Act of 1990,[Footnote 8] it is the responsibility of the
agency Chief Financial Officer (CFO) to establish the mission and
vision for the agency's future financial management and to direct,
manage, and provide oversight of financial management operations.
However, at DOD, the Comptroller--who is by statute the department's
CFO--has direct responsibility for only an estimated 20 percent of the
data relied on to carry out the department's financial management
operations. The other 80 percent comes from DOD's other business
operations and is under the control and authority of other DOD
officials.
In addition, DOD's past experience has suggested that top management
has not had a proactive, consistent, and continuing role in integrating
daily operations for achieving 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. While the current DOD leadership, such as the Secretary,
Deputy Secretary, and Comptroller have certainly demonstrated their
commitment to reforming the department, the magnitude and nature of
day-to-day demands placed on these leaders following the events of
September 11, 2001, clearly affect the level of oversight and
involvement in business transformation efforts that these leaders can
sustain. Given the importance of DOD's business transformation effort,
it is imperative that it receive the sustained leadership needed to
improve the economy, efficiency, and effectiveness of DOD's business
operations. Based on our surveys of best practices of world-class
organizations,[Footnote 9] strong executive CFO and Chief Information
Officer leadership is essential to (1) making financial management an
entitywide priority, (2) providing meaningful information to decision
makers, (3) building a team of people that delivers results, and (4)
effectively leveraging technology to achieve stated goals and
objectives.
Cultural Resistance and Parochialism:
Cultural resistance to change, military service parochialism, and
stovepiped operations have all contributed significantly to the failure
of previous attempts to implement broad-based management reforms at
DOD. The department has acknowledged that it confronts decades-old
problems deeply grounded in the bureaucratic history and operating
practices of a complex, multifaceted organization. Recent audits reveal
that DOD has made only small inroads in addressing these challenges.
For example, the Bob Stump National Defense Authorization Act for
Fiscal Year 2003[Footnote 10] requires the DOD Comptroller to determine
that each financial system improvement meets the specific conditions
called for in the act before DOD obligates funds in amounts exceeding
$1 million. However, we found that most system improvement efforts were
not reviewed by the DOD Comptroller, as required, and that DOD
continued to lack a mechanism for proactively identifying system
improvement initiatives. We asked for, but DOD did not provide,
comprehensive data for obligations in excess of $1 million for business
system modernization. Based on the limited information provided, we
found that as of December 2003, business system modernization efforts
with reported obligations totaling over $479 million were not referred
to the DOD Comptroller for review for fiscal years 2003 and 2004.
In addition, in September 2003,[Footnote 11] we reported that DOD
continues to use a stovepiped approach to develop and fund its business
system investments. Specifically, we found that DOD components receive
and control funding for business systems investments without being
subject to the scrutiny of the DOD Comptroller. DOD's ability to
address its current "business-as-usual" approach to business system
investments is further hampered by its lack of (1) a complete inventory
of business systems (a condition we first highlighted in 1998), (2) a
standard definition of what constitutes a business system, (3) a well-
defined enterprise architecture, and (4) an effective approach for
controlling financial system improvements before making obligations
exceeding $1 million. Until DOD develops and implements an effective
strategy for overcoming resistance, parochialism, and stovepiped
operations, reform will fail and "business-as-usual" will continue at
the department.
Lack of Goals and Performance Measures:
At a programmatic level, the lack of clear, linked goals and
performance measures 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 has 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
resources. As of March 2004, the department is still in the process of
implementing this approach on a departmentwide basis.
DOD currently has plans to institutionalize performance management by
aligning management activities with the President's Management Agenda.
As part of this effort, DOD linked its fiscal year 2004 budget
resources with metrics for broad program areas, e.g., air combat,
airlift, and basic research in the Office of Management and Budget's
(OMB) Program Assessment Rating Tool.[Footnote 12] We have not reviewed
DOD's efforts to link resources to metrics; however, some of our recent
work notes the lack of clearly defined performance goals and measures
in the management of such areas as defense inventory and military
pay.[Footnote 13]
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 incentives
for making more than incremental change 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 the amount of money spent, people employed, or number of
tasks completed. Incentives for its decision makers to implement
changed behavior have been minimal or nonexistent.
The lack of incentive to change is evident in the business systems
modernization area. Despite DOD's acknowledgement that many of its
systems are error prone, duplicative, and stovepiped, DOD continues to
allow its component organizations to make their own investment
decisions, following different approaches and criteria. These
stovepiped decision-making processes have contributed to the
department's current complex, error-prone environment of approximately
2,300 systems. In March 2003, we reported that ineffective program
management and oversight, as well as a lack of accountability, resulted
in DOD continuing to invest hundreds of millions of dollars in system
modernization efforts without any assurance that the projects will
produce operational improvements commensurate with the amount
invested.[Footnote 14] For example, the estimated cost of one of the
business system investment projects that we reviewed increased by as
much as $274 million, while its schedule slipped by almost 4 years.
After spending $126 million, DOD terminated that project in December
2002, citing poor performance and increasing costs. GAO and the DOD
Inspector General (DOD IG) have identified numerous business system
modernization efforts that cost more than planned, take years longer
than planned, and fall short of delivering planned or needed
capabilities. Despite this track record, DOD continues to increase
spending on business systems while at the same time it lacks the
effective management and oversight needed to achieve real results.
Without appropriate incentives to improve their project management,
ongoing oversight, and adequate accountability mechanisms, 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) break down
parochialism and reward behaviors that meet DOD-wide goals, (2) develop
incentives that motivate decision makers to initiate and implement
efforts that are consistent with better program outcomes, including
saying "no" or pulling the plug on a system or program that is failing,
and (3) 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:
Over the years, we have given DOD credit for beginning numerous
initiatives intended to improve its business operations. Unfortunately,
most of these initiatives failed to achieve their intended objective in
part, we believe, because they failed to incorporate key elements that
in our experience shows are critical to successful reform. Today, I
would like to discuss two very important broad-based initiatives DOD
currently has underway that, if properly developed and implemented,
will result in significant improvements in DOD's business operations.
In addition to these broad-based initiatives, DOD has undertaken
several interim initiatives in recent years that have resulted in
tangible, although limited, improvements. We believe that these
tangible improvements were possible because DOD incorporated many of
the key elements critical for reform. Furthermore, I would like to
offer two suggestions for legislative consideration that I believe
could significantly increase the likelihood of a successful business
transformation effort at DOD.
Keys to Successful Reform:
As I have previously testified,[Footnote 15] and the success of the
more narrowly defined DOD initiatives I will discuss later illustrate,
the following key elements collectively will enable the department to
effectively address the underlying causes of its inability to resolve
its long-standing financial and business management problems. These
elements are:
* 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 and committed 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 and monitoring
progress tied to key financial and business transformation objectives;
* 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.
For the most part, these elements, which should not be viewed as
independent actions but rather as a set of interrelated and
interdependent actions, are consistent with those discussed in the
department's April 2001 financial management transformation
report.[Footnote 16] 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.
Human Capital Initiative:
Human capital challenges at DOD are crosscutting and impact the
effectiveness of all of its business operations. Effective human
capital strategies are necessary for any business transformation to
succeed at DOD. For several years, we have reported [Footnote 17] that
many of DOD's business process and control weaknesses were attributable
in part to human capital issues. Recent audits of DOD's military
payroll and the individually billed travel card program 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.
I strongly support the need for modernizing federal human capital
policies both within DOD and for the federal government at large. We
have found that a critical success factor for overall organizational
transformation is the use of a modern, effective, credible, and
integrated performance management system to define responsibility and
assure accountability for achieving desired goals and objectives. Such
a performance management system can help manage and direct the
transformation process by linking performance expectations to an
employee's role in the transformation process. GAO has found that 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. Simply put, DOD must convince people throughout
the department that they must change business-as-usual practices or
they are likely to face serious consequences, personally and
organizationally. DOD has already applied this principle at the Defense
Finance and Accounting Service (DFAS). For example, DFAS managers--and
sometimes staff--are rated and rewarded based on their ability to reach
specific annual performance goals. But linking employee pay to the
achievement of measurable performance goals must be done within the
context of a credible human capital system that includes adequate
safeguards.
The National Defense Authorization Act for Fiscal Year 2004 [Footnote
18] authorized DOD to establish a National Security Personnel System
for its civilian employees that is modern, flexible, and consistent
with the merit principles outlined by the act. This legislation
requires DOD to develop a human capital system that is consistent with
many of the practices that we have laid out for an effective human
capital system, including a modern and results-oriented performance
management system. However, in our opinion, DOD does not yet have the
necessary institutional infrastructure in place within its organization
to support an effective human capital transformation effort. This
institutional infrastructure must include, at a minimum,
* a human capital planning process that integrates the department's
human capital policies, strategies, and programs for both civilian
(including contractors) and military personnel, with its program goals,
mission, and desired outcomes;
* the capabilities to effectively develop and implement a new human
capital system, and:
* a modern, effective, credible, and hopefully validated performance
management system that includes a set of adequate safeguards, including
reasonable transparency and appropriate accountability mechanisms, to
ensure the fair, effective, and credible implementation of the system.
The results of our review of DOD's strategic human capital planning
efforts along with the use of human capital flexibilities and related
human capital efforts across government underscore the importance of
such an institutional infrastructure in developing and effectively
implementing new personnel authorities. In the absence of this critical
element, the new human capital authorities will provide little
advantage and could actually end up doing damage if not properly
implemented.
As DOD develops regulations to implement its new civilian personnel
system, the department needs to do the following.
* Ensure the active involvement of the Office of Personnel Management
(OPM) in the development process, given the significant implications
that changes in DOD regulations may have on governmentwide human
capital policies.[Footnote 19]
* Ensure the involvement of civilian employees and unions in the
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.
* Use a phased approach to implementing the system in recognition that
different parts of the organization will have different levels of
readiness and different capabilities to implement new authorities.
Moreover, 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
has indicated that it plans to implement its new human capital system
for 300,000 civilian employees by October 1, 2004. It is highly
unlikely that DOD will have employed an appropriate process and
implemented an appropriate infrastructure to achieve this objective.
It is worth mentioning here that the Department of Homeland Security
(DHS) is also currently developing a new human capital system. DHS is
using a collaborative process that facilitates participation from all
levels of DHS, and directly involves OPM. We found that the DHS process
to date has generally reflected the important elements of a successful
transformation, including effective communication and employee
involvement.[Footnote 20] In addition, DHS plans to implement the job
evaluation, pay, and performance management system in phases to allow
time for final design, training, and careful implementation. I believe
that DOD could benefit from employing a more inclusive process and
phased implementation approach similar to the process used by DHS.
Business Management Modernization Program:
Another broad-based initiative that is vital to the department's
efforts to transform DOD business operations is the BMMP, which the
department established in July 2001. The purpose of the BMMP is to
oversee development and implementation of a departmentwide business
enterprise architecture (BEA), transition plan, and related efforts to
ensure that DOD business system investments are consistent with the
architecture. A well-defined and properly implemented business
enterprise architecture can provide assurance that the department
invests in integrated enterprisewide business solutions and,
conversely, can help move resources away from nonintegrated business
system development efforts. As we reported in July 2003,[Footnote 21]
within 1 year DOD developed an initial version of its departmentwide
architecture for modernizing its current financial and business
operations and systems. Thus far, DOD has expended tremendous effort
and resources and has made important progress towards complying with
legislative requirements. However, substantial work remains before the
architecture will begin to have a tangible impact on improving DOD's
overall business operations. 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 effort.
On the positive side, during its initial efforts to develop the
architecture, the department established some of the architecture
management capabilities advocated by best practices and federal
guidance,[Footnote 22] such as establishing a program office,
designating a chief architect, and using an architecture development
methodology and automated tool. Further, DOD's initial version of its
BEA provides a foundation on which to build and ultimately produce a
well-defined business enterprise architecture. For example, in
September 2003,[Footnote 23] we reported that the "As Is" descriptions
within the BEA include an inventory of about 2,300 systems in operation
or under development and their characteristics. The "To Be"
descriptions address, to at least some degree, how DOD intends to
operate in the future, what information will be needed to support these
future operations, and what technology standards should govern the
design of future systems.
While some progress has been made, DOD has not yet taken important
steps that are critical to its ability to successfully use the
enterprise architecture to drive reform throughout the department's
overall business operations. For example, DOD has not yet defined and
implemented the following.
* Detailed plans to extend and evolve its initial architecture to
include the missing scope and detail required by the Bob Stump National
Defense Authorization Act for Fiscal Year 2003 and other relevant
architectural requirements. Specifically, (1) the initial version of
the BEA excluded some relevant external requirements, such as
requirements for recording revenue, and lacked or provided little
descriptive content pertaining to its "As Is" and "To Be" environments
and (2) DOD had not yet developed the transition plan needed to provide
a temporal road map for moving from the "As Is" to the "To Be"
environment.
* An effective approach to select and control business system
investments[Footnote 24] for obligations exceeding $1 million. As I
previously stated, and it bears repeating here, DOD components
currently receive direct funding for their business systems and
continue to make their own parochial decisions regarding those
investments without having received the scrutiny of the DOD Comptroller
as required by the Bob Stump National Defense Authorization Act for
Fiscal Year of 2003. Later, I will offer a suggestion for improving the
management and oversight of the billions of dollars DOD invests
annually in system modernization efforts.
Until DOD completes its efforts to refine and implement its enterprise
architecture and transition plan, and develop and implement an
effective approach for selecting and controlling business system
investments, DOD will continue to lack (1) a comprehensive and
integrated strategy to guide its business process and system changes,
and (2) results-oriented measures to monitor and measure progress,
including whether system development and modernization investment
projects adequately incorporate leading practices used by the private
sector and federal requirements and achieve performance and efficiency
commensurate with the cost. These elements are critical to the success
of DOD's BMMP.
Developing and implementing a business enterprise architecture for an
organization as large and complex as DOD is a formidable challenge but
it is critical to effecting the change required to achieve the
Secretary's vision of relevant, reliable, and timely financial and
other management information to support the department's vast
operations. As mandated, we plan to continue to report on DOD's
progress in developing the next version of its architecture, developing
its transition plan, validating its "As Is" systems inventory, and
controlling its system investments.
Interim Initiatives:
Since DOD's overall business process transformation is a long-term
effort, in the interim it is important for the department to focus on
improvements that can be made using, or requiring only minor changes
to, existing automated systems and processes. As demonstrated by the
examples I will highlight in this testimony, leadership, real
incentives, accountability, and oversight and monitoring--key elements
to successful reform--have brought about improvements in some DOD
operations, such as more timely commercial payments, reduced payment
recording errors, and significant reductions in individually billed
travel card delinquency rates.
To help achieve the department's goal of improved financial
information, the DOD Comptroller has 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
QDR, and with the President's Management Agenda. To effectively
implement the balanced scorecard, the Comptroller is planning to
cascade the performance measures down to the military services and
defense agency financial communities, along with certain specific
reporting requirements. DOD has also developed a Web site where
implementation information and monthly indicator updates will be made
available for the financial communities' review. At the departmentwide
level, certain financial metrics will be 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' Director and DOD's Comptroller,
have reported improvements, including:
* From April 2001 to January 2004, DOD reduced its commercial pay
backlogs (payment delinquencies) by 55 percent.
* From March 2001 to December 2003, DOD reduced its payment recording
errors by 33 percent.
* The delinquency rate for individually billed travel cards dropped
from 18.4 percent in January 2001 to 10.7 percent in January 2004.
Using DFAS' 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,
statistics for the last few months show that progress has slowed or
even taken a few steps backward for payment recording errors and
commercial pay backlogs. Our report last year on DOD's metrics
program[Footnote 25] included a caution that, without modern integrated
systems and the streamlined processes they engender, reported progress
may not be sustainable if workload is increased.
Since we reported problems with DOD's purchase card program, DOD and
the military services have taken actions to address all of our 109
recommendations. In addition, we found that DOD and the military
services took action to improve the purchase card program consistent
with the requirements of the Bob Stump National Defense Authorization
Act for Fiscal Year 2003 and the DOD Appropriation Act for Fiscal Year
2003.[Footnote 26] Specifically, we found that DOD and the military
services had done the following.
* Substantially reduced the number of purchase cards issued. According
to GSA records, DOD had reduced the total number of purchase cards from
about 239,000 in March 2001 to about 134,609 in January 2004. These
reductions have the potential to significantly improve the management
of this program.
* Issued policy guidance to field activities to (1) perform periodic
reviews of all purchase card accounts to reestablish a continuing bona
fide need for each card account, (2) cancel accounts that were no
longer needed, and (3) devise additional controls over infrequently
used accounts to protect the government from potential cardholder or
outside fraudulent use.
* Issued disciplinary guidelines, separately, for civilian and military
employees who engage in improper, fraudulent, abusive, or negligent use
of a government charge card.
In addition, to monitor the purchase card program, 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 June 27, 2003, the DOD IG issued a report[Footnote
27]summarizing the results of an in-depth review of purchase card
transactions made by 1,357 purchase cardholders. The report identified
182 cardholders who potentially used their purchase cards
inappropriately or fraudulently.
We believe that consistent oversight played a major role in bringing
about these improvements in DOD's purchase and travel card programs.
During 2001, 2002, and 2003, seven separate congressional hearings were
held on the Army and Navy purchase and individually billed travel card
programs. Numerous legislative initiatives aimed at improving DOD's
management and oversight of these programs also had a positive impact.
Another important initiative underway at the department pertains to
financial reporting. Under the leadership of Comptroller Zakheim, DOD
is working to instill discipline into its financial reporting processes
to improve the reliability of the department's financial data.
Resolution of serious financial management and related business
management weaknesses is essential to achieving any opinion on the DOD
consolidated financial statements. Pursuant to the requirements in
section 1008 of the National Defense Authorization Act for Fiscal Year
2002,[Footnote 28] DOD has reported for the past 3 years on the
reliability of the department's financial statements, concluding that
the department is not able to provide adequate evidence supporting
material amounts in its financial statements. Specifically, DOD stated
that it was unable to comply with applicable financial reporting
requirements for (1) property, plant, and equipment (PP&E), (2)
inventory and operating materials and supplies, (3) environmental
liabilities, (4) intragovernmental eliminations and related accounting
entries, (5) disbursement activity, and (6) cost accounting by
responsibility segment. Although DOD represented that the military
retirement health care liability data had improved for fiscal year
2003, the cost of direct health care provided by DOD-managed military
treatment facilities was a significant amount of DOD's total recorded
health care liability and was based on estimates for which adequate
support was not available. DOD has indicated that by acknowledging its
inability to produce reliable financial statements, as required by the
act, the department saves approximately $23 million a year through
reduction in the level of resources needed to prepare and audit
financial statements. However, DOD has set the goal of obtaining a
favorable opinion on its fiscal year 2007 departmentwide financial
statements. To this end, DOD components and agencies have been tasked
with addressing material line item deficiencies, in conjunction with
the BMMP. This is an ambitious goal and we have been requested by
Congress to review the feasibility and cost effectiveness of DOD's
plans for obtaining such an opinion within the stated time frame.
To instill discipline in its financial reporting process, 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. We have
observed several of these briefings and have noted that the practice of
preparing and explaining interim financial statements has led to the
discovery and correction of numerous recording and reporting errors.
If DOD continues to provide for active leadership, along with
appropriate incentives and accountability mechanisms, improvements
will continue to occur in its programs and initiatives.
Suggestions for Legislative Consideration:
I would like to offer two suggestions for legislative consideration
that I believe could contribute significantly to the department's
ability to not only address the impediments to DOD success but also to
incorporate needed key elements to successful reform. These suggestions
would include the creation of a chief management official and the
centralization of responsibility and authority for business system
investment decisions with the domain[Footnote 29] leaders responsible
for the department's various business process areas, such as logistics
and human resource management.
Chief Management Official:
Previous failed attempts to improve DOD's business operations
illustrate the need for sustained involvement of DOD leadership in
helping to assure that the DOD's financial and overall business process
transformation efforts remain a priority. While the Secretary and other
key DOD leaders have certainly demonstrated their commitment to the
current business transformation efforts, the long-term nature of these
efforts requires the development of an executive position capable of
providing the 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 sound strategic planning is the foundation upon which to build,
sustained leadership is needed to maintain the continuity needed for
success. 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 management official who would serve as the
Principal Under Secretary of Defense for Management.[Footnote 30] This
position would provide the sustained attention essential for addressing
key stewardship responsibilities such as strategic planning,
performance and financial management, and business systems
modernization in an integrated manner, while also facilitating the
overall business transformation operations within DOD. This 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. 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 overall
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.
Central Control Over System Investments:
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 and, as a result, DOD has little or no
assurance that current business systems modernization investment money
is being spent in an economically efficient and effective manner. DOD's
current systems investment process has contributed to the evolution of
an overly complex and error-prone information technology environment
containing duplicative, nonintegrated, and stovepiped systems. Given
that DOD plans to spend $19 billion on business systems and related
infrastructure for fiscal year 2004--including an estimated $5 billion
in modernization money--it is critical that actions be taken to gain
more effective control over such business systems investments.
One suggestion we have for legislative action to address this issue
that is consistent with our open recommendations to DOD, is to
establish specific management oversight, accountability, and control of
funding with the "owners" of the various functional areas or domains.
This legislation would define the scope of the various business areas
(e.g., acquisition, logistics, finance and accounting) and establish
functional responsibility for management of the portfolio of business
systems in that area with the relevant Under Secretary of Defense for
the six departmental domains and the Chief Information Officer for the
Enterprise Information Environment Mission (information technology
infrastructure). For example, planning, development, acquisition, and
oversight of DOD's portfolio of logistics business systems would be
vested in the Under Secretary of Defense for Acquisition, Technology,
and Logistics.
We believe it is critical that funds for DOD business systems be
appropriated to the domain owners in order to provide for
accountability, transparency, and the ability to prevent the continued
parochial approach to systems development that exists today. The
domains would establish a hierarchy of investment review boards with
DOD-wide representation, including the military services and Defense
agencies. These boards would be responsible for reviewing and approving
investments to develop, operate, maintain, and modernize business
systems for the domain portfolio, including ensuring that investments
were consistent with DOD's BEA. All domain owners would be responsible
for coordinating their business system modernization efforts with the
chief management official who would chair the Defense Business Systems
Modernization Executive Committee. Domain leaders 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:
As seen again in Iraq, the excellence of our military forces is
unparalleled. However, that excellence is often achieved in the face of
enormous challenges in DOD's financial management and other business
areas, which have serious and far-reaching implications related to the
department's operations and critical national defense mission. Our
recent work has shown that DOD's long-standing financial management and
business problems have resulted in fundamental operational problems,
such as failure to properly pay mobilized Army Guard soldiers and the
inability to provide adequate accountability and control over supplies
and equipment shipments in support of Operation Iraqi Freedom. Further,
the lack of adequate transparency and appropriate accountability across
all business areas has resulted in certain fraud, waste, and abuse and
hinders DOD's attempts to develop world-class operations and activities
to support its forces. As our nation continues to be challenged with
growing budget deficits and increasing pressure to reduce spending
levels, every dollar that DOD can save through improved economy and
efficiency of its operations is important.
DOD's senior leaders have demonstrated a commitment to transforming the
department and improving its business operations and have taken
positive steps to begin this effort. We believe that our two suggested
legislative initiatives will greatly improve the likelihood of
meaningful, broad-based reform at DOD. The continued involvement and
monitoring by congressional committees will be critical to ensure that
DOD's initial transformation actions are sustained and extended and
that the department achieves its goal of securing the best performance
and highest measure of accountability for the American people. 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 kutzg@gao.gov, Randolph Hite at (202) 512-
3439 or hiter@gao.gov, or Evelyn Logue at 202-512-3881. Other key
contributors to this testimony include Sandra Bell, Meg Best, Molly
Boyle, Mary Ellen Chervenic, Cherry Clipper, Francine Delvecchio, Abe
Dymond, Gayle Fischer, Geoff Frank, John Kelly, Elizabeth Mead, John
Ryan, Cary Russell, Lisa Shames, Darby Smith, Edward Stephenson,
Derrick B. Stewart, Carolyn Voltz, Marilyn Wasleski, and Jenniffer
Wilson.
FOOTNOTES
[1] U.S. General Accounting Office, 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] U.S. General Accounting Office, DOD Financial Management:
Integrated Approach, Accountability, Transparency, and Incentives Are
Keys to Effective Reform, GAO-02-497T (Washington, D.C.: Mar. 6, 2002).
[3] U.S. General Accounting Office, 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).
[4] 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.
[5] The six case study units reviewed include the Colorado B Company,
Virginia B Company, West Virginia C Company, Mississippi 114th Military
Police Company, California 49th Military Police Headquarters and
Headquarters Detachment, and the Maryland 200th Military Police
Company. In addition, our limited review of pay experiences of soldiers
in the Colorado Army Guard's 220th Military Police Company, who
recently returned from Iraq, indicated that some of the same types of
pay problems that we found in our case studies had also affected them.
[6] Congressional Budget Office, The Long-Term Implications of Current
Defense Plans: Detailed Update for Fiscal Year 2004 ( MACROBUTTON
HtmlResAnchor www.cbo.gov, February 2004). Figures from this report are
in constant fiscal year 2004 dollars.
[7] U.S. General Accounting Office, Major Management Challenges and
Program Risks: Department of Defense, GAO-03-98 (Washington, D.C.:
January 2003). Figures from this report are in constant fiscal year
2003 dollars.
[8] Chief Financial Officers Act of 1990, Pub. L. No. 101-576, 104
Stat. 2842, Nov. 15, 1990 (codified, as amended in scattered sections
of title 31, United States Code).
[9] U.S. General Accounting Office, Executive Guide: Creating Value
Through World-class Financial Management, GAO/AIMD-00-134 (Washington,
D.C.: April 2000) and U.S. General Accounting Office, Executive Guide:
Maximizing the Success of Chief Information Officers: Learning From
Leading Organizations, GAO-01-376G (Washington, D.C.: February 2001).
[10] Bob Stump National Defense Authorization Act for Fiscal Year 2003,
Pub. L. No. 107-314, § 1004 (d), 116 Stat. 2458, 2629, Dec. 2, 2002.
[11] U.S. General Accounting Office, 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).
[12] OMB developed the Program Assessment Rating Tool to strength the
process for assessing the effectiveness of programs across the federal
government. For fiscal year 2004, OMB rated the following 12 defense
program areas: Air Combat; Airlift; Basic Research; Chemical
Demilitarization; Communications Infrastructure; Defense Health;
Energy Conservation Improvement; Facilities Sustainment, Restoration,
Modernization, and Demolition; Housing; Missile Defense; Recruiting;
and Shipbuilding. DOD linked metrics for these program areas, which
represent 20 percent of the department's fiscal year 2004 budget; it
linked another 20 percent in the 2005 budget and 30 percent in the 2006
budget, for a total of 70 percent.
[13] In July 2003, we reported that DOD and the military services do
not have an effective approach to prevent and mitigate equipment
corrosion, and that DOD's strategic plan should contain clearly defined
goals; measurable, outcome-oriented objectives; and performance
measures. (U.S. General Accounting Office, Defense Management:
Opportunities to Reduce Corrosion Costs and Increase Readiness,
GAO-03-753 (Washington, D.C.: July 7, 2003)). Similarly, in January
2004 we testified that existing processes and controls used to provide
pay and allowances to mobilized Army Guard personnel prevented DOD from
being able to reasonably assure timely and accurate payroll payments.
We stated that DOD needs to establish a unified set of policies and
procedures, as well as performance measures in the pay area (U.S.
General Accounting Office, Military Pay: Army National Guard Personnel
Mobilized to Active Duty Experienced Significant Pay Problems,
GAO-04-413T (Washington, D.C.: Jan. 28, 2004)).
[14] U.S. General Accounting Office, DOD Business Systems
Modernization: Continued Investment in Key Accounting Systems Needs to
be Justified, GAO-03-465 (Washington, D.C.: Mar. 28, 2003).
[15] GAO-02-497T.
[16] Department of Defense, Transforming Department of Defense
Financial Management: A Strategy for Change, (Washington, D.C.: Apr.
13, 2001).
[17] U.S. General Accounting Office, Major Management Challenges and
Program Risks: Department of Defense, GAO-01-244 (Washington, D.C.:
Jan.1, 2001).
[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] U.S. General Accounting Office, Defense Transformation:
Preliminary Observations on DOD's Proposed Civilian Personnel Reforms,
GAO-03-717T (Washington, D.C.: Apr. 29, 2003).
[20] U.S. General Accounting Office, Human Capital: DHS Personnel
System Design Effort Provides for Collaboration and Employee
Participation, GAO-03-1099 (Washington, D.C.: Sep. 30, 2003).
[21] U.S. General Accounting Office, 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).
[22] U.S. General Accounting Office, Information Technology: A
Framework for Assessing and Improving Enterprise Architecture
Management (Version 1.1), GAO-03-584G (Washington, D.C.: April 2003).
[23] GAO-03-1018.
[24] Business systems include financial and nonfinancial systems, such
as civilian personnel, finance, health, logistics, military personnel,
procurement, and transportation, with the common element being the
generation or use of financial data to support DOD's business
operations.
[25] U.S. General Accounting Office, Financial Management: DOD's
Metrics Program Provides Focus for Improving Performance, GAO-03-457,
(Washington, D.C.: Mar. 28, 2003).
[26] The Department of Defense Appropriations Act for Fiscal Year 2003,
Pub. L. No. 107-248, § 8149, 116 Stat. 1519, 1572, Oct. 23, 2002.
[27] Department of Defense, Office of the Inspector General, Summary
Report on Joint Review of Selected DOD Purchase Card Transactions,
D2003-109 (Washington, D.C.: June 27, 2003).
[28] National Defense Authorization Act for Fiscal Year 2003, Pub. L.
No. 107-107, §1008, 115 Stat. 1012, 1204, Dec. 28, 2001.
[29] DOD has one Enterprise Information Environment Mission, and six
departmental domains including (1) acquisition/ procurement, (2)
finance, accounting, and financial management, (3) human resource
management, (4) logistics, (5) strategic planning and budgeting, and 6)
installations and environment.
[30] On September 9, 2002, GAO convened a roundtable of executive
branch leaders and management experts to discuss the Chief Operating
Officer concept. For more information see U.S. General Accounting
Office, 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).
