GAO

United States Government Accountability Office

A

Testimony

Before the Subcommittee on Oversight of Government 

Management, the Federal Workforce, and the District of 

Columbia, Committee on Homeland Security and 

Governmental Affairs, U.S. Senate

For Release on Delivery

Expected at 2:00 p.m. EDT

Thursday, April 28, 2005

DEFENSE MANAGEMENT

Key Elements Needed to 

Successfully Transform 

DOD Business Operations

Statement of David M. Walker 

Comptroller General of the United States 

GAO-05-629T
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Highlights of GAO-05-629T, a testimony 

before the Subcommittee on Oversight of 

Government Management, the Federal 

Workforce, and the District of Columbia, 

Committee on Homeland Security and 

Governmental Affairs, U.S. Senate 

April 28, 2005

DEFENSE MANAGEMENT 

Key Elements Needed to Successfully 

Transform DOD Business Operations 

In addition to external security 

threats, our nation is threatened 

from within by growing fiscal 

imbalances. The combination of 

additional demands for national 

and homeland security resources, 

the long-term rate of growth of 

entitlement programs, and rising 

health care costs create the need to 

make difficult choices about the 

affordability and sustainability of 

the recent growth in defense 

spending. At a time when the 

Department of Defense (DOD) is 

challenged to maintain a high level 

of military operations while 

competing for resources in an 

increasingly fiscally constrained 

environment, DOD’s business 

management weaknesses continue 

to result in billions in annual waste, 

as well as reduced efficiencies and 

effectiveness. 

The Subcommittee asked GAO to 

provide its views on (1) the fiscal 

trends that prompt real questions 

about the affordability and 

sustainability of the rate of growth 

in defense spending, (2) business 

management challenges that DOD 

needs to address to successfully 

transform its business operations, 

and (3) key elements for 

achievement of reforms. One key 

element would be to establish a 

full-time chief management official 

(CMO) to take the lead in DOD for 

the overall business transformation 

effort. In this regard, we support 

the need for legislation to create a 

CMO in DOD with “good 

government” responsibilities that 

are professional and nonpartisan in 

nature, coupled with an adequate 

term in office. 

Our nation’s current fiscal policy is on an imprudent and unsustainable 

course and the projected fiscal gap is too great to be solved by economic 

growth alone or by making modest changes to existing spending and tax 

policies. In fiscal year 2004, DOD’s spending represented about 51 percent of 

discretionary spending, raising concerns about the affordability and 

sustainability of the current growth in defense spending and requiring tough 

choices about how to balance defense and domestic needs against available 

resources and reasonable tax burdens. 

GAO has reported that DOD continues to confront pervasive, decades-old 

management problems related to business operations that waste billions of 

dollars annually. As shown below, these management weaknesses cut across 

all of DOD’s major business areas. These areas, along with six governmentwide areas that also apply to the department, mean that DOD is responsible 

for 14 of 25 high-risk areas. 

Years When Specific DOD Areas on GAO’s 2005 High-Risk List Were First Designated as 

High Risk 

Area Year designated as high risk 

DOD approach to business transformation 2005

• DOD personnel security clearance program 2005

• DOD support infrastructure management 1997

• DOD business systems modernization 1995

• DOD financial management 1995 

• DOD weapon systems acquisition 1990

• DOD contract management 1992 

• DOD supply chain managementa 1990 

Source: GAO. 

a

This area, formerly entitled DOD inventory management, was expanded to include distribution and 

asset visibility. 

To move forward, in our view, there are three key elements that DOD must 

incorporate into its business transformation efforts to successfully address 

its systemic business management challenges. First, these efforts must 

include an integrated strategic plan, coupled with a well-defined blueprint—

referred to as a business enterprise architecture—to guide and constrain 

implementation of such a plan. Second, central control of system 

investments is crucial for successful business transformation. Finally, a CMO 

is essential for providing the sustained leadership needed to achieve lasting 

transformation. The CMO would not assume the day-to-day management 

responsibilities of other DOD officials nor represent an additional 

hierarchical layer of management, but rather would serve as a strategic 

integrator who would lead DOD’s overall business transformation efforts. 

Additionally, a 7-year term would also enable the CMO to work with DOD 

leadership across administrations to sustain the overall business 

transformation effort. 
Page 1 GAO-05-629T 

Mr. Chairman and Members of the Subcommittee: 

I appreciate the opportunity to be here today to discuss business 

transformation at the Department of Defense (DOD). At the onset, I would 

like to thank the Subcommittee for its continued oversight of key 

government operations and management issues, including DOD’s related 

activities. The active involvement of this Subcommittee is essential to 

ultimately assuring DOD’s continued progress in business transformation, 

including human capital reform, while enhancing public confidence in 

DOD’s stewardship of the hundreds of billions of taxpayer funds it receives 

each year. Senator Voinovich and Senator Akaka, along with Senator 

Ensign, I would also like to commend your leadership in sponsoring 

proposed legislation to establish a position at the highest levels of DOD 

that would be accountable and responsible for overall business 

transformation efforts—a position that we believe is critical to successfully 

transforming DOD’s business operations. 

In addition to external security threats, our nation is threatened from 

within by growing fiscal imbalances. Over the long term, the nation’s 

growing fiscal imbalance stems primarily from the aging of the population 

and rising health care costs. These trends are compounded by the presence 

of near-term deficits arising from new discretionary and mandatory 

spending as well as lower revenues as a share of the economy.1

 If left 

unchecked, these fiscal imbalances will ultimately impede economic 

growth, have an adverse effect on our future standard of living, and in due 

course impact our ability to address key national and homeland security 

needs. These factors create the need to make choices that will only become 

more difficult the longer they are postponed. Among these difficult choices 

will be decisions about the affordability and sustainability of the recent 

growth in defense spending. In fiscal year 2004, DOD spending represented 

20 percent of federal spending and 51 percent of discretionary spending. 

Therefore, it is increasingly important that DOD gets the most from every 

defense dollar and helps to assure that its funds are targeted to addressing 

specific needs versus a long list of unaffordable and unsustainable wants. 

The Secretary of Defense has estimated that improving business operations 

could save 5 percent of DOD’s annual budget, which, based on the fiscal 

year 2004 budget, represents a savings of about $22 billion. It is also 

critically important to ensure that DOD’s unmatched military capabilities 

1

Funds for discretionary programs are provided in appropriation acts, while funds for 

mandatory programs are controlled by funds other than appropriations acts. 
Page 2 GAO-05-629T 

are supported by a sound management structure and systems designed to 

support the warfighter in an economic, efficient, and effective manner. 

At a time when DOD is challenged to maintain a high level of military 

operations while competing for resources in an increasingly fiscally 

constrained environment, DOD’s business management weaknesses 

continue to result in reduced efficiencies and effectiveness that waste 

billions of dollars every year. These business management weaknesses 

touch on all of DOD’s major business operations, ranging from the 

department’s inadequate management of overall business transformation to 

decades-old financial management problems to various contracting and 

selected supply chain challenges. In fact, all the business areas that I will 

discuss today are on our 2005 “high-risk” list of programs and activities that 

need urgent attention and fundamental transformation to ensure that our 

national government functions in the most economical, efficient, and 

effective manner possible.2

 In addition to human capital management, DOD 

also shares responsibility for five other governmentwide high-risk areas, 

such as managing federal real property. 

Senior administration leaders and advisors—including the Secretary of 

Defense, the nominee for Deputy Secretary of Defense, the Deputy Director 

of the Office of Management and Budget (OMB), and members of the 

Defense Business Board—have demonstrated a commitment to addressing 

DOD’s management challenges. However, little sustainable progress has 

been made to date, and, at present, no one individual at the right 

organizational level with an adequate term in office is responsible for 

overall business transformation efforts. Although OMB has worked closely 

with a number of agencies that have high-risk issues, historically it has 

been much less involved with DOD. To his credit, Clay Johnson, OMB’s 

Deputy Director for Management, recently reaffirmed plans to refocus on 

GAO’s high-risk list in order to make as much progress as possible during 

the Bush Administration’s second term. He also committed to placing 

additional emphasis on DOD’s high-risk areas, including working to help 

ensure that DOD has action plans for addressing all its “high-risk” areas. 

Given the magnitude of DOD’s problems and the stakes involved, it is 

critical that OMB actively collaborate with the department to ensure it 

establishes these action plans. It is also clear that, given the number and 

nature of DOD’s business challenges, it will take far longer than the balance 

of this administration to address all of the department’s high-risk areas. 

2

GAO, High-Risk Series: An Update, GAO-05-207 (Washington, D.C.: January 2005). 
Page 3 GAO-05-629T 

Today, I would like to provide our perspectives on (1) the fiscal trends that 

prompt real questions about the affordability and sustainability of the rate 

of growth in defense spending, (2) business management challenges that 

DOD needs to address to successfully transform its business operations, 

and (3) key elements to successfully achieve needed reforms. In particular, 

I will emphasize the need for a strategic plan for business transformation 

and offer suggestions that require legislative action—the need for central 

control of systems investment funding and the need for a chief 

management official (CMO) to be dedicated full-time to leading DOD’s 

business transformation effort. Implementation of these two suggestions 

would provide the sustained top-level leadership and accountability needed 

by DOD to better permit the development and successful implementation 

of the various plans necessary to successfully achieve business 

transformation. 

I would like to further emphasize two points about the CMO. First, the 

position divides and institutionalizes the current functions of the Deputy 

Secretary of Defense into a Deputy Secretary who, as the alter ego of the 

Secretary, would focus on policy-related issues such as military 

transformation, and a Deputy Secretary of Defense for Management, the 

CMO, who would be responsible and accountable for the overall business 

transformation effort. Serving as the strategic integrator for DOD’s 

business transformation effort, the CMO would develop and implement a 

strategic plan for business transformation. This new executive would have 

sufficient clout to work with the Secretary of Defense, the Deputy 

Secretary of Defense, the undersecretaries of defense, and the service 

secretaries to make business transformation a reality. Second, I would also 

like to emphasize what the CMO would not do. The CMO would not assume 

the responsibilities of the undersecretaries of defense, the service 

secretaries, or other DOD officials for the day-to-day management of 

business activities. Therefore, in our view, creating a CMO would not be 

adding another hierarchical layer to oversee the day-to-day management of 

the department. Instead, the CMO would be responsible and accountable 

for planning, integrating, and executing the overall business transformation 

effort.

My statement is based on previous GAO reports and our work was 

performed in accordance with generally accepted government auditing 

standards. 
Page 4 GAO-05-629T 

Summary As I testified before the full committee in February,3

 our nation is on an 

unsustainable fiscal path. Long-term budget simulations by GAO, the 

Congressional Budget Office (CBO), and others show that, over the long 

term, we face a large and growing structural deficit due primarily to known 

demographic trends and rising health care costs. Continuing on this 

unsustainable fiscal path will gradually erode, if not suddenly damage, our 

economy, our standard of living, and ultimately our national security. All 

reasonable simulations indicate that the problem is too big to be solved by 

economic growth alone or by making modest changes to existing spending 

and tax policies. Rather, a fundamental reexamination of major spending 

and tax policies and priorities will be important to recapture our fiscal 

flexibility and ensure that our programs and priorities respond to emerging 

social, economic, and security changes and challenges. Traditional, 

incremental approaches to budgeting at DOD will need to give way to much 

more fundamental and periodic reexaminations of defense programs than 

we have seen in the past, to ensure that DOD gets the most from every 

defense dollar.

Given its size and mission, DOD is one of the largest and most complex 

organizations in the world to effectively manage. While DOD maintains 

military forces with unparalleled capabilities, it continues to confront 

pervasive, decades-old management problems related to its business 

operations—which include outdated organizational structures, systems, 

and processes—that support these forces. These management weaknesses 

cut across all of DOD’s major business areas, such as human capital 

management, including the department’s national security personnel 

system initiative; the personnel security clearance program; support 

infrastructure management; business systems modernization; financial 

management; weapon systems acquisition; contract management; and 

selected supply chain management issues. As I previously noted, all of 

these areas are on GAO’s high-risk list of major government programs and 

operations that either need urgent attention and transformation to ensure 

that the U.S. government functions in the most economical, efficient, and 

effective manner possible, or that are at high risk because of their greater 

vulnerability to fraud, waste, abuse, and mismanagement. We also added 

DOD’s overall approach to business transformation to our high-risk list this 

year because of our concerns over DOD’s lack of adequate management 

3 21st Century Challenges: Reexamining the Base of the Federal Government, GAO-05-

352T (Washington, D.C.: Feb. 16, 2005).
Page 5 GAO-05-629T 

responsibility and accountability, along with the absence of a strategic and 

integrated business transformation plan that is needed to achieve and 

sustain business reform on a broad, strategic, departmentwide, and 

integrated basis. 

Regarding the way forward, in our view, there are three essential elements 

that DOD must incorporate into its business transformation efforts if it is to 

successfully address the systemic management problems related to its 

high-risk areas. First, in our experience, a successful business 

transformation effort must include a comprehensive, integrated business 

transformation strategic plan and a well-defined blueprint, referred to as a 

business enterprise architecture, to guide and constrain implementation of 

such a plan. The strategic plan should contain results-oriented 

performance measures that link institutional, unit, and individual goals, 

measures, and expectations. Second, we believe that additional central 

control for the allocation and execution of funds associated with business 

systems modernization is necessary. Finally, due to the complexity and 

long-term nature of these efforts, strong and sustained executive 

leadership is needed if they are to succeed. 

We believe one way to ensure this strong and sustained leadership over 

DOD’s business management reform efforts would be to create a full-time, 

executive-level II position for a CMO, who would serve as the Deputy 

Secretary of Defense for Management. For this reason, we support the need 

for this position to divide and institutionalize the functions of the Deputy 

Secretary of Defense by creating a separate Deputy Secretary of Defense 

for Management. I’d like to note that over 30 years ago, then Secretary of 

Defense, Melvin Laird, asked Congress to establish an additional Deputy 

Secretary of Defense for many of the same reasons we are proposing that a 

CMO is needed. In a letter to Congress, Secretary Laird stated that the most 

efficient management of DOD resources could not be achieved with just 

the Secretary and Deputy Secretary, and that DOD deficiencies were in 

large measure due to insufficient senior management attention to the 

department’s affairs. At that time, the legislation establishing a second 

deputy secretary did not specifically distinguish between the two deputies. 

As we envision it, the roles and responsibilities of a CMO would be more 

clearly defined and have the added feature of a term of office that spans 

administrations, which would serve to underscore the importance of taking 

a professional, nonpartisan, sustainable, and institutional approach to this 

business transformation effort. 
Page 6 GAO-05-629T 

Growing Fiscal 

Imbalance Raises 

Questions about the 

Affordability and 

Sustainability of 

Current Defense 

Spending

The federal government’s financial condition and long-term fiscal outlook 

present enormous challenges to the nation’s ability to respond to emerging 

forces reshaping American society, the place of the United States in the 

world, and the future role of DOD as well as the rest of the federal 

government. The near-term deficits are daunting—a $412 billion unified 

budget deficit in fiscal year 2004 (including a $567 billion on-budget deficit 

and a $155 billion off-budget surplus) and a $368 billion deficit (not 

including any supplemental appropriations) forecast for fiscal year 2005 by 

the CBO. If these near-term deficits represented only a short-term 

phenomenon—prompted by such factors as economic downturn or 

national security crises—there would be less cause for concern. However, 

deficits have grown notwithstanding the economy recovery from the 

recession in 2001, and the incremental costs of responding to homeland 

security and the nation’s global war against terrorism represent only a 

relatively small fraction of current and projected deficits. Moreover, based 

on our long-range fiscal simulations, the current fiscal condition is but a 

prelude to a much more daunting long-term fiscal outlook. GAO’s long-term 

simulations illustrate the magnitude of the fiscal challenges associated with 

an aging society and the significance of the related challenges the 

government will be called upon to address. Absent significant policy 

changes on the spending or revenue side of the budget, our simulations 

show that growth in spending on federal retirement and health entitlements 

will encumber an escalating share of the government’s resources. Indeed, 

when we assume that recent tax reductions are made permanent and 

discretionary spending keeps pace with the economy, our long-term 

simulations suggest that by 2040 federal revenues may be adequate to pay 

little more than interest on the federal debt.4

 

In fact, the cost implications of the baby boom generation’s retirement have 

already become a factor in CBO’s baseline projections and will only 

intensify as the baby boomers age. According to CBO, total federal 

spending for Social Security, Medicare, and Medicaid is projected to grow 

by about 25 percent over the next 10 years—from 8.4 percent of Gross 

Domestic Product in 2004 to 10.4 percent in 2015. In addition, CBO 

reported that excluding supplemental funding appropriated in 2004 and 

requested in 2005 (mostly for activities in Iraq and Afghanistan), 

discretionary budget authority for defense programs is estimated to grow 

4

 Additional information on GAO’s long-term budget simulations and the nation’s fiscal 

outlook can be found at http://www.gao.gov/special.pubs/longterm/.
Page 7 GAO-05-629T 

from $394 billion in 2004 to $421 billion in 2005, a 6.8 percent increase. The 

expected growth combined with the fact that DOD accounted for more 

than half of all discretionary spending in fiscal year 2004 raises concerns 

about the sustainability and affordability of increased defense spending. 

Despite the need to make strategic investment decisions to address these 

fiscal pressures, DOD’s current approach to planning often supports the 

status quo and results in a mismatch between programs and budgets. As we 

have reported, DOD has difficulties overcoming cultural resistance to 

change and the inertia of various organizations, policies, and procedures 

rooted in the Cold War era.5

 Long-standing organizational and budgetary 

programs need to be addressed, such as the existence of stovepiped or 

siloed organizations, the involvement of many layers and players in 

decision making, and the allocation of budgets on a proportional rather 

than a strategic basis across the military services. DOD’s approach to 

planning does not always provide reasonable visibility to decision makers, 

including Congress, over the projected cost of defense programs. As we 

have reported in the past, DOD uses overly optimistic estimations of future 

program costs that often lead to costs being understated.6

 For example, in 

January 2003 we reported that the estimated cost of developing eight major 

weapon systems had increased from about $47 billion in fiscal year 1998 to 

about $72 billion by fiscal year 2003.7

 As a result of these inaccurate 

estimates, DOD has more programs than it can support with its available 

dollars, which often leads to program instability, costly program stretchouts, and program termination. 

Increasingly limited fiscal resources across the federal government, 

coupled with emerging requirements from the changing security 

environment, emphasize the need for DOD to address its current inefficient 

approach to planning and develop a risk-based strategic investment 

framework for establishing goals, evaluating and setting priorities, and 

making difficult resource decisions. In its strategic plan, the September 

2001 Quadrennial Defense Review, DOD outlined a new risk management 

5 GAO-05-325SP. 

6

GAO, Future Years Defense Program: Actions Needed to Improve Transparency of DOD’s 

Projected Resource Needs, GAO-04-514 (Washington, D.C.: May 7, 2004). 

7

GAO, Major Management Challenges and Program Risks: Department of Defense, GAO03-98 (Washington, D.C.: January 2003). These amounts are in constant fiscal year 2003 

dollars. 
Page 8 GAO-05-629T 

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. We 

recognize what a large undertaking developing a departmentwide risk 

management framework will be and understand that DOD is still in the 

process of implementing this approach. However, it remains unclear how 

DOD will use the risk management framework to measure progress in 

achieving business and force transformation. It also remains unclear how 

the framework will be used to correct limitations we have previously 

identified in DOD’s strategic planning and budgeting. We are currently 

monitoring DOD’s efforts to implement the risk management framework. 

Pervasive Business 

Management 

Weaknesses Place 

DOD’s Overall 

Business 

Transformation at Risk

Numerous management problems, inefficiencies, and wasted resources 

continue to trouble DOD’s business operations, resulting in billions of 

dollars of wasted resources annually at a time when our nation is facing an 

increasing fiscal imbalance. Specific business management challenges that 

DOD needs to address to successfully transform its business operations 

include DOD’s approach to business transformation, its personnel security 

clearance program, support infrastructure management, business systems 

modernization, financial management, weapons systems acquisition, 

contract management, supply chain management, and strategic human 

capital management. These management challenges are on our 2005 highrisk list of programs and activities that need urgent and fundamental 

transformation if the federal government is to function in the most 

economical, efficient, and effective manner possible. The 8 DOD specific 

high-risk areas, along with 6 government-wide areas that apply to DOD, 

mean that the department is responsible for 14 of 25 high-risk areas. As 

shown in table 1, we added DOD’s approach to business management 

transformation to this list in 2005 because it represents an overarching 

high-risk area that encompasses the other individual, DOD specific, highrisk areas, but many of these other management challenges have been on 

the list for a decade or more. 
Page 9 GAO-05-629T 

Table 1: Years When Specific DOD Areas on GAO’s 2005 High-Risk List Were First 

Designated as High Risk

Source: GAO.

a

This area, formerly entitled DOD inventory management, was expanded to include distribution and 

asset visibility.

DOD’s Approach to 

Business Transformation

DOD’s approach to business management transformation represents an 

overarching high-risk area, encompassing several other key business 

management challenges. Over the years, DOD has embarked on a series of 

efforts to reform its business management operations, including 

modernizing underlying information technology (business) systems. 

However, serious inefficiencies remain. As a result, the areas of support 

infrastructure management,8

 business systems modernization, financial 

management, weapon systems acquisition, contract management, and 

supply chain management remain high-risk DOD business operations. We 

now consider DOD’s overall approach to business management 

transformation to be a high-risk area because (1) DOD’s business 

improvement initiatives and control over resources are fragmented; 

(2) DOD lacks a clear strategic and integrated business transformation plan 

and an investment strategy, including a well-defined enterprise 

architecture, to guide and constrain implementation of such a plan; and 

(3) DOD has not designated a senior management official responsible and 

accountable for overall business transformation reform and related 

resources. 

Area Year designated high risk

DOD approach to business transformation 2005

• DOD personnel security clearance program 2005

• DOD support infrastructure management 1997

• DOD business systems modernization 1995

• DOD financial management 1995

• DOD weapon systems acquisition 1990

• DOD contract management 1992

• DOD supply chain managementa

 1990a

8

Support infrastructure includes categories such as force installations, central logistics, the 

defense health program, and central training.
Page 10 GAO-05-629T 

Unless DOD makes progress in overall business transformation, we believe 

it will continue to have difficulties in confronting other problems in its 

business operations. DOD spends billions of dollars to sustain key business 

operations intended to support the warfighter. We have previously testified 

on inefficiencies in DOD’s business operations, such as the lack of 

sustained leadership, the lack of a strategic and integrated business 

transformation plan, and inadequate incentives.9

 Moreover, the lack of 

adequate transparency and accountability across DOD’s major business 

areas results in billions of dollars of wasted resources annually at a time of 

increasing military operations and growing fiscal constraints. 

Business transformation requires long-term cultural change, business 

process reengineering, and a commitment from both the executive and 

legislative branches of government. Although sound strategic planning is 

the foundation on which to build, DOD needs clear, capable, sustained, and 

professional leadership to maintain the continuity necessary for success. 

Such leadership could facilitate the overall business transformation effort 

within DOD by providing the momentum needed to overcome cultural 

resistance to change, military service parochialism, and stovepiped 

operations, all of which have contributed significantly to the failure of 

previous attempts to implement broad-based management reform at DOD. 

Without such leadership, it is also likely that DOD will continue to spend 

billions of dollars on stovepiped, duplicative, and nonintegrated systems 

that do not optimize mission performance or effectively support the 

warfighter. 

Personnel Security 

Clearance Program 

Delays in completing hundreds of thousands of background investigations 

and adjudications (reviews of investigative information to determine 

eligibility for a security clearance) have led us to identify as a business 

management challenge the DOD personnel security clearance program, 

which we just added to our high-risk list in 2005. Personnel security 

clearances allow individuals to gain access to classified information. In 

some cases, unauthorized disclosure of classified information could 

reasonably be expected to cause exceptionally grave damage to national 

9

GAO, Department of Defense: Further Actions Are Needed to Effectively Address 

Business Management Problems and Overcome Key Business Transformation Challenges, 

GAO-05-140T (Washington, D.C.: Nov. 18, 2004); and GAO, DOD’s High-Risk Areas: 

Successful Business Transformation Requires Sound Strategic Planning and Sustained 

Leadership, GAO-05-520T (Washington, D.C.: Apr. 13, 2005). 
Page 11 GAO-05-629T 

defense or foreign relations. DOD has approximately 2 million active 

clearances as a result of worldwide deployments, contact with sensitive 

equipment, and other security requirements. While our work on the 

clearance process has focused on DOD, clearance delays in other federal 

agencies suggest that similar impediments and their effects may extend 

beyond DOD.

Since at least the 1990s, we have documented problems with DOD’s 

personnel security clearance process, particularly problems related to 

backlogs and the resulting delays in determining clearance eligibility.10

Since fiscal year 2000, DOD has declared its personnel security clearance 

investigations program to be a systemic weakness11—a weakness that 

affects more than one DOD component and may jeopardize the 

department’s operations. An October 2002 House Committee on 

Government Reform report also recommended including DOD’s 

adjudicative process as a material weakness.12 As of September 30, 2003 

(the most recent data available), DOD could not estimate the full size of its 

backlog, but we identified over 350,000 cases exceeding established time 

frames for determining eligibility.13

DOD has taken steps to address the backlog—such as hiring more 

adjudicators and authorizing overtime for adjudicative staff—but a 

significant shortage of trained federal and private-sector investigative 

personnel presents a major obstacle to timely completion of cases. Other 

impediments to eliminating the backlog include the absence of an 

integrated, comprehensive management plan for addressing a wide variety 

of problems identified by us and others. In addition to matching 

adjudicative staff to workloads and working with OPM to develop an 

overall management plan, DOD needs to develop and use new methods for 

forecasting clearance needs and monitoring backlogs; eliminate 

10GAO, DOD Personnel: Inadequate Personnel Security Investigations Pose National 

Security Risks, GAO/NSIAD-00-12 (Washington, D.C.: Oct. 27, 1999).

11Department of Defense Annual Statement of Assurance, Fiscal Year 2000 and Fiscal 

Year 2001; Department of Defense Performance and Accountability Report, Fiscal Year 

2002 (Jan. 31, 2003) and Fiscal Year 2003 (Dec. 23, 2003). 

12Committee on Government Reform, Defense Security Service: The Personnel Security 

Investigations (PSI) Backlog Poses a Threat to National Security, H.R. Rep. No. 107-767 

(Washington, D.C.: Oct. 24, 2002).

13GAO, DOD Personnel Clearances: DOD Needs to Overcome Impediments to Eliminating 

Backlog and Determining Its Size, GAO-04-344 (Washington, D.C.: Feb. 9, 2004). 
Page 12 GAO-05-629T 

unnecessary limitations on reciprocity (the acceptance of a clearance and 

access granted by another department, agency, or military service); 

determine the feasibility of implementing initiatives that could decrease the 

backlog and delays; and provide better oversight for all aspects of its 

personnel security clearance process. The National Defense Authorization 

Act for Fiscal Year 200414 authorized the transfer of DOD’s personnel 

security investigative function and over 1,800 investigative employees to 

OPM. This transfer took place in February 2005. While the transfer 

eliminated DOD’s responsibility for conducting the investigations, it did not 

eliminate the shortage of trained investigative personnel needed to address 

the backlog. Although DOD retained the responsibility for adjudicating 

clearances, OPM is now accountable for ensuring that investigations are 

completed in a timely manner. By the end of fiscal year 2005, OPM projects 

that it will have 6,500 of the estimated 8,000 full-time equivalent federal and 

contract investigators it needs to help eliminate the investigations backlog. 

Support Infrastructure 

Management 

DOD has made progress and expects to continue making improvements in 

its support infrastructure management, but much work remains to be done. 

DOD’s support infrastructure includes categories such as force 

installations, central logistics, the defense health program, and central 

training. DOD’s infrastructure costs continue to consume a larger-thannecessary portion of its budget than DOD believes is desirable, despite 

reductions in the size of the military force following the end of the Cold 

War. For several years, DOD also has been concerned about its excess 

facilities infrastructure, which affects its ability to devote more funding to 

weapon systems modernization and other critical needs. DOD has reported 

that many of its business processes and much of its infrastructure are 

outdated and must be modernized. Left alone, the current organizational 

arrangements, processes, and systems will continue to drain scarce 

resources. 

DOD officials recognize that they must achieve greater efficiencies in 

managing their support operations. DOD has achieved some operating 

efficiencies and reductions from such efforts as base realignments and 

closures, consolidations, organizational and business process 

reengineering, and competitive sourcing. It also has achieved efficiencies 

by eliminating unneeded facilities through such means as demolishing 

14 Pub. L. No. 108-136 § 906 (Nov. 24, 2003).
Page 13 GAO-05-629T 

unneeded buildings and privatizing housing at military facilities. In 

addition, DOD and the services are currently gathering and analyzing data 

to support a new round of base realignments and closures in 2005 and 

facilitating other changes as a result of DOD’s overseas basing study. 

Despite this progress, much work remains for DOD to transform its 

support infrastructure to improve operations, achieve efficiencies, and 

allow it to concentrate resources on the most critical needs. Organizations 

throughout DOD need to continue reengineering their business processes 

and striving for greater operational effectiveness and efficiency. DOD 

needs to develop a plan to better guide and sustain the implementation of 

its diverse business transformation initiatives in an integrated fashion. 

DOD also needs to strengthen its recent efforts to develop and refine its 

comprehensive long-range plan for its facilities infrastructure to ensure 

adequate funding to support facility sustainment, modernization, 

recapitalization, and base operating support needs. DOD generally concurs 

with our prior recommendations in this area and indicates it is taking 

actions to address them. A key to any successful approach to resolving 

DOD’s support infrastructure management issues will be addressing this 

area as part of a comprehensive, integrated business transformation effort. 

Business Systems 

Modernization 

We continue to categorize DOD’s business systems modernization program 

as a management challenge because of a lack of an enterprise architecture 

to guide and constrain system investments and because of ineffective 

management oversight, system acquisition, and investment management 

practices. As a result, DOD’s current operating practices and over 4,000 

systems function in a stovepiped, duplicative, and nonintegrated 

environment that contributes to DOD’s operational problems. For years, 

DOD has attempted to modernize these systems, and we have provided 

numerous recommendations to help guide its efforts. For example, in 2001 

we provided DOD with a set of recommendations to help it develop and 

implement an enterprise architecture (or modernization blueprint) and 

establish effective investment management controls.15 Such an enterprise 

architecture is essential for DOD to guide and constrain how it spends 

billions of dollars annually on information technology systems. We also 

made numerous project-specific and DOD-wide recommendations aimed at 

getting DOD to follow proven best practices when it acquired system 

15GAO, Information Technology: Architecture Needed to Guide Modernization of DOD’s 

Financial Operations, GAO-01-525 (Washington, D.C.: May 17, 2001).
Page 14 GAO-05-629T 

solutions.16 While DOD agreed with most of these recommendations, to 

date the department has made limited progress in addressing them. 

In May 2004, we reported that after 3 years and over $203 million in 

obligations, DOD had not yet developed a business enterprise architecture 

containing sufficient scope and detail to guide and constrain its 

departmentwide systems modernization and business transformation.17

One reason for this limited progress is DOD’s failure to adopt key 

architecture management best practices that we recommended,18 such as 

developing plans for creating the architecture; assigning accountability and 

responsibility for directing, overseeing, and approving the architecture; and 

defining performance metrics for evaluating the architecture. Under a 

provision in the Ronald W. Reagan National Defense Authorization Act for 

Fiscal Year 2005,19 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 OMB. Additionally, the act requires 

the development of a transition plan that includes an acquisition strategy 

for new systems and 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 

16GAO-04-615; Department of Defense: Further Actions Needed to Establish and Implement 

a Framework for Successful Financial and Business Management Transformation, GAO04-551T (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, Accountability, 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).

17GAO, 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).

18GAO-01-525.

19Ronald W. Reagan National Defense Authorization Act for Fiscal Year 2005, Pub. L. No. 

108-375, §332, 118 Stat. 1811, 1851 (Oct. 28, 2004) (codified, in part, at 10 U.S.C. §§186, 

2222).
Page 15 GAO-05-629T 

corporatewide solution for addressing DOD’s business management 

deficiencies. 

In May 2004, we also reported that the department’s approach to investing 

billions of dollars annually in existing systems had not changed 

significantly.20 As a result, DOD lacked an effective investment 

management process for selecting and controlling ongoing and planned 

business systems investments. While DOD issued a policy that assigns 

investment management responsibilities for business systems, in May 2004 

we reported that DOD had not yet defined the detailed procedures 

necessary for implementing the policy, clearly defined the roles and 

responsibilities of the business domain owners (now referred to as core 

business mission areas), established common investment criteria, or 

ensured that its business systems are consistent with the architecture. 21

To address certain provisions and requirements of the Ronald W. Reagan 

National Defense Authorization Act for Fiscal Year 2005,22 on March 24, 

2005, the Deputy Secretary of Defense directed the transfer of program 

management, oversight, and support responsibilities regarding DOD 

business transformation efforts from the Office of the Under Secretary of 

Defense, Comptroller, to the Office of the Under Secretary of Defense for 

Acquisition, Technology, and Logistics (OUSD(AT&L)). According to the 

directive, this transfer of functions and responsibilities will allow the 

OUSD(AT&L) to establish the level of activity necessary to support and 

coordinate activities of the newly established Defense Business Systems 

Management Committee (DBSMC). As required by the act, the DBSMC—

with representation including the Deputy Secretary of Defense, the 

designated approval authorities,23 and secretaries of the military services 

and heads of the defense agencies—is the highest ranking governance body 

responsible for overseeing DOD business systems modernization efforts. 

20 GAO-04-731R.

21 GAO-04-731R.

22 10 U.S.C. § 2222.

23 Approval authorities include the Under Secretary of Defense for Acquisition, Technology, 

and Logistics; the Under Secretary of Defense (Comptroller); the Under Secretary of 

Defense for Personnel and Readiness; and the Assistant Secretary of Defense for Networks 

and Information Integration/Chief Information Officer of the Department of Defense. These 

approval authorities are responsible for the review, approval, and oversight of business 

systems and must establish investment review processes for systems under their 

cognizance.
Page 16 GAO-05-629T 

While this committee may serve as a useful planning and coordination 

forum, it is important to remember that committees do not lead, people do. 

In addition, DOD still needs to designate a person to have overall 

responsibility and accountability for this effort. This person must have the 

background and authority needed to successfully achieve the related 

objectives for business systems modernization efforts. 

According to DOD’s annual report to congressional defense committees on 

the status of the department’s business management modernization 

program, DOD has not yet established investment review boards below the 

DBSMC for each core business mission. The statutory requirements 

enacted as part of the Ronald W. Reagan National Defense Authorization 

Act for Fiscal Year 2005 further require that the DBSMC must agree with 

the designated approval authorities’ certification of funds exceeding $1 

million for the modernization of business systems before funds can be 

obligated.24 More important, the obligation of these funds without the 

requisite approval by the DBSMC is deemed a violation of the AntiDeficiency Act.25 As DOD develops a comprehensive, integrated business 

transformation plan, such a plan must include an approach to resolve the 

business systems modernization problems. To this end, it is critical that this 

plan provide for the implementation of our many recommendations related 

to business systems modernization. 

Financial Management DOD continues to face financial management problems that are pervasive, 

complex, long-standing, and deeply rooted in virtually all of its business 

operations. DOD’s financial management deficiencies adversely affect the 

department’s ability to control costs, ensure basic accountability, anticipate 

future costs and claims on the budget, measure performance, maintain 

funds control, prevent fraud, and address pressing management issues. As I 

testified before the House Committee on Government Reform in February 

2005,26 and as discussed in our report on the U.S. government’s 

24Pub. L. No. 108-875, § 332, 118 Stat. 1811, 1854 (Oct. 28, 2004) (codified at 10 U.S.C. § 

2222(a)(2)). 

2531 U.S.C. § 1341(a)(1)(A); see 10 U.S.C. § 2222(b).

26GAO, Fiscal Year 2004 U.S. Government Financial Statements: Sustained Improvement 

in Federal Financial Management Is Crucial to Addressing Our Nation’s Future Fiscal 

Challenges, GAO-05-284T (Washington, D.C.: Feb. 9, 2005).
Page 17 GAO-05-629T 

consolidated financial statements for fiscal year 2004,27 DOD’s financial 

management deficiencies, taken together, represent a major impediment to 

achieving an unqualified opinion on the U.S. government’s consolidated 

financial statements.

Our recent reports and testimonies on Army reserve and national guard pay 

issues clearly illustrate the impact deficiencies in DOD’s financial 

management have had on the very men and women our country is 

depending on to perform our military operations. For example, in February 

2005, we reported that the Army’s process for extending active duty orders 

for injured soldiers lacks an adequate control environment and 

management controls,28 including (1) clear and comprehensive guidance, 

(2) a system to provide visibility over injured soldiers, and (3) adequate 

training and education programs. The Army also has not established userfriendly processes, including clear approval criteria and adequate 

infrastructure and support services. 

Poorly defined processes for extending active duty orders for injured and 

ill reserve component soldiers have caused soldiers to be inappropriately 

dropped from their active duty orders. For some, this has led to significant 

gaps in pay and health insurance, which have created financial hardships 

for these soldiers and their families. Based on our analysis of Army 

manpower data during the period from February 2004 through April 7, 

2004, almost 34 percent of the 867 soldiers who applied for extension of 

active duty orders because of injuries or illness lost their active duty status 

before their extension requests were granted. For many soldiers, this 

resulted in being removed from active duty status in the automated systems 

that control pay and access to benefits such as medical care and access to a 

commissary or post exchange that allows soldiers and their families to 

purchase groceries and other goods at a discount. Many Army locations 

have used ad hoc procedures to keep soldiers in pay status; however, these 

procedures often circumvent key internal controls and put the Army at risk 

of making improper and potentially fraudulent payments. Finally, the 

27For our report on the U.S. government’s consolidated financial statements for fiscal year 

2004, see U.S. Department of the Treasury, Financial Report on the United States 

Government (Washington, D.C.: December 2004), 33-53, which can be found on GAO’s Web 

site at www.gao.gov.

28GAO, Military Pay: Gaps in Pay and Benefits Create Financial Hardships for Injured 

Army National Guard and Reserve Soldiers, GAO-05-125 (Washington, D.C.: Feb. 17, 2005).
Page 18 GAO-05-629T 

Army’s nonintegrated systems, which require extensive error-prone manual 

data entry, further delay access to pay and benefits. 

The Army recently implemented the Medical Retention Processing (MRP) 

program, which takes the place of the previously existing process in most 

cases. The MRP program, which authorizes an automatic 179 days of pay 

and benefits, may resolve the timeliness of the front-end approval process. 

However, the MRP program has some of the same problems as the existing 

process and may also result in overpayments to soldiers who are released 

early from their MRP orders. 

DOD’s senior civilian and military leaders have taken positive steps to 

begin reforming the department’s financial management operations. 

However, to date, tangible evidence of improvement has been seen in only 

a few specific areas, such as internal controls related to DOD’s purchase 

card and individually billed travel card programs. Further, we reported in 

September 2004 that, while DOD had established a goal of obtaining a clean 

opinion on its financial statements by 2007, it lacked a written and realistic 

plan to make that goal a reality.29 DOD’s continuing, substantial financial 

management weaknesses adversely affect its ability to produce auditable 

financial information as well as provide accurate and timely information 

for management and Congress to use in making informed decisions. 

Overhauling the financial management and related business operations of 

one of the largest and most complex organizations in the world represents 

a daunting challenge. Such an overhaul of DOD’s financial management 

operations goes far beyond financial accounting to the very fiber of the 

department’s wide-ranging business operations and its management 

culture. It will require (1) sustained leadership and resource control, 

(2) clear lines of responsibility and accountability, (3) plans and related 

results-oriented performance measures, and (4) appropriate individual and 

organizational incentives and consequences. DOD is still in the very early 

stages of a departmentwide overhaul that will take years to accomplish. 

DOD has not yet established a framework to integrate improvement efforts 

in this area with related broad-based DOD initiatives, such as human 

capital reform. However, successful, lasting reform in this area will only be 

29GAO, 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).
Page 19 GAO-05-629T 

possible if implemented as part of a comprehensive and integrated 

approach to transforming all of DOD’s business operations. 

Weapon Systems 

Acquisition

Another business management challenge DOD faces is its weapon systems 

acquisition program. While DOD’s acquisition process has produced the 

best weapons in the world, it also consistently yields undesirable 

consequences—such as cost increases, late deliveries to the warfighter, 

and performance shortfalls. Such problems were highlighted, for example, 

in our reviews of DOD’s F/A-22 Raptor, Space-Based Infrared System, 

Airborne Laser, and other programs. Problems occur because DOD’s 

weapon programs do not capture early on the requisite knowledge that is 

needed to efficiently and effectively manage program risks. For example, 

programs move forward with unrealistic program cost and schedule 

estimates, lack clearly defined and stable requirements, use immature 

technologies in launching product development, and fail to solidify design 

and manufacturing processes at appropriate junctures in development. 

When programs require more resources than planned, the buying power of 

the defense dollar is reduced and funds are not available for other 

competing needs. It is not unusual for estimates of time and money to be 

off by 20 to 50 percent. When costs and schedules increase, quantities are 

cut and the value for the warfighter—as well as the value of the investment 

dollar—is reduced. In these times of asymmetric threats and netcentricity, 

individual weapon system investments are getting larger and more 

complex. Just 4 years ago, the top five weapon systems cost about $281 

billion; today, in the same base year dollars, the five weapon systems cost 

about $521 billion. If these megasystems are managed with traditional 

margins of error, the financial consequences—particularly the ripple 

effects on other programs—can be dire. 

While weapon systems acquisition continues to remain on our high-risk list, 

DOD has undertaken a number of acquisition reforms over the past 5 years. 

Specifically, DOD has restructured its acquisition policy to incorporate 

attributes of a knowledge-based acquisition model and has reemphasized 

the discipline of systems engineering. In addition, DOD recently introduced 

new policies to strengthen its budgeting and requirements determination 

processes in order to plan and manage weapon systems based on joint 

warfighting capabilities. While these policy changes are positive steps, 

implementation in individual programs will continue to be a challenge 

because of inherent funding, management, and cultural factors that lead 
Page 20 GAO-05-629T 

managers to develop business cases for new programs that over-promise 

on cost, delivery, and performance of weapon systems. 

It is imperative that needs be distinguished from wants and that DOD’s 

limited resources be allocated to the most appropriate weapon system 

investments. Once the best investments that can be afforded are identified, 

then DOD must follow its own policy to employ the knowledge-based 

strategies essential for delivering the investments within projected 

resources. Making practice follow policy is not a simple matter. It is a 

complex challenge involving many factors. One of the most important 

factors is putting the right managers in their positions long enough so that 

they can be both effective and accountable for getting results.

Contract Management Another long-standing business management challenge is DOD’s contract 

management program. As the government’s largest purchaser at over 

$200 billion in fiscal year 2003, DOD is unable to assure that it is using 

sound business practices to acquire the goods and services needed to meet 

the warfighters’ needs. For example, over the past decade DOD has 

significantly increased its spending on contractor-provided information 

technology and management support services, but it has yet to fully 

implement a strategic approach to acquiring these services. In 2002, DOD 

and the military departments established a structure to review individual 

service acquisitions valued at $500 million or more, and in 2003 they 

launched a pilot program to help identify strategic sourcing opportunities. 

To further promote a strategic orientation, however, DOD needs to 

establish a departmentwide concept of operations; set performance goals, 

including savings targets; and ensure accountability for achieving them. In 

March 2004, we reported that if greater management focus were given to 

opportunities to capture savings through the purchase card program, DOD 

could potentially save tens of millions of dollars without sacrificing the 

ability to acquire items quickly or compromising other goals.30

DOD also needs to have the right skills and capabilities in its acquisition 

workforce to effectively implement best practices and properly manage the 

goods and services it buys. However, DOD reduced its civilian workforce 

by about 38 percent between fiscal years 1989 and 2002 without ensuring 

that it had the specific skills and competencies needed to accomplish 

30GAO, Contract Management: Agencies Can Achieve Significant Savings on Purchase 

Card Buys, GAO-04-430 (Washington, D.C.: Mar. 12, 2004). 
Page 21 GAO-05-629T 

current and future DOD acquisition/contract administration missions, and 

more than half of its current workforce will be eligible for early or regular 

retirement in the next 5 years. We found that inadequate staffing and the 

lack of clearly defined roles and responsibilities contributed to contract 

administration challenges encountered in Operation Iraqi Freedom (OIF).31

Further, we have reported that DOD’s extensive use of military logistical 

support contracts in OIF and elsewhere required strengthened oversight.32

Just recently, we identified surveillance issues in almost a third of the 

contracts we reviewed. We also noted that some personnel performing 

surveillance had not received required training, while others felt that they 

did not have sufficient time in a normal workday to perform their 

surveillance duties.33 DOD has made progress in laying a foundation for 

reshaping its acquisition workforce by initiating a long-term strategic 

planning effort, but as of June 2004 it did not yet have the comprehensive 

strategic workforce plan needed to guide its efforts. 

DOD uses various techniques—such as performance-based service 

contracting, multiple-award task order contracts, and purchase cards—to 

acquire the goods and services it needs. We have found, however, that DOD 

personnel did not always make sound use of these tools. For example, in 

June 2004, we reported that more than half of the task orders to support 

Iraq reconstruction efforts we reviewed were, in whole or in part, outside 

the scope of the underlying contract.34 In July 2004, we found that DOD 

personnel waived competition requirements for nearly half of the task 

orders reviewed.35 As a result of the frequent use of waivers, DOD had 

fewer opportunities to obtain the potential benefits of competition—

improved levels of service, market-tested prices, and the best overall value. 

31GAO, Rebuilding Iraq: Fiscal Year 2003 Contract Award Procedures and Management 

Challenges, GAO-04-605 (Washington, D.C.: June 1, 2004).

32GAO, Military Operations: DOD’s Extensive Use of Logistics Support Contracts Requires 

Strengthened Oversight, GAO-04-854 (Washington, D.C.: July 19, 2004); and Defense 

Logistics: High-Level DOD Coordination Is Needed to Further Improve the Management 

of the Army’s LOGCAP Contract, GAO-05-328 (Washington, D.C.: Mar. 21, 2005).

33GAO, Contract Management: Opportunities to Improve Surveillance on Department of 

Defense Service Contracts, GAO-05-274 (Washington, D.C.: Mar. 17, 2005).

34GAO-04-605. 

35GAO, Contract Management: Guidance Needed to Promote Competition for Defense 

Task Orders, GAO-04-874 (Washington, D.C.: July 30, 2004). 
Page 22 GAO-05-629T 

We also found that DOD lacked safeguards to ensure that waivers were 

granted only under appropriate circumstances.

Our work has shown that DOD would benefit by making use of commercial 

best practices, such as taking a strategic approach to acquiring services; 

building on initial efforts to develop a strategic human capital plan for its 

civilian workforce; and improving safeguards, issuing additional guidance, 

and providing training to its workforce on the appropriate use of 

contracting techniques and approaches.36 DOD is undertaking corrective 

actions, but because most efforts are in their early stages, it is uncertain 

whether they can be fully and successfully implemented in the near term. A 

key to resolving DOD’s contract management issues will be addressing 

them as part of a comprehensive and integrated business transformation 

plan.

Supply Chain Management In 1990, we identified DOD’s inventory management as a management 

challenge, or a high-risk area, because inventory levels were too high and 

the supply system was not responsive to the needs of the warfighter. We 

have since expanded the inventory management high-risk area to include 

DOD’s management of certain key aspects of its supply chain, including 

distribution, inventory management, and asset visibility, because of 

significant weaknesses we have uncovered since our 2003 high-risk series 

was published. For example, during OIF, the supply chain encountered 

many problems, including backlogs of hundreds of pallets and containers 

at distribution points, a $1.2 billion discrepancy in the amount of material 

shipped to—and received by—Army activities, cannibalized equipment 

because of a lack of spare parts, and millions of dollars spent in late fees to 

lease or replace storage containers because of distribution backlogs and 

losses. Moreover, we identified shortages of items such as tires, vehicle 

track shoes, body armor, and batteries for critical communication and 

electronic equipment. These problems were the result of systemic 

deficiencies in DOD’s supply chain, including inaccurate requirements, 

funding delays, acquisition delays, and ineffective theater distribution. 

36GAO, Best Practices: Improved Knowledge of DOD Service Contracts Could Reveal 

Significant Savings, GAO-03-661 (Washington, D.C.: June 9, 2003); and Best Practices: 

Taking a Strategic Approach Could Improve DOD’s Acquisition of Services, GAO-02-230

(Washington, D.C.: Jan. 18, 2002). 
Page 23 GAO-05-629T 

While DOD reports show that the department currently owns about 

$67 billion worth of inventory, shortages of certain critical spare parts are 

adversely affecting equipment readiness and contributing to maintenance 

delays. The Defense Logistics Agency (DLA) and each of the military 

services have experienced significant shortages of critical spare parts, even 

though more than half of DOD’s reported inventory—about $35 billion—

exceeded current operating requirements. In many cases, these shortages 

contributed directly to equipment downtime, maintenance problems, and 

the services’ failure to meet their supply availability goals. DOD, DLA, and 

the military services each lack strategic approaches and detailed plans that 

could help mitigate these critical spare parts shortages and guide their 

many initiatives aimed at improving inventory management.37

DOD’s continued supply chain problems also resulted in shortages of items 

in Iraq. In an April 8, 2005, report, we reported that demands for items like 

vehicle track shoes, batteries, and tires exceeded their availability because 

the department did not have accurate or adequately funded Army war 

reserve requirements and had inaccurate forecasts of supply demands for 

the operation.38 Furthermore, the Army’s funding approval process delayed 

the flow of funds to buy them. Meanwhile, rapid acquisition of other items 

faced obstacles. Body armor production was limited by the availability of 

Kevlar and other critical materials, whereas the delivery of up-armored 

High Mobility Multi-Purpose Wheeled Vehicles and armor kits was slowed 

by DOD’s decisions to pace production. In addition, numerous problems, 

such as insufficient transportation, personnel, and equipment, as well as 

inadequate information systems, hindered DOD’s ability to deliver the right 

items to the right place at the right time for the warfighter. Among the items 

the department had problems delivering were generators for Assault 

Amphibian Vehicles, tires, and Meals Ready-to-Eat.

In addition to supply shortages, DOD also lacks visibility and control over 

the supplies and spare parts it owns. Therefore, it cannot monitor the 

responsiveness and effectiveness of the supply system to identify and 

37GAO-05-207.

38GAO, Defense Logistics: Actions Needed to Improve the Availability of Critical Items 

during Current and Future Operations, GAO-05-275 (Washington, D.C.: Apr. 8, 2005).
Page 24 GAO-05-629T 

eliminate choke points.39 Currently, DOD does not have the ability to 

provide timely or accurate information on the location, movement, status, 

or identity of its supplies. Although total asset visibility has been a 

departmentwide goal for over 30 years, DOD estimates that it will not 

achieve this visibility until the year 2010. DOD may not meet this goal by 

2010, however, unless it overcomes three significant impediments: 

developing a comprehensive plan for achieving visibility, building the 

necessary integration among its many inventory management information 

systems, and correcting long-standing data accuracy and reliability 

problems within existing inventory management systems. 

DOD, DLA, and the services have undertaken a number of initiatives to 

improve and transform DOD’s supply chain. Many of these initiatives were 

developed in response to the logistics problems reported during OIF. While 

these initiatives represent a step in the right direction, the lack of a 

comprehensive, departmentwide logistics reengineering strategy to guide 

their implementation may limit their overall effectiveness. A key to 

successful implementation of a comprehensive logistics strategy will be 

addressing these initiatives as part of a comprehensive, integrated business 

transformation.

Strategic Human Capital 

Management 

DOD is attempting to address the critically important governmentwide 

high-risk challenge of strategic human capital management through its 

proposed human resources management system, the National Security 

Personnel System (NSPS). Successful implementation of NSPS is essential 

for DOD as it attempts to transform its military forces and defense business 

practices in response to 21st century challenges. In addition, this new 

human resources management system, if properly designed and effectively 

implemented, could serve as a model for governmentwide human capital 

transformation. DOD is one of several federal agencies that have been 

granted the authority by Congress to design a new human capital system as 

a way to address the governmentwide high-risk area of strategic human 

capital management. This effort represents a huge undertaking for DOD, 

given its massive size and geographically and culturally diverse workforce. 

39GAO, Defense Inventory: Improvements Needed in DOD’s Implementation of Its LongTerm Strategy for Total Asset Visibility of Its Inventory, GAO-05-15 (Washington, D.C.: 

Dec. 6, 2004).
Page 25 GAO-05-629T 

As I recently testified on DOD’s proposed NSPS regulations,40 our ongoing 

work continues to raise questions about DOD’s chances of success in its 

efforts to effect fundamental business management reform, such as NSPS. I 

would like to acknowledge, however, that DOD’s NSPS regulations take a 

valuable step toward a modern performance management system as well as 

a more market-based and results-oriented compensation system. 

On February 14, 2005, the Secretary of Defense and the Acting Director of 

Office of Personnel Management (OPM) released the proposed NSPS 

regulations for public comment. Many of the principles underlying those 

regulations are generally consistent with proven approaches to strategic 

human capital management. For instance, the proposed regulations 

provide for (1) elements of a flexible and contemporary human resources 

management system, such as pay bands and pay for performance; (2) rightsizing of DOD’s workforce when implementing reduction-in-force orders by 

giving greater priority to employee performance in its retention decisions; 

and (3) continuing collaboration with employee representatives. (It should 

be noted, however, that 10 federal labor unions have filed suit alleging that 

DOD failed to abide by the statutory requirements to include employee 

representatives in the development of DOD’s new labor relations system 

authorized as part of NSPS.)

Despite this progress, we have three primary areas of concern about the 

proposed NSPS regulations. DOD’s proposed regulations do not (1) define 

the details of the implementation of the system, including such issues as 

adequate safeguards to help ensure fairness and guard against abuse; 

(2) require, as we believe they should, the use of core competencies to 

communicate to employees what is expected of them on the job; and 

(3) identify a process for the continuing involvement of employees in the 

planning, development, and implementation of NSPS. 

DOD also faces multiple implementation challenges once it issues its final 

NSPS regulations. Given the huge undertaking NSPS represents, another 

challenge is to elevate, integrate, and institutionalize leadership 

responsibility for this large-scale organizational change initiative to ensure 

its success. A chief management official or similar position can effectively 

provide the continuing, focused leadership essential to successfully 

completing these multiyear transformations. Additionally, DOD could 

40GAO, Human Capital: Preliminary Observations on Proposed DOD National Security 

Personnel System Regulations, GAO-05-432T (Washington, D.C.: Mar. 15, 2005). 
Page 26 GAO-05-629T 

benefit if it develops a comprehensive communications strategy that 

provides for ongoing, meaningful two-way communication to create shared 

expectations among employees, employee representatives, managers, 

customers, and stakeholders. Finally, appropriate institutional 

infrastructure could enable DOD to make effective use of its new 

authorities. At a minimum, this infrastructure would include a human 

capital planning process that integrates DOD’s human capital policies, 

strategies, and programs with its program goals, mission, and desired 

outcomes; the capabilities to effectively develop and implement a new 

human capital system; and a set of adequate safeguards—including 

reasonable transparency and appropriate accountability mechanisms—to 

help ensure the fair, effective, and credible implementation and application 

of a new system. 

We strongly support the need for government transformation and the 

concept of modernizing federal human capital policies within both DOD 

and the federal government at large. There is general recognition that the 

federal government needs a framework to guide human capital reform. 

Such a framework would consist of a set of values, principles, processes, 

and safeguards that would provide consistency across the federal 

government but be adaptable to agencies’ diverse missions, cultures, and 

workforces.

Key Elements for 

Successful Business 

Transformation 

Although DOD has a number of initiatives to address its high-risk areas, we 

believe that DOD must fundamentally change its approach to overall 

business transformation effort before it is likely to succeed. We believe 

there are three critical elements of successful transformation: 

(1) developing and implementing an integrated and strategic business 

transformation plan, along with an enterprise architecture to guide and 

constrain implementation of such a plan; (2) establishing central control 

over systems investment funds; and (3) providing sustained leadership for 

business reform efforts. To ensure these three elements are incorporated 

into the department’s overall business management, we believe Congress 

should legislatively create a full-time, high-level executive with long-term 

“good government” responsibilities that are professional and nonpartisan 

in nature. This executive, the Chief Management Official (CMO), would be 

a strategic integrator responsible for leading the department’s overall 

business transformation, including developing and implementing a related 

strategic plan. The CMO would not assume the responsibilities of the 

undersecretaries of defense, the services, and other DOD entities for the 

day-to-day management of business activities. However, the CMO would be 
Page 27 GAO-05-629T 

accountable for ensuring that all DOD business policies, procedures, and 

reform initiatives are consistent with an approved strategic plan for 

business transformation. 

Reform Efforts Must 

Include an Integrated, 

Comprehensive Strategic 

Plan

Our prior work indicates that agencies that are successful in achieving 

business management transformation undertake strategic planning and 

strive to establish goals and measures that align at all levels of the agency. 

The lack of a comprehensive and integrated strategic transformation plan 

linked with performance goals, objectives, and rewards has been a 

continuing weakness in DOD’s business transformation. Since 1999, for 

example, we have recommended that a comprehensive and integrated 

strategic business transformation plan be developed for reforming DOD’s 

major business operations and support activities. In 2004, we suggested 

that DOD clearly establish management accountability for business reform. 

While DOD has been attempting to develop an enterprise architecture for 

modernizing its business processes and supporting information technology 

assets for the last 4 years, it has not developed a strategic and integrated 

transformation plan for managing its many business improvement 

initiatives. Nor has DOD assigned overall management responsibility and 

accountability for such an effort. Unless these initiatives are addressed in a 

unified and timely fashion, DOD will continue to see billions of dollars, 

which could be directed to other higher priorities, wasted annually to 

support inefficiencies in its business functions.

At a programmatic level, the lack of clear, comprehensive, and integrated 

performance goals and measures has handicapped DOD’s past reform 

efforts. For example, we reported in May 2004 that the lack of performance 

measures for DOD’s business transformation initiative—encompassing 

defense policies, processes, people, and systems—made it difficult to 

evaluate and track specific program progress, outcomes, and results. As a 

result, DOD managers lacked straightforward road maps 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 formulated departmentwide performance goals and measures 

and continued to refine and align them with outcomes described in its 

strategic plan—the September 2001 Quadrennial Defense Review (QDR). 

As previously discussed, DOD outlined a new risk management framework 

in the QDR that DOD was to use in considering trade-offs among defense 

objectives and resource constraints, but as of March 2005 DOD was still in 

the process of implementing it. 
Page 28 GAO-05-629T 

Finally, DOD has not established a clear linkage among institutional, unit, 

and individual results-oriented goals, performance measures, and reward 

mechanisms for undertaking large-scale organizational change initiatives 

that are needed for successful business management reform. Traditionally, 

DOD has justified its need for more funding on the basis of the quantity of 

programs it has pursued 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 

establishment of a strategic and integrated business transformation plan 

could help DOD address these systemic management problems.

Central Control over 

Business Systems 

Investment Funds Is Crucial

DOD’s current business 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 to improve the management 

oversight and control of its business systems modernization investments. 

However, as previously discussed, a provision of the Ronald W. Reagan 

National Defense Authorization Act for Fiscal Year 2005, consistent with 

the suggestion I have made in prior testimonies, established specific 

management oversight and accountability with the “owners” of the various 

core business mission areas. This 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 core business mission areas 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.

This legislation also requires that the responsible approval authorities 

establish a hierarchy of investment review boards, the highest level being 

the Defense Business Systems Management Committee (DBSMC), 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 
Page 29 GAO-05-629T 

systems for their business-area portfolio, including ensuring that 

investments are consistent with DOD’s business enterprise architecture. 

However, as I pointed out earlier, DOD has not yet established the lower 

level investment review boards as required by the legislation. 

Although this recently enacted legislation clearly defines the roles and 

responsibilities of business systems investment approval authorities, 

control over the budgeting for and execution of funding for systems 

investment activities 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 those 

responsible for business systems improvements control the allocation and 

execution of funds for DOD business systems. However, implementation 

may require review of the various statutory authorities for the military 

services and other DOD components. Control over business systems 

investment funds would improve the capacity of DOD’s designated 

approval authorities to fulfill their responsibilities and gain 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 systems modernization efforts with a CMO who would chair 

the DBSMC. Cognizant business area approval authorities would also be 

required to report to Congress through a CMO and the Secretary of Defense 

on applicable business systems that are not compliant with review 

requirements and to include a summary justification for noncompliance.

Chief Management Official 

Is Essential for Sustained 

Leadership of Business 

Management Reform

As DOD embarks on large-scale business transformation efforts, we believe 

that the complexity and long-term nature of these efforts requires the 

development of an executive position capable of providing strong and 

sustained change management leadership across the department—and 

over a number of years and various administrations. One way to ensure 

such leadership would be to create by legislation a full-time executive-level 

II position for a CMO, who would serve as the Deputy Secretary of Defense 

for Management. This position would elevate, integrate, and institutionalize 

the high-level attention essential for ensuring that a strategic business 

transformation plan—as well as the business policies, procedures, systems, 

and processes that are necessary for successfully implementing and 

sustaining overall business transformation efforts within DOD—are 

implemented and sustained. An executive-level II position for a CMO would 
Page 30 GAO-05-629T 

provide this individual with the necessary institutional clout to overcome 

service parochialism and entrenched organizational silos, which in our 

opinion need to be streamlined below the service secretaries and other 

levels. 

The CMO would function as a change agent, while other DOD officials 

would still be responsible for managing their daily business operations. The 

position would divide and institutionalize the current functions of the 

Deputy Secretary of Defense into a Deputy Secretary who, as the alter ego 

of the Secretary, would focus on policy-related issues such as military 

transformation, and a Deputy Secretary of Defense for Management, the 

CMO, who would be responsible and accountable for the overall business 

transformation effort and would serve full-time as the strategic integrator 

of DOD’s business transformation efforts by, for example, developing and 

implementing a strategic and integrated plan for business transformation 

efforts. The CMO would not conduct the day-to-day management functions 

of the department; therefore, creating this position would not add an 

additional hierarchical layer to the department. Day-to-day management 

functions of the department would continue to be the responsibility of the 

undersecretaries of defense, the service secretaries, and others. Just as the 

CMO would need to focus full-time on business transformation, we believe 

that the day-to-day management functions are so demanding that it is 

difficult for these officials to maintain the oversight, focus, and momentum 

needed to implement and sustain needed reforms of 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 and their overall level within the department 

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. 

If created, we believe that the new 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. As prior GAO 

work examining the experiences of major change management initiatives 

in large private and public sector organizations has shown, it can often take 

at least 5 to 7 years until such initiatives are fully implemented and the 

related cultures are transformed in a sustainable way. Articulating the roles 

and responsibilities of the position in statute would also help to create 

unambiguous expectations and underscore Congress’s desire to follow a 

professional, nonpartisan, sustainable, and institutional approach to the 
Page 31 GAO-05-629T 

position. In that regard, an individual appointed to the CMO position 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 DOD. 

Furthermore, to improve coordination and integration activities, we 

suggest that all business systems modernization approval authorities 

designated in the Ronald W. Reagan National Defense Act of 2005 

coordinate their efforts with the CMO, who would chair the DBSMC that 

DOD recently established to comply with the act. We also suggest that 

cognizant business area approval authorities would also be required to 

report to Congress through the CMO and the Secretary of Defense on 

applicable business systems that are not compliant with review 

requirements and include a summary justification for noncompliance. In 

addition, the CMO 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 toward achieving agreed-upon 

goals should be a basis for determining the level of compensation earned, 

including any related bonus. In addition, the CMO’s achievements and 

compensation should be reported to Congress each year.

Concluding 

Observations

The long-term fiscal pressures we face as a nation are daunting and 

unprecedented. The size and trend of our projected longer-term deficits 

mean that the nation cannot ignore the resulting fiscal pressures—it is not 

a matter of whether the nation deals with the fiscal gap, but when and how. 

Unless we take effective and timely action, our near-term and longer-term 

deficits present the prospect of chronic and seemingly perpetual budget 

shortfalls and constraints becoming a fact of life for years to come. These 

pressures will intensify the need for DOD to make disciplined and strategic 

investment decisions that identify and balance risks across a wide range of 

programs, operations, and functions. To its credit, DOD is in the process of 

implementing a risk management framework to use in considering tradeoffs among defense objectives and resource constraints and establishing 

department-level priorities, rather than relying on incremental changes to 

existing budget levels. We recognize what a large undertaking developing a 

departmentwide risk management framework will be and, while we are still 

monitoring DOD’s efforts to implement the framework, we have 

preliminary concerns based on our work reviewing other DOD reform 

efforts. Unless DOD is better able to balance its resources, DOD will 
Page 32 GAO-05-629T 

continue to have a mismatch between programs and budgets, and will be 

less likely to maximize the value of the defense dollars it spends. 

DOD continues to face pervasive, decades-old management problems 

related to its business operations and these problems affect all of DOD’s 

major business areas. While DOD has taken steps to address these 

problems, our previous work has uncovered a persistent pattern among 

DOD’s reform initiatives that limits their overall impact on the department. 

These initiatives have not been fully implemented in a timely fashion 

because of the absence of comprehensive, integrated strategic planning, 

inadequate transparency and accountability, and the lack of sustained 

leadership. As previously mentioned, the Secretary of Defense has 

estimated that improving business operations could save 5 percent of 

DOD’s annual budget. This represents a savings of about $22 billion a year, 

based on the fiscal year 2004 budget. In this time of growing fiscal 

constraints, every dollar that DOD can save through improved economy 

and efficiency of its operations is important to the well-being of our nation. 

Until DOD resolves the numerous problems and inefficiencies in its 

business operations, billions of dollars will continue to be wasted every 

year. 

DOD’s senior leaders have demonstrated a commitment to transforming 

the department and have taken several positive steps to begin this effort. To 

overcome the previous cycle of failure at DOD in implementing broadbased management reform, however, we believe that three elements are 

key to successfully achieve needed reforms. First, DOD needs to 

implement and sustain a strategic and integrated business transformation 

plan. Second, we believe that the implementation of two proposed 

legislative initiatives—establishing central control of business system 

funds and creating a CMO—is crucial. We believe that central control over 

business system investment funds would better enable DOD to ensure that 

its resources are being invested in an economical, efficient, and effective 

manner. As long as funding is controlled by the components, it is likely that 

the existing problems with stovepiped, duplicative, and nonintegrated 

systems will continue. We support the need for legislation to create a CMO, 

in part, because we doubt that there is a single individual—no matter how 

talented and experienced—who could effectively address all that needs to 

be addressed at DOD, including conducting a global war on terrorism, 

transforming the military, and tackling long-standing, systemic business 

transformation challenges. We believe that a CMO, serving a 7-year term 

with the potential for reappointment, would have the institutional clout and 

an adequate term in office to work with DOD’s senior leadership across 
Page 33 GAO-05-629T 

administrations to make business transformation a reality. Since the CMO 

would not have responsibility for day-to-day management, this position 

would not superimpose another hierarchical layer over the department to 

oversee daily business operations. Instead, the CMO would be responsible 

and accountable for strategic planning, performance and financial 

managment, and business system modernization, while facilitating overall 

business transformation. Without the strong and sustained leadership 

provided by a CMO, DOD will likely continue to have difficulties in 

maintaining the oversight, focus, and momentum needed to implement and 

sustain the reforms to its business operations. 

Mr. Chairman and Members of the Subcommittee, this concludes my 

prepared statement. I would be happy to answer any questions you may 

have at this time.

(350699)
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