GAO

United States Government Accountability Office

A

Testimony

Before the Subcommittee on Readiness and Management 

Support, Committee on Armed Services, U.S. Senate 

For Release on Delivery 

Expected at 10:00 a.m. EDT

Wednesday, April 13, 2005

DOD’S HIGH-RISK AREAS

Successful Business 

Transformation Requires 

Sound Strategic Planning 

and Sustained Leadership

Statement of David M. Walker

Comptroller General of the United States 

GAO-05-520T
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Highlights of GAO-05-520T, a testimony 

before the Subcommittee on Readiness 

and Management Support, Committee on 

Armed Services, U.S. Senate 

April 13, 2005

DOD HIGH-RISK AREAS 

Successful Business Transformation 

Requires Sound Strategic Planning and 

Sustained Leadership 

GAO has reported on inefficiencies and inadequate transparency and 

accountability across DOD’s major business areas, resulting in billions of 

dollars of wasted resources annually. As shown in the following table, these 

problems have resulted in GAO’s designation of eight DOD areas as highrisk, two of which were newly added this year. Progress in addressing one of 

these new high-risk areas—DOD’s overall approach to business 

transformation—is needed to confront the other seven areas. DOD also 

shares some responsibility for six other governmentwide high-risk areas, 

including strategic human capital management. Although DOD’s senior 

leaders have shown commitment to business management reform, little 

tangible evidence of actual improvement has been seen to date. 

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. 

In addition to the specific high-risk areas, there are other broad-based 

challenges facing our government that merit continuing close attention. One 

emerging area of concern involves the need for DOD along with other 

agencies to develop and use a strategic risk-based approach for establishing 

goals, evaluating and setting priorities, and making difficult resource 

decisions across the department. Strategically managing risks and 

investment decisions is crucial for DOD as it faces growing questions about 

the affordability and sustainability of current defense spending. 

To move forward, there are three key elements that DOD must incorporate 

into its business management reform efforts to successfully address the 

systemic management problems related to its high-risk areas. First, any 

reform efforts must include a comprehensive, integrated strategic plan with 

results-oriented performance measures, including a well-defined blueprint 

(an enterprise architecture) to guide and constrain implementation of such a 

plan. Second, central control of system investments is crucial for successful 

transformation. Finally, a legislatively created Deputy Secretary of Defense 

for Management is essential for providing the strong and sustained executive 

leadership needed if reform efforts are to succeed. 

In January 2005, GAO released its 

2005 high-risk series update report 

for the 109th Congress. GAO’s highrisk series has increasingly focused 

on major government programs 

and operations that need urgent 

attention and transformation to 

ensure that the U.S. government 

functions in the most economical, 

efficient, and effective manner 

possible. GAO also emphasizes 

those federal programs and 

operations that are at high risk 

because of their greater 

vulnerabilities to fraud, waste, 

abuse, and mismanagement. Of the 

25 areas on GAO’s 2005 high-risk 

list, 8 are Department of Defense 

(DOD) programs or operations and 

6 are governmentwide high-risk 

areas for which DOD shares some 

responsibility. These high-risk 

areas touch on all of DOD’s major 

business operations. DOD’s failure 

to effectively address these many 

high-risk areas results in billions of 

dollars of waste each year and 

inadequate accountability to 

Congress and the American people. 

The Subcommittee asked GAO to 

provide its views on (1) DOD’s 

high-risk areas, including those it 

shares responsibility for with other 

federal agencies; (2) an emerging 

challenge for DOD that merits 

close attention, involving DOD’s 

approach to risk management; and 

(3) key elements, such as a chief 

management official, to 

successfully address these highrisk areas and achieve business 

transformation reform. 
Page 1 GAO-05-520T 

Mr. Chairman and Members of the Subcommittee: 

Thank you for the opportunity to discuss the Department of Defense’s 

(DOD) “high-risk” programs and operations summarized in GAO’s 2005 

high-risk series update report.1

 During my tenure as Comptroller General, 

our high-risk series has increasingly focused on those major government 

programs and operations that need urgent attention and transformation to 

ensure that our national government functions in the most economical, 

efficient, and effective manner possible. We also emphasize those federal 

programs and operations that are at high risk because of their greater 

vulnerabilities to fraud, waste, abuse, and mismanagement. Some of these 

high-risk programs and operations are in need of transformation, and 

several will require action by both the executive branch and Congress for 

successful transformation to occur. 

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

organizations to effectively manage in the world. While DOD maintains 

military forces with significant capabilities, it continues to confront 

pervasive, decades-old management problems related to its business 

operations, including systems and processes, that support these forces. Of 

the 25 areas on our 2005 high-risk list, 8 are DOD programs or operations 

and 6 are governmentwide high-risk areas for which DOD shares some 

responsibility. These high-risk areas touch on all of DOD’s major business 

operations. DOD’s failure to effectively address these high-risk areas 

results in billions of dollars of wasted resources each year and inadequate 

accountability to Congress and the American people. In some cases, such 

as DOD’s financial management and weapon systems acquisition areas, we 

have been highlighting high-risk challenges for a decade or more. To its 

credit, the Office of Management and Budget (OMB) has worked closely 

with a number of agencies that have high risk issues, but to-date has been 

less involved with DOD. Recently, Clay Johnson, OMB's Deputy Director 

for Management 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 place additional emphasis on DOD's 

high-risk areas, including working to help ensure that DOD has action plans 

for addressing all new "high-risk" areas. Given the magnitude of DOD's 

problems and the stakes involved, I believe it is critical that OMB actively 

collaborate with the department to ensure it establishes the action plans 

1

GAO, High-Risk Series: An Update, GAO-05-207 (Washington, D.C.: January 2005), issued 

for the 109th Congress.
Page 2 GAO-05-520T 

and milestones needed to address its high risk areas. Continued oversight 

by Congress, such as this hearing, is key to achieving change at DOD and, 

in the case of some areas, legislative action will be needed. 

Today, I will provide my perspectives on (1) DOD’s high-risk areas, 

including those for which it shares responsibility with other federal 

agencies; (2) an emerging challenge that merits close attention, involving 

the need for DOD and other federal agencies to develop comprehensive 

approaches for risk management; and (3) three key elements to 

successfully address these high-risk areas and achieve needed reforms. In 

particular, I will emphasize two suggestions for legislative consideration—

the need for central control of systems investment funding and a chief 

management official—that I have previously testified about.2

Implementation of these two suggestions would provide the sustained toplevel leadership and accountability needed by DOD to better permit the 

effective use of transition plans, processes, systems, people, and tools and 

thereby increase the likelihood of successful business transformation. 

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

performed in accordance with generally accepted government auditing 

standards. 

Summary While DOD began the new millennium with military forces second to none, 

it has not been effective in managing its business operations. At a time 

when DOD is challenged to maintain a high level of operations while 

competing for resources in an increasingly fiscally constrained 

environment, weaknesses in DOD’s business operations continue to result 

in reduced efficiencies and effectiveness. 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.

Continuing problems within DOD’s business operations and transformation 

initiatives have resulted in our designation of eight DOD-specific programs 

and operations to our 2005 high-risk list, which includes two new areas and 

the expansion of a third area. First, we added DOD’s overall approach to 

2

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).
Page 3 GAO-05-520T 

business transformation to the high-risk list because of our concern over 

DOD’s lack of adequate management accountability and the absence of a 

strategic and integrated action plan for the overall business transformation 

effort. Unless DOD makes progress in its overall business transformation 

effort, we believe that it will continue to have difficulties in confronting the 

other seven DOD-specific high-risk areas in an integrated, departmentwide 

approach. Second, we added DOD’s personnel security clearance program 

to the list because the increased delays and growing backlogs of security 

clearances for DOD personnel, contractors, and others present a range of 

risks in today’s security environment. Finally, we expanded our prior highrisk area of inventory management to include DOD’s management of 

certain key aspects of its supply chain, including distribution, inventory 

management, and asset visibility, because of issues related to supporting 

the warfighter during Operation Iraqi Freedom. The remaining DODspecific high-risk areas cover other major business operations such as 

support infrastructure management, business systems modernization, 

financial management, weapon systems acquisition, and contract 

management. Although the Secretary of Defense and senior leaders have 

shown commitment to business management transformation, little tangible 

evidence of actual improvement has been seen in DOD’s business 

operations to date. In addition, DOD has not taken the steps necessary to 

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

and integrated basis.

In addition to the DOD-specific high-risk areas, DOD shares responsibility 

for six other high-risk areas that are governmentwide in scope. A first and 

critical governmentwide high-risk area, strategic human capital 

management, has remained high risk because some federal human capital 

strategies are still not appropriately constituted to meet current and 

emerging challenges or drive the transformations necessary for agencies to 

meet these challenges. The National Defense Authorization Act for Fiscal 

Year 20043

 has given DOD significant authorities to address the way in 

which defense civilian employees are hired, compensated, promoted, and 

disciplined, and proposed regulations to implement these authorities have 

been jointly released by the Secretary of Defense and the Acting Director of 

the Office of Personnel Management (OPM). The remaining five 

governmentwide high-risk areas include managing federal real property, 

protecting federal information systems and the nation’s critical 

3

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).
Page 4 GAO-05-520T 

infrastructure, establishing appropriate and effective information-sharing 

mechanisms to improve homeland security, modernizing federal disability 

programs, and managing interagency contracting more effectively. 

There are other important broad-based challenges facing our government 

that we will be closely monitoring even though we have not yet categorized 

them as high risk. One emerging area of concern involves the need for DOD 

along with other agencies to develop and use a strategic risk-based 

approach for establishing goals, evaluating and setting priorities, and 

making difficult resource decisions. Strategically managing risks and 

investment decisions across the department is crucial for DOD as it faces 

growing questions about the affordability and sustainability of the rate of 

growth in defense spending and the shift in focus from conventional threats 

posed by the Cold War era to more unconventional and asymmetric threats 

evidenced in the events of September 11, 2001. To its credit, we understand 

that DOD is attempting to implement a risk management framework for 

making broad, strategic investment decisions across the department, and 

we are monitoring this effort.

Regarding the way forward, 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 and action plan with results-oriented performance 

measures that link institutional, unit, and personnel goals, measures, and 

expectations. Second, we propose that those responsible for business 

systems modernization control the allocation and execution of funds for 

DOD business systems. 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 Chief Management 

Official (CMO), who would serve as the Deputy Secretary of Defense for 

Management. We believe that the new CMO position should be filled by an 

individual appointed by the President and confirmed by the Senate, for a 

set term of 7 years with the potential for reappointment. Articulating the 

role and responsibilities of the position in statute and establishing a term 

that spans administrations underscores the importance of a professional, 

nonpartisan approach to this business management-oriented position. This 

position would elevate, integrate, and institutionalize the attention 

essential for addressing key stewardship responsibilities, such as strategic 
Page 5 GAO-05-520T 

planning, enterprise architecture development and implementation, 

information technology management, and financial management, while 

facilitating the overall business management transformation within DOD.

DOD’s High-Risk Areas, 

Including Governmentwide 

High-Risk Areas

Numerous systems problems, inefficiencies, and wasted resources 

continue to trouble DOD’s business operations, resulting in our designation 

of 14 high-risk areas that are either DOD-specific programs or 

governmentwide high-risk areas for which DOD shares some responsibility. 

As shown in table 1, we have designated two new high-risk areas for DOD 

this year. The first, DOD’s approach to business management 

transformation, represents an overarching high-risk area, encompassing 

the other seven key DOD-specific business operations that we have 

designated as individual high-risk areas. The second, DOD’s personnel 

security clearance program, was added to our 2005 high-risk list because of 

delays in completing hundreds of thousands of background investigations 

and adjudications (a review of investigative information to determine 

eligibility for a security clearance). Many of the remaining DOD-specific 

areas have been on the list for a decade or more. In addition to the DODspecific high-risk areas shown in table 1, I will later discuss the six 

governmentwide areas, such as human capital management, for which 

DOD shares responsibility with other federal agencies. 

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 was formerly entitled DOD inventory management. 

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
Page 6 GAO-05-520T 

DOD’s Approach to 

Business Transformation

DOD’s approach to business management transformation represents an 

overarching high-risk area, encompassing several other key business 

operations. 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, 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 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 investment strategy, including a welldefined 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. 

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, including systems and 

processes related to support infrastructure,4

 finances, weapon systems 

acquisition, the management of contracts, and the supply chain. We have 

previously testified on inefficiencies in DOD’s business operations, such as 

the lack of sustained leadership, the lack of a comprehensive and 

integrated business transformation strategic and action plan, and 

inadequate incentives.5

 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. 

4

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

defense health program, and central training.

5

GAO-05-140T; GAO, Department of Defense: Long-standing Problems Continue to Impede 

Financial and Business Management Transformation, GAO-04-907T (Washington, D.C.: 

July 7, 2004), and DOD Business Systems Modernization: Billions Continue to Be 

Invested with Inadequate Management Oversight and Accountability, GAO-04-615

(Washington, D.C.: May 27, 2004). 
Page 7 GAO-05-520T 

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 would provide the attention essential for addressing key 

stewardship responsibilities—such as strategic planning, performance 

management, business information management, and financial 

management—in an integrated manner, while helping to facilitate the 

overall business transformation effort within DOD.

Personnel Security Clearance 

Program

The second high-risk area is DOD’s personnel security clearance program. 

Delays in completing hundreds of thousands of background investigations 

and adjudications (a review of investigative information to determine 

eligibility for a security clearance) have led us to add the DOD personnel 

security clearance program to our 2005 high-risk list. 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 

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.6

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

investigations program to be a systemic weakness7

—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 

6

GAO, DOD Personnel: Inadequate Personnel Security Investigations Pose National 

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

7

Department 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). 
Page 8 GAO-05-520T 

adjudicative process as a material weakness.8 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.9

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 

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 200410 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. 

Support Infrastructure 

Management

The third high-risk area is DOD’s support infrastructure management, 

which we first identified as being high risk in 1997. DOD has made progress 

and expects to continue making improvements in its infrastructure 

management, but much work remains to be done. DOD’s support 

8

Committee 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).

9

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

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

10 Pub. L. No. 108-136 § 906 (Nov. 24, 2003).
Page 9 GAO-05-520T 

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-than-necessary 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 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 

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 integrate, 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 The fourth high-risk area is DOD’s business systems modernization 

program, which we first designated as high risk in 1995. We continue to 
Page 10 GAO-05-520T 

categorize DOD’s business systems modernization program as a high-risk 

area because of a lack of an enterprise architecture to guide and constrain 

system investments and 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.11 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 solutions.12 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.13

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

11GAO, Information Technology: Architecture Needed to Guide Modernization of DOD’s 

Financial Operations, GAO-01-525 (Washington, D.C.: May 17, 2001).

12GAO-04-615 and Department of Defense: Further Actions Needed to Establish and 

Implement a Framework for Successful Financial and Business Management 

Transformation, GAO-04-551T (Washington, D.C.: Mar. 23, 2004); DOD Business Systems 

Modernization: Important Progress Made to Develop Business Enterprise Architecture, 

but Much Work Remains, GAO-03-1018 (Washington, D.C.: Sept. 19, 2003); DOD Financial 

Management: Integrated Approach, 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).

13GAO, 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).
Page 11 GAO-05-520T 

architecture management best practices that we recommended,14 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 2005,15 DOD must develop an enterprise architecture to cover 

all defense business systems and related business functions and activities 

that is sufficiently defined to effectively guide, constrain, and permit 

implementation of a corporatewide solution and is consistent with the 

policies and procedures established by the Office of Management and 

Budget (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 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.16 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 reported17 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. 

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

National Defense Authorization Act for Fiscal Year 2005,18 on March 24, 

14GAO-01-525.

15Ronald 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).

16 GAO-04-731R.

17 GAO-04-731R.

18 10 U.S.C. §2222.
Page 12 GAO-05-520T 

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,19 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. 

While this committee may serve as a useful planning and coordination 

forum, it is important to remember that committees and task forces do not 

lead, people do. In addition, DOD still needs to designate a person to have 

overall responsibility and accountability for this effort for a sustained 

period of time. This person must have the background and authority 

needed to successfully achieve the related objectives for business systems 

modernization efforts. 

On March 19, 2005, the Deputy Secretary of Defense delegated the 

authority for the review, approval, and oversight of the planning, design, 

acquisition, development, operation, maintenance, and modernization of 

defense business systems to the designated approval authority for each 

business area.20 However, according to DOD’s annual report to 

19 The designated approval authorities are the Under Secretary of Defense for Acquisition, 

Technology, and Logistics for business systems related to acquisition, logistics and 

installations and environment; the Under Secretary of Defense (Comptroller)for business 

systems related to financial management and strategic planning and budgeting; the Under 

Secretary of Defense for Personnel and Readiness for business systems related to human 

resource management; and the Assistant Secretary of Defense for Networks and 

Information Integration/Chief Information Officer of the Department of Defense for 

business systems related to information technology infrastructure or information 

assurance.

20 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 13 GAO-05-520T 

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 200521

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. More 

importantly, the obligation of these funds without the requisite approval by 

the DBSMC is deemed a violation of the Anti-Deficiency Act.22

As DOD develops a comprehensive, integrated business transformation 

plan, such a plan must include an approach to resolve the business systems 

modernization problems. We were recently briefed on the department’s 

conceptual framework for business system modernization. While the 

framework has merit and is a good first step, the department will need to 

translate its framework into a comprehensive and integrated plan of action. 

This plan should include priorities, key stakeholders, timeframes, and 

accountability and it should be linked to institutional, unit, and individual 

reward systems. To this end, it is critical that DOD provide the 

implementation of our many business systems modernization-related 

recommendations in this plan. 

Financial Management The fifth high-risk area is DOD’s financial management program, which we 

first designated as high risk in 1995. As I testified before the House 

Committee on Government Reform in February 2005,23 and as discussed in 

our report on the U.S. government’s consolidated financial statements for 

fiscal year 2004,24 DOD’s financial management deficiencies, taken 

together, represent a major impediment to achieving an unqualified opinion 

21Pub. L. No. 108-875, § 332, 118 Stat. 1811, 1854 (Oct. 28, 2004) (codified at 10 U.S.C. § 2222 

(a)(2)). 

2231 U.S.C. §1341(a)(1)(A); see 10 U.S.C. § 2222(b).

23GAO, 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).

24For 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.
Page 14 GAO-05-520T 

on the U.S. government’s consolidated financial statements. 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. 

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 controls25—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 has 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 

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

data entry, further delay access to pay and benefits. 

25GAO, 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 15 GAO-05-520T 

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 200426 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. 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 

possible if implemented as part of a comprehensive and integrated 

approach to transforming all of DOD’s business operations. 

26GAO, 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 16 GAO-05-520T 

Weapon Systems Acquisition The sixth high-risk area is DOD’s acquisition of weapon systems. We 

designated this as a high-risk area in 1990, and it remains so today. 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 

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

on cost, delivery, and performance of weapon systems. 
Page 17 GAO-05-520T 

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 The seventh high-risk area is DOD’s contract management program, which 

we designated as a high-risk area in 1992. DOD, the government’s largest 

purchaser at over $200 billion in fiscal year 2003, is unable to assure that it 

is using sound business practices to acquire the goods and services needed 

to meet the warfighter’s 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 not yet fully 

implemented 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.27

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 

current and future DOD 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 

27GAO, Contract Management: Agencies Can Achieve Significant Savings on Purchase 

Card Buys, GAO-04-430 (Washington, D.C., Mar. 12, 2004). 
Page 18 GAO-05-520T 

encountered in Operation Iraqi Freedom (OIF).28 Further, we have reported 

that DOD’s extensive use of military logistical support contracts in OIF and 

elsewhere required strengthened oversight.29 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.30 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.31 In July 2004, we found that DOD 

personnel waived competition requirements for nearly half of the task 

orders reviewed.32 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. 

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; 

28GAO, Rebuilding Iraq: Fiscal Year 2003 Contract Award Procedures and Management 

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

29GAO, 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).

30GAO, Contract Management: Opportunities to Improve Surveillance on Department of 

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

31GAO-04-605. 

32GAO, Contract Management: Guidance Needed to Promote Competition for Defense 

Task Orders, GAO-04-874 (Washington, D.C.: July 30, 2004). 
Page 19 GAO-05-520T 

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.33 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 The eighth high-risk area is DOD’s supply chain management program. 

In 1990, we identified DOD’s inventory management as 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. 

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—

33GAO, 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 20 GAO-05-520T 

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. 

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.34 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 

eliminate choke points.35 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 

34GAO, 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).

35GAO, 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 21 GAO-05-520T 

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.

DOD Management 

Weaknesses Contribute to 

Governmentwide High-Risk 

Areas

I would now like to spend a few minutes discussing the six 

governmentwide high-risk areas where DOD shares responsibility with 

other federal agencies. First, I would like to provide our preliminary 

observations on DOD’s attempt to address a critically important 

governmentwide high-risk area—strategic human capital management—

through its new human resources management system, the National 

Security Personnel System (NSPS). I also will briefly discuss DOD’s need to 

address five additional governmentwide high-risk challenges as part of the 

transformation of its business management practices. 

Strategic Human Capital 

Management

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 resource 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 has been granted the authority by Congress to 

design a new human capital system as a way to address the first 

governmentwide high-risk area, strategic human capital management. This 

effort represents a huge undertaking for DOD, given its massive size and 

geographically and culturally diverse workforce. As I recently testified on 

DOD’s proposed NSPS regulations,36 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 

36GAO, Human Capital: Preliminary Observations on Proposed DOD National Security 

Personnel System Regulations, GAO-05-432T (Washington, D.C.: Mar. 15, 2005). 
Page 22 GAO-05-520T 

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 

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 

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 includes a human capital 

planning process that integrates DOD’s human capital policies, strategies, 
Page 23 GAO-05-520T 

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.

Other Related Governmentwide 

High-Risk Areas

In addition to the governmentwide human capital high-risk area, DOD 

shares responsibility for five other high-risk areas. These areas are 

managing federal real property, protecting federal information systems and 

the nation’s critical infrastructure, establishing appropriate and effective 

information-sharing mechanisms to improve homeland security, 

modernizing federal disability programs, and managing interagency 

contracting more effectively. 

• Managing federal real property: In January 2003, we designated 

federal real property as a high-risk area due to long-standing problems 

with excess and underutilized property, deteriorating facilities, 

unreliable real property data, and costly space challenges. To better 

manage federal real property, DOD is preparing for a round of base 

realignments and closures (BRAC) in 2005 to eliminate excess physical 

capacity and rationalize its infrastructure with the defense strategy. For 

BRAC 2005, we will continue to serve as an independent and objective 

observer of the process and will assess and report on DOD’s decisionmaking processes leading up to the proposed realignment and closure 

recommendations. From our vantage point, we will determine to what 

extent DOD follows a clear, transparent, consistently applied process—

one where we can see a logical flow between DOD’s analysis and its 

decision making. Although we do not attend or participate in 

deliberative meetings involving BRAC, we are permitted access to the 

minutes of these meetings and to officials involved in the process. 
Page 24 GAO-05-520T 

• Protecting federal information systems and the nation’s critical 

infrastructure: Although DOD has made some improvements, 

significant information security weaknesses at DOD as well as other 

federal agencies continue to place a broad array of federal operations 

and assets at risk of fraud, misuse, and disruption. In November 2002, 

for example, a British computer administrator was indicted on charges 

that he accessed and damaged 98 computers in 14 states from March 

2001 through March 2002, causing some $900,000 in damage to the 

computers. The attacks rendered the networks of the Earle Naval 

Weapons Station in New Jersey and the Military District of Washington 

inoperable. We reported in 2003 that DOD had undertaken a 

defensewide information assurance program to promote integrated, 

comprehensive, and consistent practices across the department to 

prevent similar attacks on its information systems and had recently 

issued policy guidance and implementation instructions.37 However, we 

found that DOD did not have mechanisms in place for comprehensively 

measuring compliance with federal and department information 

security policies and ensuring that those policies are consistently 

practiced throughout DOD. In fact, DOD reported several material 

control weaknesses, which included needing to decrease the time 

necessary for correcting reported weaknesses and ensuring that 

computer security policies were enforced and security capabilities were 

tested regularly. 

• Establishing appropriate and effective information sharing 

mechanisms to improve homeland security: Recent events and 

changes in the overall security environment have served to reinforce the 

importance of having appropriate and effective information and 

knowledge-sharing mechanisms in place that cross organizational, 

geographic, and sectoral boundaries. Progress has been made since the 

tragic events of September 11, 2001, but much remains to be done. 

Achieving success in this area will involve the combined efforts of many 

agencies, including DOD, as well as a range of other key players. 

• Modernizing federal disability programs: Our work examining 

federal disability programs has found that these programs are neither 

well aligned with 21st century realities nor positioned to provide 

meaningful and timely support for Americans with disabilities. Since 

37GAO, Information Security: Further Efforts Needed to Fully Implement Statutory 

Requirements in DOD, GAO-03-1037T (Washington, D.C.: July 24, 2003).
Page 25 GAO-05-520T 

GAO designated this area as high risk in 2003, the Department of 

Veterans Affairs (VA) and the Social Security Administration (SSA) have 

made some progress toward improving their disability programs. 

However, both VA and SSA still have difficulties managing their 

disability programs. They experience lengthy processing times for 

disability claims and lack a clear understanding of the extent of possible 

inconsistencies in their disability decisions. Furthermore, these 

programs remain grounded in outmoded concepts of disability that have 

not been updated to reflect the current state of science, medicine, 

technology, and labor market conditions. 

The U.S. government is faced with the return of more than 10,000 

servicemembers who have sustained combat-related injuries in the 

current conflicts in Afghanistan and Iraq. Reassessing the impact of 

disabilities on their work capacity is especially important in light of 

recent advances in medicine and improved prosthetics, which have 

enabled some service members to return to active duty. This example 

illustrates the potential for better aligning federal disability programs 

with social changes that focus on supporting the work capacities of all 

people with disabilities. In light of the projected shrinkage of the 

workforce, focusing on work capacity is becoming increasingly 

important for the U.S. economy. 

The last two National Defense Authorization Acts afford us an 

opportunity to develop information and analysis that could be used to 

reassess the basis for current federal disability policies. The National 

Defense Authorization Act for Fiscal Year 2004 established the Veterans’ 

Disability Benefits Commission.38 This commission is charged with 

studying the benefits provided to compensate and assist veterans who 

suffer disabilities attributable to military service, and their survivors.39

The law requires the commission to study, among other things, the 

appropriateness of such benefits, the appropriate standard for 

determining whether a veteran’s disability should be compensated, and 

the appropriateness of a schedule for rating disabilities based on 

average impairment of earning capacity. The Ronald W. Reagan National 

Defense Authorization Act for Fiscal Year 2005 mandated a GAO study 

of the disability benefits that are payable under federal, state, and local 

38 Pub. L. No. 108-136, § 1501, 117 Stat. 1392, 1677 (Nov. 24, 2003).

39 § 1502.
Page 26 GAO-05-520T 

laws to federal, state, and local government employees.40 To the extent 

feasible, the study is to focus on benefits for disabilities incurred in the 

performance of jobs in which employees perform tasks with risks that 

are analogous to the risks associated with the performance of military 

tasks by members of the armed forces. In addition, DOD is mandated to 

study the adequacy of current and projected disability benefits that are 

available to disabled members and former members of the armed forces 

for service-connected disabilities,41 including a comparison of the 

disability benefits for members of the armed forces with commercial 

and other private sector disability benefits. We believe these studies 

should provide important information and analysis for deliberations on 

more fundamental reform of the design, cost, and feasibility of federal 

disability programs.

• Managing interagency contracting: In recent years, federal agencies 

have been making a major shift in the way they procure many goods and 

services. Rather than spending a great deal of time and resources 

contracting for goods and services themselves, they are making greater 

use of existing contracts already awarded by other agencies, in 

particular for buying services. These contracts are designed to leverage 

the government’s aggregate buying power and provide a much-needed 

simplified method for procuring commonly used goods and services. 

These contract vehicles offer the benefits of improved efficiency and 

timeliness; however, they need to be effectively managed. Our work and 

that of some agency inspectors general has revealed instances of 

improper use of interagency contracts. For example, we recently 

reviewed selected DOD contracts and task orders for Iraq 

reconstruction and found some task orders under the General Services 

Administration (GSA) schedules program that did not satisfy legal 

requirements for competition because the work was not within the 

scope of the underlying contracts.42 More broadly, the GSA Inspector 

General conducted a comprehensive review of the contracting activities 

of GSA’s Federal Technology Service, an entity that provides contracting 

services for agencies across the government, and reported that millions 

of dollars in fiscal year 2003 awards did not comply with laws and 

regulations.

40Pub. L. No. 108-375, § 666(d).

41§ 666(a).

42GAO-04-605.
Page 27 GAO-05-520T 

Administration officials have acknowledged that the management of 

interagency contracting needs to be improved. As the largest customer 

for interagency contracts, it is particularly important that DOD 

successfully tackle the challenge of better managing its use of 

interagency contracts. We have reported on challenges DOD has faced 

in using interagency contracts. For example, we found that DOD waived 

competition requirements for a significant percentage of supply 

schedule orders we reviewed, frequently based on an expressed 

preference to retain the services of incumbent contractors.43 DOD 

concurred with our recommendations to develop guidance for the 

conditions under which waivers of competition may be used, require 

documentation to support waivers, and establish approval authority 

based on the value of the orders. 

In conjunction with the OMB and GSA, DOD is taking a number of 

steps—including developing new skills assessments, setting standards 

for the acquisition workforce, and coordinating training programs aimed 

at improving the capacity of the federal acquisition workforce—to 

properly handle the growing and more complex workload of service 

acquisitions. DOD also has recently issued a new policy designed to 

improve oversight of its use of other agencies’ contracts.

Need for Risk Management 

Approaches Is an Emerging 

Concern

In addition to specific areas that we have designated as high risk, there are 

other important broad-based challenges facing our government that are 

serious and merit continuing close attention. One emerging area of concern 

involves the need for instilling a disciplined approach within DOD, as well 

as other agencies, for identifying and managing risk across a wide range of 

programs, operations, and functions. As a framework for decision making, 

we have advocated a comprehensive threat and risk management approach 

that fully links strategic goals to plans and budgets, assesses the values and 

risks of various courses of action as a tool for setting priorities and 

allocating resources, and provides for the use of performance measures to 

assess outcomes. 

Emerging requirements from the changing security environment, coupled 

with increasingly limited fiscal resources across the federal government, 

emphasize the need for DOD to develop and use a risk-based strategic 

43GAO-04-874.
Page 28 GAO-05-520T 

framework for establishing realistic 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 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, these risk areas are to form 

the basis for DOD’s annual performance goals. They are to be used to track 

performance results and link to planning and resource decisions. 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 this 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, including the use of 

overly optimistic assumptions in estimating funding needs, which often 

result in a mismatch between programs and budgets. We are currently 

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

Sound Strategic 

Planning, Centralized 

Control over Business 

Systems Investments, 

and Sustained 

Leadership Are Key to 

Successfully 

Addressing DOD’s 

High-Risk Areas

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

believe that DOD must fundamentally change its approach to the overall 

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

there are three critical elements of successful transformation—developing 

and implementing an integrated strategic and action plan along with an 

enterprise architecture to guide and constrain implementation of such a 

plan, establishing central control over systems investment funds, and 

providing sustained leadership. To ensure these 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 should have appropriate authority over all of 

DOD’s business operations, as well as central control of all business 

transformation-related funding with the designated approval authorities 

assigned responsibility for transformation activities within their specific 

business process areas. 
Page 29 GAO-05-520T 

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.44

The lack of a comprehensive and integrated strategic and action plan 

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

continuing weakness in DOD’s business management transformation. Since 

1999, for example, we have recommended that a comprehensive and 

integrated strategy and action plan be developed for reforming DOD’s 

major business operations and support activities.45 In 2004, we suggested 

that DOD clearly establish management accountability for business 

reform.46 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 

comprehensive and integrated strategy or action 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 200447 that the lack of 

performance measures for DOD’s business management 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. 

44GAO, Defense Management: Tools for Measuring and Managing Defense Agency 

Performance Could Be Strengthened, GAO-04-919 (Washington, D.C.: Sept. 13, 2004). 

45 GAO, Defense Reform Initiative: Organization, Status, and Challenges, GAO/NSIAD-99-

87 (Washington, D.C.: Apr. 21, 1999). 

46GAO-04-551T. 

47GAO-04-731R.
Page 30 GAO-05-520T 

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 an integrated, comprehensive strategic 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 2005,48 consistent with 

the suggestion I have made in prior testimonies,49 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.

48Pub. L. No. 108-375, §332.

49GAO-04-551T; and GAO, Department of Defense: Further Actions Needed to Establish and 

Implement a Framework for Successful Business Transformation, GAO-04-626T

(Washington, D.C.: Mar. 31, 2004).
Page 31 GAO-05-520T 

This legislation also requires that the responsible approval authorities 

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

the 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 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 lowerlevel 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 chief management 

official (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 organizational change initiatives, such as 

business management transformation, the complexity and long-term nature 

of these initiatives requires the development of an executive position 

capable of providing strong and sustained leadership—over a number of 

years and various administrations. 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 CMO, who would serve as the Deputy 
Page 32 GAO-05-520T 

Secretary of Defense for Management. This position would elevate, 

integrate, and institutionalize the attention essential for addressing key 

stewardship responsibilities, such as strategic planning, human capital 

management, performance and financial management, acquisition and 

contract management, and business systems modernization, while 

facilitating the overall business management reforms within DOD.

The day-to-day demands placed on the Secretary of Defense, 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 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. A CMO could provide the sustained and focused 

leadership that these other top officials are unable to provide. 

If created, 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. Articulating the roles and responsibilities 

of the position in statute would help to create unambiguous expectations 

and underscore Congress’s desire to follow a professional, nonpartisan 

approach to the 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 and 

serve as an integrator for DOD’s needed business transformation efforts. 

Further, 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 200550 coordinate their efforts 

with the CMO, who would chair the Defense Business Systems 

Management Committee that DOD recently established to comply with the 

act. 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 

5010 U.S.C. § 222(f).
Page 33 GAO-05-520T 

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 would be a basis for determining the level of compensation earned, 

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

compensation would be reported to Congress each year.

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. 

(350689)
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