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 3:30 p.m. EST 

Thursday, November 18, 2004

DEPARTMENT OF 

DEFENSE

Further Actions Are 

Needed to Effectively 

Address Business 

Management Problems and 

Overcome Key Business 

Transformation Challenges

Statement of David M. Walker

Comptroller General of the United States

GAO-05-140T
What GAO Found

United States Government Accountability Office

Why GAO Did This Study

Highlights

Accountability Integrity Reliability

www.gao.gov/cgi-bin/getrpt?GAO-05-140T.

To view the full product, including the scope 

and methodology, click on the link above. 

For more information, contact Gregory Kutz, 

(202) 512-9095 or kutzg@gao.gov. 

Highlights of GAO-05-140T, a report to the 

Subcommittee on Readiness and 

Management Support, Committee on 

Armed Services, U.S. Senate 

November 18, 2004

DEPARTMENT OF DEFENSE: 

Further Actions Are Needed to Effectively 

Address Business Management Problems 

and Overcome Key Business 

Transformation Challenges 

Although senior DOD leaders have shown commitment to transformation as 

evidenced by key initiatives such as human capital reform, the Business 

Management Modernization Program, and the Financial Improvement 

Initiative, little tangible evidence of improvement has been seen in DOD’s 

business operations. Overhauling the business operations of one of the 

largest and most complex organizations in the world represents a huge 

management challenge, especially given the increased demands on our 

military forces. However, this challenge can be met if DOD employs key 

elements, such as a comprehensive and integrated business transformation 

plan. Six DOD program areas are on GAO’s high-risk list, and the department 

shares responsibility for three other governmentwide high-risk areas. 

Substantial weaknesses in DOD business operations adversely affect its 

ability to provide timely, reliable management information for DOD and 

Congress to use in making informed decisions. Further, the lack of adequate 

transparency and appropriate accountability across all of DOD’s major 

business areas results in billions of dollars annually in wasted resources in a 

time of increasing fiscal challenges. 

Examples of the Impact of Business Management Problems at DOD 

Business area 

affected Problem identified and its impact 

Military pay 782 of the 829 mobilized Army National Guard and Reserve soldiers from 14 

case study units GAO investigated had pay problems. These problems 

distracted soldiers from their missions, imposed financial hardships on their 

families, and had a negative impact on retention. 

Logistics Asset visibility and other logistical support problems hampered mission 

readiness during Operation Iraqi Freedom, including cannibalization of vehicles 

for parts and duplication of requisitions. 

Travel Ineffective controls over DOD’s centrally billed travel accounts led to millions of 

dollars wasted on unused airline tickets, reimbursements to travelers for 

improper or fraudulent ticket claims, and issuance of tickets based on invalid 

travel orders. 

Program 

planning 

Overly optimistic planning assumptions used to estimate DOD’s annual budget 

request limit visibility of projected costs. As a result, DOD has too many 

programs for the available dollars, which often leads to program instability, 

increased costs, and program termination. 

Source: GAO. 

Four underlying causes impede reform: (1) lack of clear and sustained 

leadership for overall business transformation efforts, (2) cultural resistance 

to change, (3) lack of meaningful metrics and ongoing monitoring, and 

(4) inadequate incentives and accountability mechanisms. To address these 

issues, GAO reiterates the key elements to successful reform that are 

embodied in our prior recommendations and two suggestions for legislative 

action. First, GAO suggests that a senior management position be 

established to provide strong and sustained leadership over all major 

transformation efforts. Second, GAO proposes that business systems 

modernization money be appropriated to designated approval authorities 

responsible and accountable for system investments within DOD business 

areas. Absent this unified responsibility, authority, accountability, and 

control of funding, the current transformation efforts are likely to fail. 

In March 2004, GAO testified 

before this Subcommittee on the 

impact and causes of financial and 

related business weaknesses on the 

Department of Defense’s (DOD) 

operations and the status of DOD 

reform efforts. GAO’s reports 

continue to show that fundamental 

problems with DOD’s financial 

management and related business 

operations result in substantial 

waste and inefficiency, adversely 

impact mission performance, and 

result in a lack of adequate 

transparency and appropriate 

accountability across all major 

business areas. Over the years, 

DOD leaders have initiated a 

number of efforts to address these 

weaknesses and transform the 

department. For years, GAO has 

reported that DOD is challenged in 

its efforts to effect fundamental 

financial and business management 

reform, and GAO’s ongoing work 

continues to raise serious questions 

about DOD’s chances of success. 

The Subcommittee asked GAO to 

provide a current status report on 

DOD’s progress to date and 

suggestions for improvement. 

Specifically, GAO was asked to 

provide (1) an overview of the 

impact and causes of weaknesses 

in DOD’s business operations, 

 (2) the status of DOD reform 

efforts, (3) the impact of recent 

legislation pertaining to DOD’s 

transformation and financial 

improvement initiatives, and 

(4) suggestions for improving 

DOD’s efforts to improve the 

reliability of its financial 

information. 
Page 1 GAO-05-140T 

Mr. Chairman and Members of the Subcommittee:

It is a pleasure to be back before this Subcommittee to discuss financial 

management and overall business transformation efforts at the Department 

of Defense (DOD). At the outset, I would like to thank the Subcommittee 

for having this hearing and acknowledge the important role hearings such 

as this one serve in addressing DOD’s business transformation challenges. 

DOD spends billions of dollars each year to sustain key business operations 

that support our forces, including systems and processes related to 

acquisition and contract management, financial management, supply chain 

management, support infrastructure management, human capital 

management, and other key areas. Recent and ongoing military operations 

in Afghanistan and Iraq and new homeland defense missions have led to 

higher demands on our forces in a time of growing fiscal challenges for our 

nation. In an effort to better manage DOD’s resources, the Secretary of 

Defense has appropriately placed a high priority on transforming key 

business processes to improve their efficiency and effectiveness in 

supporting the department’s military mission. However, as our reports 

continue to show, fundamental problems with DOD’s financial management 

and related business operations continue to result in substantial waste and 

inefficiency, adversely impact mission performance, and result in a lack of 

adequate transparency and appropriate accountability across all major 

business areas. Of the 25 areas on GAO’s governmentwide high-risk list, 6 

are DOD program areas, and the department shares responsibility for 3 

other high-risk areas that are governmentwide in scope.1

 The problems we 

continue to identify relate to human capital challenges, ineffective internal 

control and processes, and duplicative and nonintegrated business 

information, systems, and operations. The seriousness of weaknesses in 

DOD’s business operations underscores the importance of no longer 

condoning the “status quo” at DOD. 

Although, the Secretary and several key agency officials have shown 

commitment to transformation, as evidenced by key initiatives such as 

human capital reform, the Business Management Modernization Program 

(BMMP), and the Financial Improvement Initiative, little tangible evidence 

1

 GAO, High-Risk Series: An Update, GAO-03-119 (Washington, D.C.: January 2003). The 

nine interrelated high-risk areas that represent the greatest challenge to DOD’s development 

of world-class business operations to support its forces are: contract management, financial 

management, human capital management, information security, support infrastructure 

management, inventory management, real property, systems modernization, and weapon 

systems acquisition. 
Page 2 GAO-05-140T 

of significant broad-based and sustainable improvements has been seen in 

DOD’s business operations to date. Improvements have generally been 

limited to specific business process areas, such as DOD’s purchase card 

program, and resulted in the incorporation of many key elements of reform, 

such as increased management oversight and monitoring and resultsoriented performance measures. It is important to note that current 

business transformation initiatives are not integrated and lack many of the 

key elements that contributed to the success of the narrowly defined 

initiatives that I will highlight today. 

For DOD to successfully transform its business operations, it will need a 

comprehensive and integrated business transformation plan, people with 

the skills, responsibility, and authority to implement the plan, an effective 

process and related tools, such as a Business Enterprise Architecture 

(BEA), 2

 and results-oriented performance measures that link institutional, 

unit, and individual personnel goals and expectations to promote 

accountability for results. Over the last 3 years, we have made a series of 

recommendations to DOD and suggested legislative changes that, if 

implemented, could help DOD move forward in establishing the means to 

successfully address the challenges it faces in transforming its business 

operations.3

 The framework that we have proposed includes several key 

elements for successful reform, recognizes the complexity of the 

challenges facing DOD in its efforts to transform the department, and the 

long-term nature of overcoming these challenges. Moreover, it recognizes 

that the lack of clearly defined and sustained leadership, an enterprise 

2

 A BEA is a well-defined blueprint for operational and technological change. It generally 

consists of three integrated components: a snapshot of the enterprise’s current operational 

and technological environment, a snapshot of its target environment, and a capital 

investment roadmap for transitioning from the current to the target environment.

3

 GAO, DOD Business Systems Modernization: Billions Continue to Be Invested with 

Inadequate Management Oversight and Accountability, GAO-04-615 (Washington, D.C.: 

May 27, 2004), Department of Defense: Further Actions Needed to Establish and 

Implement a Framework for Successful Financial and Business Management 

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

Modernization: Important Progress Made to Develop Business Enterprise Architecture, 

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

Management: Integrated Approach, Transparency, and Incentives Are Keys to Effective 

Reform, GAO-02-497T (Washington, D.C., Mar. 6, 2002), Defense Management: New 

Management Reform Program Still Evolving, GAO-03-58 (Washington, D.C.: Dec. 12, 2002), 

Information Technology: Architecture Needed to Guide Modernization of DOD’s Financial 

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

Management: Integrated Approach, Accountability, and Incentives Are Keys to Effective 

Reform, GAO-01-681T (Washington, D.C.: May 8, 2001).
Page 3 GAO-05-140T 

architecture to guide and direct business operational changes, cultural 

resistance to change, and internal parochialism have impeded the success 

of previous reform efforts. DOD has agreed with our recommendations 

and launched efforts intended to implement many of them, but progress 

has been slow. Unless DOD can address the underlying causes that have 

contributed to the failure of previous broad-based reform efforts, 

improvements will remain marginal and confined to narrowly defined 

business process areas and incremental improvements in human capital 

policies, business processes, internal controls, and information technology 

systems. 

Today, I will provide my perspectives on (1) the impact that long-standing 

weaknesses continue to have on the economy, efficiency, and effectiveness 

of DOD’s business operations, (2) underlying causes that have impeded the 

success of prior efforts, (3) keys to successful reform, and (4) DOD 

business transformation efforts and interim improvements. In addition, 

while statutory requirements enacted recently as a part of the Ronald W. 

Reagan National Defense Authorization Act for Fiscal Year 20054

 are a 

positive step towards improving leadership and accountability over DOD’s 

systems transformation efforts, I will offer two suggestions for legislative 

consideration related to sustained top-level leadership, responsibility, and 

accountability that would better permit the effective use of transition 

plans, processes, people, and tools and thereby increase the likelihood of 

successful business transformation. My statement is based on previous 

GAO reports and routine efforts to track the status of open 

recommendations, as well as on our review of the work of other Supreme 

Audit Institutions and DOD auditors, and recent DOD reports and studies. 

Our work was performed in accordance with generally accepted 

government auditing standards.

4

Ronald W. Reagan National Defense Authorization Act for Fiscal Year 2005, Pub. L. No. 108-

375, §§332, 352, 118 Stat. 1811 (Oct. 28, 2004) (codified, in part, at 10 U.S.C. §§185, 2222). 
Page 4 GAO-05-140T 

Impact of Financial 

Management and 

Related Business 

Process Weaknesses

As I previously stated, and we have reported on for several years, DOD 

faces a range of challenges that are complex, long-standing, pervasive, and 

deeply rooted in virtually all major business operations throughout the 

department. As I testified last March and as discussed in our latest financial 

audit report,5

 DOD’s financial management deficiencies, taken together, 

continue to represent the single largest obstacle to achieving an unqualified 

(clean) audit opinion on the U.S. government’s consolidated financial 

statements. While it is important to note that some DOD organizations, 

such as the Defense Finance Accounting Service (DFAS),6

 the Defense 

Contract Audit Agency, and the Office of the Inspector General, have clean 

audit opinions for fiscal year 2004, significant DOD components do not. To 

date, none of the military services has passed the test of an independent 

financial audit because of pervasive weaknesses in internal control and 

processes and fundamentally flawed business systems. Moreover, the lack 

of adequate transparency and appropriate accountability across DOD’s 

major business areas results in billions of dollars of wasted resources 

annually at a time of growing fiscal constraints.

In identifying improved financial performance as one of its five 

governmentwide initiatives, the President’s Management Agenda 

recognized that obtaining an unqualified financial audit opinion is a basic 

prescription for any well-managed organization. At the same time, it 

recognized that without sound internal control and accurate and timely 

financial and performance information, it is not possible to accomplish the 

President’s agenda and secure the best performance and highest measure 

of accountability for the American people. The Joint Financial Management 

Improvement Program (JFMIP)7

 principals have defined certain measures, 

in addition to receiving an unqualified financial statement audit opinion, for 

achieving financial management success. These additional measures 

5

 GAO, Fiscal Year 2003 U.S. Government Financial Statements: Sustained Improvement 

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

Challenges, GAO-04-477T (Washington, D.C.: Mar. 3, 2004).

6

 DFAS’s financial statements and corresponding audit opinion pertain only to the 

administrative functions of DFAS itself and, consequently, do not provide any assurance as 

to the reliability of the accounting processes and systems DFAS uses to provide services to 

other DOD components, including the military services.

7

 JFMIP is a joint undertaking of the Office of Management and Budget, GAO, the 

Department of Treasury, and the Office of Personnel Management, working in cooperation 

with each other and with operating agencies to improve financial management practices 

throughout the government.
Page 5 GAO-05-140T 

include (1) being able to routinely provide timely, accurate, and useful 

financial and performance information, (2) having no material internal 

control weaknesses or material noncompliance with laws and regulations, 

and (3) meeting the requirements of the Federal Financial Management 

Improvement Act of 1996 (FFMIA).8

 Unfortunately, DOD does not meet any 

of these conditions. For example, for fiscal year 2004, the DOD Inspector 

General issued a disclaimer of opinion on DOD’s financial statements, 

citing 11 material weaknesses in internal control and noncompliance with 

FFMIA requirements.

Recent audits and investigations by GAO and DOD auditors continue to 

confirm the existence of pervasive weaknesses in DOD’s financial 

management and related business processes and systems. These problems 

have (1) resulted in a lack of reliable information needed to make sound 

decisions and report on the status of DOD activities, including 

accountability of assets, through financial and other reports to Congress 

and DOD decision makers, (2) hindered its operational efficiency, 

(3) adversely affected mission performance, and (4) left the department 

vulnerable to fraud, waste, and abuse, of which I have a few examples.

• 782 of the 829 mobilized Army National Guard and Reserve soldiers 

from 14 case study units we reviewed had at least one pay problem—

including overpayments, underpayments, and late payments—

associated with their mobilization. DOD’s inability to provide timely and 

accurate payments to these soldiers, many of whom risked their lives in 

dangerous combat missions in Iraq or Afghanistan, distracted them from 

their missions, imposed financial hardships on the soldiers and their 

families, and has negatively impacted retention. (GAO-04-89, Nov. 13, 

2003 and GAO-04-911, Aug. 20, 2004) 

• DOD incurred substantial logistical support problems as a result of 

weak distribution and accountability processes and controls over 

supplies and equipment shipments in support of Operation Iraqi 

Freedom, similar to those encountered during the prior gulf war. These 

weaknesses resulted in (1) supply shortages, (2) backlogs of materials 

delivered in-theater but not delivered to the requesting activity, (3) a 

discrepancy of $1.2 billion between the amount of materiel shipped and 

that acknowledged by the activity as received, (4) cannibalization of 

8

 Pub. L. No. 104-208, div. A., § 101 (f), title VIII, 110 stat. 3009, 3009-389 (Sept. 30, 1996).
Page 6 GAO-05-140T 

vehicles, and (5) duplicate supply requisitions. (GAO-04-305R, Dec. 18, 

2003) 

• Inadequate asset accountability also resulted in DOD’s inability to locate 

and remove from its inventory over 250,000 defective chemical and 

biological protective garments known as Battle Dress Overgarments 

(BDOs)—the predecessor of the new Joint Service Lightweight 

Integrated Suit Technology (JSLIST). Subsequently, we found that DOD 

had sold many of these defective suits to the public, including 379 that 

we purchased in an undercover operation. In addition, DOD may have 

issued over 4,700 of the defective BDO suits to local law enforcement 

agencies. Although local law enforcement agencies are most likely to be 

the first responders to a terrorist attack, DOD failed to inform these 

agencies that using these BDO suits could result in death or serious 

injury. (GAO-04-15NI, Nov. 19, 2003) 

• Ineffective controls over Navy foreign military sales using blanket 

purchase orders placed classified and controlled spare parts at risk of 

being shipped to foreign countries that may not be eligible to receive 

them. For example, we identified instances in which Navy country 

managers (1) overrode the system to release classified parts under 

blanket purchase orders without filing required documentation 

justifying the release and (2) substituted classified parts for parts 

ordered under blanket purchase orders, bypassing the control-edit 

function of the system designed to check a country’s eligibility to 

receive the parts. (GAO-04-507, June 25, 2004)

• DOD and congressional decision makers lack reliable data upon which 

to base sourcing decisions due to recurring weaknesses in DOD datagathering, reporting, and financial systems. As in the past, we have 

identified significant errors and omissions in the data submitted to 

Congress on the amount of each military service’s depot maintenance 

work outsourced or performed in-house. As a result, both DOD and 

Congress lack assurances that the dollar amounts of public-private 

sector workloads reported by the military services are reliable. (GAO04-871, Sept. 29, 2004)

• Ineffective controls over DOD’s centrally billed travel accounts led to 

millions of dollars wasted on unused airline tickets, reimbursements to 

travelers for improper and potentially fraudulent airline ticket claims, 

and issuance of airline tickets based on invalid travel orders. For 

example, we identified 58,000 airline tickets—primarily purchased in 
Page 7 GAO-05-140T 

fiscal years 2001 and 2002—with a residual value of more than $21 

million that were unused and not refunded as of October 2003. On the 

basis of limited airline data, we determined that since 1997, the potential 

magnitude of DOD’s unused tickets could be at least $115 million. 

(GAO-04-825T, June 9, 2004 and GAO-04-398, Mar. 31, 2004)

• The Navy’s lack of detailed cost information hinders its ability to 

monitor programs and analyze the cost of its activities. For example, we 

found that the Navy lacked the detailed cost and inventory data needed 

to assess its needs, evaluate spending patterns, and leverage its 

telecommunications buying power. As a result, we found that at the sites 

reviewed, the Navy paid for telecommunications services it no longer 

required, paid too much for services it used, and paid for potentially 

fraudulent or abusive long-distance charges. For instance, we found that 

DOD paid over $5,000 in charges for one card that was used to place 189 

calls in one 24-hour period from 12 different cities to 12 different 

countries. (GAO-04-671, June 14, 2004)

• DOD continues to use overly optimistic planning assumptions to 

estimate its annual budget request. These assumptions are reflected in 

its Future Years Defense Program (FYDP), which reports projected 

spending for the current budget year and at least 4 succeeding years. 

Such overly optimistic assumptions limit the visibility of costs projected 

throughout the FYDP period and beyond. As a result, DOD has too 

many programs for the available dollars, which often leads to program 

instability, costly program stretch-outs, and program termination. For 

example, in January 2003, we reported that the estimated costs of 

developing eight major weapons systems had increased from about $47 

billion in fiscal year 1998 to about $72 billion by fiscal year 2003. In 

addition, in September 2004 the Congressional Budget Office projected 

that if the costs of weapons programs and certain other activities 

continued to grow as they have historically rather than as DOD 

currently projects, executing today’s defense plans would require 

spending an average of $498 billion a year through 2009. Without 

realistic projections, Congress and DOD will not have visibility over the 

full range of budget options available to achieve defense goals. (GAO-03-

98, Jan. 2003 and GAO-04-514, May 7, 2004)

• DOD did not know the size of its security clearance backlog at the end 

of September 2003 and had not estimated this backlog since January 

2000. Using September 2003 data, we estimated that DOD had a backlog 

of roughly 360,000 investigative and adjudicative cases, but the actual 
Page 8 GAO-05-140T 

backlog size is uncertain. DOD’s failure to eliminate and accurately 

assess the size of its backlog may have adverse affects. For example, 

delays in updating overdue clearances for personnel doing classified 

work may increase national security risks and slowness in issuing new 

clearances can increase the costs of doing classified government work. 

(GAO-04-344, Feb. 9, 2004)

These examples clearly demonstrate not only the severity of DOD’s current 

problems, but also the importance of reforming the department’s business 

operations to more effectively support DOD’s core mission, to improve the 

economy and efficiency of its operations, and to provide for transparency 

and accountability to Congress and American taxpayers. 

Underlying Causes of 

Financial and Related 

Business Process 

Transformation 

Challenges

The underlying causes of DOD’s financial management and related 

business process and system weaknesses are generally the same ones I 

have outlined in my prior testimonies before this Subcommittee over the 

last 3 years. Unfortunately, DOD has made little progress in addressing 

these fundamental issues and thus is at high risk that its current major 

reform initiatives will fail. For each of the problems I cited previously, we 

found that one or more of these long-standing causes were contributing 

factors. Over the years, the department has undertaken many well-intended 

initiatives to transform business operations departmentwide and improve 

the reliability of information for decision making and reporting. However, 

many of these efforts resulted in costly failures because the department did 

not fully address the following four underlying causes of transformation 

challenges. 

Lack of Sustained 

Leadership and 

Management Accountability

DOD has not routinely assigned accountability for performance to specific 

organizations or individuals who have sufficient authority, resource 

control, and continuity in their position to accomplish desired goals. In 

addition, top management has not had a proactive, consistent, and 

continuing role in integrating daily operations with business 

transformation-related performance goals. It is imperative that major 

improvement initiatives have the direct, active support and involvement of 

the Secretary and Deputy Secretary of Defense to ensure that daily 

activities throughout the department remain focused on achieving shared, 

agencywide outcomes and success. However, sustaining top management 

continuity and commitment to performance goals, long-term planning, and 

follow-through that will necessarily span several years is particularly 
Page 9 GAO-05-140T 

challenging for DOD. For example, in fiscal year 2004, DOD’s Comptroller, 

Deputy Under Secretary of Defense for Management Reform, and Deputy 

Chief Financial Officer—to whom the Secretary delegated the leadership 

role for key transformation initiatives—all resigned from the department 

within a 5-month period. Moreover, the department’s primary 

transformation program—BMMP—has had three different directors 

responsible for leading the program since Secretary Rumsfeld initiated it a 

little over 3 years ago. Given the importance of DOD’s business 

transformation effort, it is imperative that it receives sustained, focused 

departmentwide leadership needed to improve the economy, efficiency, 

and effectiveness of DOD’s business operations. As I will discuss in more 

detail later, we continue to advocate the establishment of a new executive 

position to provide strong and sustained leadership to the entire spectrum 

of DOD business transformation initiatives. 

Cultural Resistance and 

Parochialism 

The department has acknowledged that it confronts decades-old problems 

deeply grounded in the bureaucratic history and operating practices of a 

complex, multifaceted organization. Many of DOD’s current operating 

practices and systems were developed piecemeal to accommodate 

different organizations, each with its own policies and procedures. As we 

have reported over the last 3 years,9

 DOD has continued to use a stovepiped 

approach to develop and fund its business system investments. The 

existing systems environment evolved over time as DOD components—

each receives its own system funding and follows decentralized acquisition 

and investment practices—developed narrowly focused parochial 

solutions to their business problems. While the Ronald W. Reagan National 

Defense Authorization Act for Fiscal Year 200510 more clearly defines the 

roles and responsibilities of business system investment approval 

authorities, control over the budgeting for and execution of funding for 

system investment activities remains at the component level. As I will 

discuss later, unless business systems modernization money is 

appropriated to those who are responsible and accountable for reform, 

DOD is at risk for continuing its current stovepiped approach to developing 

and funding system investments and failing to fundamentally improve its 

9

 GAO-01-681T, GAO-04-551T, GAO-03-1018, and GAO, DOD Business Systems 

Modernization: Limited Progress in Development of Business Enterprise Architecture 

and Oversight of Information Technology Investments, GAO-04-731R (Washington, D.C.: 

May 17, 2004).

10Pub. L. No. 108-375, §332. 
Page 10 GAO-05-140T 

business operations. DOD’s ability to address its current “business-asusual” approach to business system investments is further hampered by its 

lack of an effective methodology and process for obtaining a complete 

picture of its current business systems environment—a condition we first 

highlighted in 1997.11 In September 2004, DOD reported that the 

department had identified over 4,000 business systems—up from the 1,731 

the department reported in October 2002. Unfortunately, due to its lack of 

an effective methodology and process for identifying business systems, 

including a clear definition of what constitutes a business system, DOD 

continues to lack assurance that its systems inventory is reliable. This lack 

of visibility over business systems in use throughout the department 

hinders DOD’s ability to identify and eliminate duplicate and nonintegrated 

systems and transition to an integrated systems environment. 

Lack of Results-Oriented 

Goals and Performance 

Measures 

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

performance goals and measures has handicapped DOD’s past reform 

efforts. As a result, DOD managers lacked straightforward roadmaps 

showing how their work contributed to attaining the department’s strategic 

goals, and they risked operating autonomously rather than collectively. As 

of March 2004, DOD had formulated departmentwide performance goals 

and measures and continues to refine and align them with the outcomes 

described in its strategic plan—the September 2001 Quadrennial Defense 

Review (QDR). The QDR outlined a new risk management framework 

consisting of four dimensions of risk—force management, operational, 

future challenges, and institutional—to use in considering trade-offs among 

defense objectives and resource constraints. According to DOD’s Fiscal 

Year 2003 Annual Report to the President and the Congress, these risk 

areas are to form the basis for DOD’s annual performance goals. They will 

be used to track performance results and will be linked to planning and 

resource decisions. As of October 2004, the department was still in the 

process of implementing this approach departmentwide. However, it 

remains unclear how DOD will use this approach to measure progress in 

achieving business reform. 

11 GAO, Financial Management: DOD Inventory of Financial Management Systems is 

Incomplete, GAO/AIMD-97-29 (Washington, D.C.: Jan. 31, 1997).
Page 11 GAO-05-140T 

As we reported in May 2004, DOD had yet to establish measurable, resultsoriented goals for BMMP.12 BMMP is the department’s major business 

transformation initiative encompassing defense policies, processes, 

people, and systems that guide, perform, or support all aspects of business 

management, including development and implementation of the BEA. A 

key element of any major program is its ability to establish clearly defined 

goals and performance measures to monitor and report its progress to 

management. The lack of BMMP performance measures has made it is 

difficult to evaluate and track specific program progress, outcomes, and 

results, such as explicitly defined performance measures to evaluate the 

architecture’s quality, content, and utility of subsequent major updates. 

Given that DOD had reported total obligations for BMMP of over $203 

million since architecture development began 3 years ago, with little 

tangible improvements in DOD operations, this is a serious performance 

management weakness. 

Further, DOD has not established measurable criteria that decision makers 

must consider for its revised weapons system acquisition policy, issued in 

May 2003.13 The revisions make major improvements to DOD acquisition 

policy by adopting knowledge-based, evolutionary practices used by 

successful commercial companies. However, DOD has not provided the 

necessary controls to ensure such an approach is followed. For example, 

the policy does not establish measures to gauge design and manufacturing 

knowledge at critical junctures in the product development process, 

allowing significant unknowns to be judged as acceptable risks. Without 

controls in the form of measurable criteria that decision makers must 

consider, DOD runs the risk of making decisions based on overly optimistic 

assumptions. 

Lack of Incentives for 

Change 

The final underlying cause of the department’s long-standing inability to 

carry out needed fundamental reform has been the lack of a clear linkage of 

institutional, unit, and individual results-oriented goals, performance 

measures, and reward mechanisms for making more than incremental 

changes to existing “business-as-usual” operations, systems, and 

organizational structures. Traditionally, DOD has focused on justifying its 

12 GAO-04-731R.

13 GAO, Defense Acquisitions: DOD’s Revised Policy Emphasizes Best Practices, but More 

Controls Are Needed, GAO-04-53 (Washington, D.C.: Nov. 10, 2003).
Page 12 GAO-05-140T 

need for more funding rather than on the outcomes its programs have 

produced. DOD has historically measured its performance by resource 

components, such as the amount of money spent, people employed, or 

number of tasks completed. Incentives for its decision makers to 

implement behavioral changes have been minimal or nonexistent. 

The lack of incentives to change is evident in the business systems 

modernization area. We have identified numerous business system 

modernization efforts that were not economically justified on the basis of 

cost, benefits, and risk; took years longer than planned; and fell far short of 

delivering planned or needed capabilities. Despite this track record, DOD 

continues to invest billions in business systems while at the same time it 

lacks the effective management and oversight needed to achieve real 

results. Without appropriate incentives and accountability mechanisms, as 

well as more centralized control of systems modernization funding, DOD 

components will continue to develop duplicative and nonintegrated 

systems that are inconsistent with the Secretary’s vision for reform. To 

effect real change, actions are needed to (1) develop a well-defined 

blueprint for change, such as an enterprise architecture, that provides a 

common framework of reference for making informed system investment 

decisions, (2) adopt an investment decision-making model that uses the 

architecture to break down parochialism and reward behaviors that meet 

DOD-wide goals, (3) establish incentives that motivate decision makers to 

initiate and implement efforts that are consistent with better architecture 

and program outcomes, including saying “no” or pulling the plug early on a 

system or program that is failing, (4) address human capital issues, such as 

the adequacy of staffing level, skills, and experience available to achieve 

the institutional, unit, and individual objectives and expectations, and 

(5) facilitate a congressional focus on results-oriented management, 

particularly with respect to resource allocation decisions.

Keys to Successful 

Reform and Current 

Status of Reform 

Efforts

The success of DOD’s current broad-based business reform initiatives is 

threatened, as prior initiatives were, by DOD’s continued failure to 

incorporate key elements that are critical to achieve successful reform. 

Any efforts at reform must include (1) a comprehensive, integrated 

business transformation plan, (2) personnel with the necessary skills, 

experience, responsibility, and authority to implement the plan, 

(3) effective processes and related tools, such as a BEA and business 

system investment decision making controls, and (4) results-oriented 

performance measures that link institutional, unit, and individual personnel 

goals, measures, and expectations. Today, I would like to discuss three of 
Page 13 GAO-05-140T 

those broad-based initiatives. In addition, I will briefly highlight some of the 

several smaller, more narrowly focused initiatives DOD has started in 

recent years that, through incorporation of many of the key elements, have 

been successful in making tangible improvements in DOD operations. 

Furthermore, I would like to reiterate two suggestions for legislative 

consideration that I believe are essential in order for DOD to be successful 

in its overall business transformation effort. 

Keys to Successful Reform As I have previously testified,14 and as illustrated by the success of the 

more narrowly defined DOD initiatives I will discuss later, there are several 

key elements that collectively would 

• enable the department to effectively address the underlying causes of its 

inability to resolve its 

• long-standing business management problems. These elements, which 

we believe are key to any 

• successful approach to transforming the department’s business 

operations, include

• addressing the department’s financial management and related business 

operational challenges as part of a comprehensive, integrated, DODwide strategic plan for business reform;

• providing for sustained, committed, and focused leadership by top 

management, including but not limited to the Secretary of Defense;

• establishing resource control over business systems investments;

• establishing clear lines of responsibility, authority, and accountability;

• incorporating results-oriented performance measures that link key 

institutional, unit, and individual personnel transformation objectives 

and expectations, and monitoring progress;

14 GAO-04-551T and GAO-02-497T.
Page 14 GAO-05-140T 

• addressing human capital issues, such as the adequacy of staff levels, 

skills, and experience available to achieve the institutional, unit, and 

individual personnel performance goals and expectations;

• providing appropriate incentives or consequences for action or inaction; 

• establishing an enterprise architecture to guide and direct business 

systems modernization investments; and 

• ensuring effective oversight and monitoring. 

These elements, which should not be viewed as independent actions but 

rather as a set of interrelated and interdependent actions, are reflected in 

the recommendations we have made to DOD over the last 3 years and are 

consistent with those actions discussed in the department’s April 2001 

financial management transformation report.15 The degree to which DOD 

incorporates them into its current reform efforts—both long and short 

term—will be a deciding factor in whether these efforts are successful. 

Thus far, the department’s progress in implementing our recommendations 

pertaining to its broad-based initiatives has been slow. Further, while the 

new legislation16 on business systems oversight directs DOD to take action 

on some of these elements, we have not yet seen a comprehensive, 

cohesive, and integrated strategy that details how some of the ongoing 

efforts are being integrated. For example, we have not seen how the 

department plans to integrate its objective of obtaining an unqualified audit 

opinion in fiscal year 2007 with the BMMP.17 It appears as if these two 

efforts are being conducted without the degree of coordination that would 

generally be expected between efforts that share similar objectives.

Human Capital Initiative The first broad-based administrative initiative is effective implementation 

of the National Security Personnel System (NSPS). In November 2003, 

Congress authorized the Secretary of Defense to establish a new human 

15 Department of Defense, Transforming Department of Defense Financial Management: A 

Strategy for Change, (Washington, D.C.: Apr. 13, 2001).

16 Pub. L. No. 108-375, §332. 

17 GAO, Financial Management: Further Actions Are Needed to Establish Framework to 

Guide Audit Opinion and Business Management Improvement Efforts at DOD, GAO-04-

910R (Washington, D.C.: Sept. 20, 2004). 
Page 15 GAO-05-140T 

capital management system—NSPS—for its civilian employees, which is 

modern, flexible, and consistent with the merit principles outlined by the 

act.18 This legislation requires DOD to develop a personnel system that is 

consistent with many of the practices that we have identified as elements 

of an effective human capital management system, including a modern and 

results-oriented performance management system. For several years, we 

have reported19 that many of DOD’s business process and control 

weaknesses were attributable in part to human capital issues. For example, 

GAO audits of DOD’s Army Reserve and National Guard payroll and the 

centrally billed travel card programs20 further highlight the adverse impact 

that outdated and inadequate human capital practices, such as insufficient 

staffing, training, and monitoring of performance, continue to have on DOD 

business operations. If properly developed and implemented, NSPS could 

result in significant improvements to DOD’s business operations. 

I strongly support the need for modernizing federal human capital policies 

both within DOD and for the entire federal government. Since April 2003 I 

have testified on four different occasions, including before this 

Subcommittee, on NSPS and related DOD human capital issues.21 In the 

near future, we will issue a summary of the forum GAO and the National 

Commission on the Public Service Implementation Initiative cohosted to 

advance the discussion of how human capital reform should proceed. 

Participants discussed whether there should be an overall governmentwide 

18 National Defense Authorization Act for Fiscal Year 2004, Pub. L. No. 108-136, § 1101, 117 

Stat. 1392, 1621 (Nov. 24, 2003) (amending subpart I of part III of title 5, United States Code).

19 GAO, Major Management Challenges and Program Risks: Department of Defense, GAO01-244 (Washington, D.C.: Jan.1, 2001).

20 GAO, Military Pay: Army Reserve Soldiers Mobilized to Active Duty Experienced 

Significant Pay Problems, GAO-04-911, (Washington, D.C.: Aug. 20, 2004), Military Pay: 

Army National Guard Personnel Mobilized to Active Duty Experienced Significant Pay 

Problems, GAO-04-89, (Washington, D.C.: Nov. 13, 2003), and DOD Travel Cards: Control 

Weaknesses Led to Millions in Fraud, Waste, and Improper Payments, GAO-04-825T, 

(Washington, D.C.: June 9, 2004).

21 GAO, Defense Transformation: Preliminary Observations on DOD’s Proposed Civilian 

Personnel Reforms, GAO-03-717T (Washington, D.C.: April 29, 2003); Defense 

Transformation: DOD’s Proposed Civilian Personnel System and Governmentwide 

Human Capital Reform, GAO-03-741T (Washington, D.C.: May 1, 2003); Human Capital: 

DOD’s Civilian Personnel Strategic Management and the Proposed National Security 

Personnel System, GAO-03-493T (Washington, D.C.: May 12, 2003); Building on DOD’s 

Reform Effort to Foster Governmentwide Improvements, GAO-03-851T (Washington, D.C.: 

June 4, 2003).
Page 16 GAO-05-140T 

framework for human capital reform and, if yes, what such a framework 

should include. While the forum neither sought nor achieved consensus on 

all of the issues identified in the discussion, there was broad agreement 

that there should be a governmentwide framework to guide human capital 

reform built on a set of timeless beliefs and boundaries. Beliefs entail the 

fundamental principles that should govern all approaches to human capital 

reform and should not be altered or waived by agencies seeking human 

capital authorities. Boundaries include the criteria and processes that 

establish the checks and limitations when agencies seek and implement 

human capital authorities. 

A modern, effective, credible, and integrated performance management 

system can help improve DOD's business operations. Specifically, such a 

performance management system aligns individual performance 

expectations with organizational goals and thus defines responsibility and 

assures accountability for achieving them.22 In addition, a performance 

management system can help manage and direct a transformation process 

by linking performance expectations to an employee’s role in the process. 

Individual performance and contributions are evaluated on competencies 

such as change management. Leaders, managers, and employees who 

demonstrate these competencies are rewarded for their success in 

contributing to the achievement of the transformation process. 

There are significant opportunities to use the performance management 

system to explicitly link senior executive expectations for performance to 

results-oriented goals. There is a need to hold senior executives 

accountable for demonstrating competencies in leading and facilitating 

change and fostering collaboration both within and across organizational 

boundaries to achieve results. Setting and meeting expectations such as 

these will be critical to achieving needed transformation changes. 

Recently, Congress established a new performance-based pay system for 

members of the Senior Executive Service (SES) that is designed to provide 

a clear and direct link between SES performance and pay. An agency can 

raise the pay cap for its senior executives if the agency's performance 

management system makes meaningful distinctions based on relative

22 GAO, Results-Oriented Cultures: Creating a Clear Linkage Between Individual 

Performance and Organizational Success, GAO-03-488 (Washington, D.C.: Mar. 14, 2003).
Page 17 GAO-05-140T 

performance.23 This visible step in linking pay to the achievement of 

measurable performance goals within a context of a credible human capital 

system that includes adequate safeguards is helpful in constructing a 

results-oriented culture. 

In my March 2004 testimony on DOD’s financial management and related 

business management transformation efforts,24 I stated that as DOD 

develops regulations to implement its new human capital management 

system, the department needs to do the following: 

• Ensure the active involvement of the Office of Personnel Management in 

the development process, given the significant implications that changes 

in DOD regulations may have on governmentwide human capital 

policies.25 In this regard, the Office of Personnel Management has 

assigned a senior representative to support and advise DOD on the 

development of jointly prescribed NSPS regulations and the 

implementation of NSPS.

• Ensure the involvement of civilian employees and unions in the design 

and development of a new personnel system. The law calls for DOD to 

involve employees, especially in the design of its new performance 

management system. Involving employees in planning helps to develop 

agency goals and objectives that incorporate insights about operations 

from a front-line perspective. It can also serve to increase employees’ 

understanding and acceptance of organizational goals and improve 

motivation and morale. In this regard, DOD has launched a new Web site 

to educate its employees about the new National Security Personnel 

System. In addition, DOD leadership has indicated that it has sought 

input from civilian employees through town hall meetings, focus groups, 

and discussions with union leaders.

• Use a phased approach to implement the system, recognizing that 

different parts of the organization will have different levels of readiness 

and different capabilities to implement new authorities. A phased 

23 GAO, Human Capital: Senior Executive Performance Management Can Be 

Significantly Strengthened to Achieve Results, GAO-04-614 (Washington, D.C.: May 26, 

2004).

24 GAO-04-551T. 

25 GAO-03-717T.
Page 18 GAO-05-140T 

approach allows for learning so that appropriate adjustments and 

midcourse corrections can be made before the regulations are fully 

implemented departmentwide. In this regard, DOD had initially 

indicated that it planned to implement its new human capital system for 

300,000 civilian employees by October 1, 2004. DOD has since indicated 

that it has adjusted its timelines to reflect a more cautious, deliberative 

approach involving more stakeholders. DOD has now indicated that it 

plans to phase in its new human capital system beginning in July 2005.

We are currently evaluating DOD’s NSPS design process and look forward 

to sharing our findings with Congress upon completion of our review.

Business Management 

Modernization Program

While BMMP26 is vital to the department’s efforts to transform its business 

operations, DOD has not effectively addressed many of the impediments to 

successful reform that I mentioned earlier, including (1) a lack of sustained, 

effective, and focused leadership, (2) a lack of results-oriented goals and 

performance measures, and (3) long-standing cultural resistance and 

parochialism. As a result, the program has yielded very little, if any, tangible 

improvements in DOD’s business operations. We have made numerous 

recommendations to DOD that center on the need to incorporate the key 

elements to successful reform, which I discussed previously, into the 

program. In May 2004 we reported27 that no significant changes had been 

made to the architecture since the initial version was released. Further, we 

reported that DOD had not yet adopted key architecture management best 

practices, such as assigning accountability and responsibility for directing, 

overseeing, and approving the architecture and explicitly defining 

performance metrics to evaluate the architecture’s quality, content, and 

utility. For these and other reasons, DOD’s verification and validation 

contractor concluded that this latest version of the architecture retained 

most of the critical problems of the initial version, such as how the 

26 Originally named the Financial Management Modernization Program, BMMP was 

chartered in July 2001 to oversee the development of the financial management enterprise 

architecture. Such an architecture was required by 10 U.S.C. §185 (b) (4) and by section 

1004 of the Bob Stump National Defense Authorization Act for Fiscal Year 2003. Pub. L. No. 

107-314, §116, Stat 2458, 2629 (Dec. 2, 2002). The Ronald W. Reagan National Defense 

Authorization Act for Fiscal Year 2005 now requires DOD (through the Defense Business 

Systems Management Committee) to develop a business enterprise architecture and a 

transition plan by September 2005, covering all defense business systems. See 10 U.S.C. § 

2222 (c).

27GAO-04-731R.
Page 19 GAO-05-140T 

architecture should be used by the military services and other DOD 

components in making acquisition and portfolio investment decisions. I 

will now expand on the problems facing BMMP.

The purpose of BMMP is to provide world-class mission support to the war 

fighter through transformation of DOD’s business processes and systems. A 

key element of BMMP is the development and implementation of a welldefined BEA. Properly developed and implemented, a BEA can provide 

assurance that the department invests in integrated enterprisewide 

business solutions and, along with effective project management and 

resource controls, it can be instrumental in developing corporatewide 

solutions and moving resources away from nonintegrated business system 

development efforts. As we reported in July 2003,28 DOD had developed an 

initial version of BEA and had expended tremendous effort and resources 

in doing so. However, we also reported that substantial work remains 

before the architecture would be sufficiently defined to have a tangible 

impact on improving DOD’s overall business operations. In May 2004, we 

reported29 that after about 3 years of effort and over $203 million in 

reported obligations for BMMP operations, BEA’s content and DOD’s 

approach to investing billions of dollars annually in existing and new 

systems had not changed significantly. Under a provision in the recently 

enacted Ronald W. Reagan National Defense Authorization Act for fiscal 

year 2005,30 DOD must develop an enterprise architecture to cover all 

defense business systems and related business functions and activities that 

is sufficiently defined to effectively guide, constrain, and permit 

implementation of a corporatewide solution and is consistent with the 

policies and procedures established by the Office of Management and 

Budget. Further, the act requires the development of a transition plan that 

includes not only an acquisition strategy for new systems, but also a listing 

of the termination dates of current legacy systems that will not be part of 

the corporatewide solution, as well as a listing of legacy systems that will 

be modified to become part of the corporatewide solution for addressing 

DOD’s business management deficiencies. Transforming DOD’s business 

operations and making them more efficient through the elimination of 

28 GAO, Business Systems Modernization: Summary of GAO's Assessment of the 

Department of Defense's Initial Business Enterprise Architecture, GAO-03-877R

(Washington, D.C.: July 7, 2003).

29 GAO-04-731R.

30Codified at 10 U.S.C. §2222 (c)-(e).
Page 20 GAO-05-140T 

nonintegrated and noncompliant legacy systems would free up resources 

that could be used to support the department’s core mission, enhance 

readiness, and improve the quality of life for our troops and their families.

I cannot overemphasize the degree of difficulty DOD faces in developing 

and implementing a well-defined architecture to provide the foundation 

that will guide its overall business transformation. The department’s 

business transformation depends on its ability to develop and implement 

business systems that provide corporate solutions. Successful 

implementation of corporate solutions through adherence to a well-defined 

enterprise architecture and effective project management and fund control 

would go a long way toward precluding the continued proliferation of 

duplicative, stovepiped systems and reduce spending on multiple systems 

that are supposed to perform the same function. Without these things, we 

have continued to see31 that DOD is still developing systems that are not 

designed to solve corporatewide problems. 

For example, the Defense Logistics Agency’s (DLA) Business Systems 

Modernization (BSM) and the Army’s Logistics Modernization Program 

(LMP), both of which were initiated prior to commencement of the BEA 

effort, were not directed towards a corporate solution to the department’s 

long-standing weaknesses in inventory and logistics management, such as 

the lack of total asset visibility. Rather, both projects focused on their 

respective entity’s inventory and logistics management operations. As a 

result, neither project will provide asset visibility beyond the stovepiped 

operation for which they were designed. For example, BSM is only 

designed to provide visibility over the items within the DLA environment—

something DLA has stated already exists within its current system 

environment. As a result, DOD continues to lack the capability to identify 

the exact location of items, such as defective chemical and biological 

protective suits, that were distributed to end-users, such as the military 

services, or sold to the public. The department would have to resort to 

inefficient and ineffective data calls, as it has done in the past, to identify 

and withdraw defective items from use. 32

31 GAO-04-615. 

32 GAO, Chemical and Biological Defense: Improved Risk Assessment and Inventory 

Management Are Needed, GAO-01-667 (Washington, D.C.: Sept. 28, 2001).
Page 21 GAO-05-140T 

Another major impediment to the successful transformation of DOD’s 

business systems is funds control. DOD invests billions of dollars annually 

to operate, maintain, and modernize its business systems. For fiscal year 

2004, the department requested approximately $28 billion in IT funding to 

support a wide range of military operations as well as DOD business 

systems operations, of which DOD reported that approximately 

$18.8 billion 33—$5.8 billion for business systems and $13 billion for 

business systems infrastructure—relates to the operation, maintenance, 

and modernization of the department’s reported thousands of business 

systems. The $18.8 billion is spread across the military services and defense 

agencies, with each receiving and controlling its own funding for IT 

investments. Although the recently enacted Ronald W. Reagan National 

Defense Authorization Act for fiscal year 2005 more clearly defines the 

roles and responsibilities of business system investment approval 

authorities, control over the budgeting for and execution of funding for 

system investment activities remains at the component level. Under a 

provision in the act,34 effective October 1, 2005, DOD must identify each 

defense system for which funding is proposed in its budget, including the 

identification of all funds, by appropriation, for current services (to operate 

and maintain the system) and modernization. Further, DOD may not 

obligate funds for a defense business system modernization that will have a 

total cost in excess of $1 million unless specific conditions called for in the 

act are met.35 The Defense Business Systems Management Committee, also 

required by the act to be established, must then approve the designated

33 The remaining $9 billion is for national security systems. These systems are intelligence 

systems, cryptologic activities related to national security, military command and control 

systems, and equipment that is an integral part of a weapon or weapons system or is critical 

to the direct fulfillment of military or intelligence missions. 

34 Codified at 10 U.S.C. §2222 (a).

35 A key condition identified in the act includes certification by designated approval 

authorities that the defense business system modernization is (1) in compliance with the 

enterprise architecture, (2) necessary to achieve critical national security capability or 

address a critical requirement in an area such as safety or security or (3) necessary to 

prevent a significant adverse effect on a project that is needed to achieve an essential 

capability, taking into consideration the alternative solutions for preventing such an adverse 

effect.
Page 22 GAO-05-140T 

approval authorities’36 certification before funds can be obligated. Further, 

obligation of funds for modernization programs without certification and 

approval by the Defense Business Systems Management Committee is 

deemed a violation of the Anti-Deficiency Act.37 Although proper 

implementation of this legislation should strengthen oversight of DOD’s 

systems modernization efforts, it is questionable whether DOD has 

developed or improved its processes and procedures to identify and 

control system investments occurring at the component level. Unless DOD 

establishes effective processes and controls to identify and control system 

investments occurring within DOD components and overcome parochial 

interests when corporatewide solutions are more appropriate, it will lack 

the ability to ensure compliance with the act. 

We fully recognize that developing and implementing an enterprise 

architecture for an organization as large and complex as DOD is a 

formidable challenge. Nevertheless, a well-defined architecture is essential 

to enabling some of the elements for successful reform that I discussed 

earlier. Accordingly, we remain supportive of the need for BMMP, but are 

deeply concerned about the program’s lack of meaningful progress and 

inability to address management challenges. Accordingly, we plan to 

continue working constructively with the department to strengthen the 

program and will report to this Subcommittee on DOD’s progress and 

challenges in the spring of 2005.

Financial Improvement 

Initiative

While DOD’s former Comptroller started the financial improvement 

initiative with the goal of obtaining an unqualified audit opinion for fiscal 

year 2007 on its departmentwide financial statements, we found that the 

initiative was simply a goal that lacked a clearly defined, well-documented, 

and realistic plan to make the stated goal a reality. 

36Approval authorities, including the Under Secretary of Defense for Acquisition, 

Technology, and Logistics; the Under Secretary of Defense (Comptroller); the Assistant 

Secretary of Defense for Networks and Information Integration and the Chief Information 

Officer of the Department of Defense, and the Deputy Secretary of Defense or Under 

Secretary of Defense, as designated by the Secretary of Defense, are responsible for the 

review, approval, and oversight of business systems and must establish investment review 

processes for systems under their cognizance.

37 31 U.S.C. §1341(a)(1)(A); see 10 U.S.C § 2222(b).
Page 23 GAO-05-140T 

In September 2004 we reported 38 that DOD’s financial improvement 

initiative lacked several of the key elements critical to success, including 

(1) a comprehensive, integrated plan, (2) results-oriented goals and 

performance measures, and (3) effective oversight and monitoring. 

Specifically, we found that DOD had not established a framework to 

integrate the improvement efforts planned by DOD components with 

broad-based DOD initiatives such as human capital and BMMP. Rather, 

DOD intended to rely upon the collective efforts of DOD components, as 

shown in their discrete plans, to address its financial management 

deficiencies while at the same time continuing its broad-based initiatives. 

However, the component plans we reviewed did not consistently identify 

whether a proposed corrective action included a manual work-around or 

business system enhancement or replacement. Further, the component 

plans lacked sufficient information regarding human capital needs, such as 

the staffing level and skills required to implement and sustain the plans. In 

addition, as we have previously reported,39 the department currently lacks 

a mechanism to effectively identify, monitor, and oversee business system 

investments, including enhancements, occurring within the department. 

Because of this lack of visibility over how DOD components plan to 

advance their financial management functionality, the DOD Comptroller 

and BMMP may not have sufficient information to assess the feasibility of a 

work-around or to review and approve all modifications to existing legacy 

business systems to ensure that they (1) are sound investments, 

(2) optimize mission performance and accountability, and (3) are 

consistent with applicable requirements and key architectural elements in 

DOD’s business enterprise architecture. 

In addition, our review of key individual component plans revealed that the 

plans varied in levels of detail, completeness, and scope, such that it will be 

difficult for DOD Comptroller staff to use the departmental database of 

component plans it was developing to oversee and monitor component 

efforts. We found that the component plans did not consistently identify 

how staff (human capital), processes, or business systems would be 

changed to implement corrective actions. Such changes are key elements 

in assessing the adequacy of a component’s plan and in monitoring 

progress and sustainability. 

38 GAO-04-910R.

39 GAO-04-615.
Page 24 GAO-05-140T 

Further, DOD lacked effective oversight and accountability mechanisms to 

ensure that the plans are implemented and corrective actions are 

sustainable. The database the department is currently using was not 

integrated electronically with subordinate component plans and the 

milestone dates identified in the component plans were generally based on 

assertion dates prescribed by the DOD Comptroller and not on actual 

estimates of effort required. Furthermore, task dependencies were not 

clearly identified, including critical corrective tasks that would need to be 

completed in order for the fiscal year 2007 audit opinion to be achieved. 

On the positive side, DOD had developed business rules,40 which if 

implemented as planned, should clearly establish a process for ensuring 

that corrective actions, as described in the component plans, are 

implemented and validated in order to minimize the department’s risk of 

unsupported claims by DOD components that reported financial 

information is auditable. Further, the business rules clearly recognize that 

management, not the auditor, is responsible for documenting business 

processes, systems, and internal control for collecting and maintaining 

transaction data. In addition, DOD’s involvement of its components in 

developing and implementing solutions to long-standing deficiencies in 

their business operations under this initiative is a critical and positive step 

toward obtaining the commitment and buy-in that has not been readily 

apparent in BMMP. Further, the recently enacted Ronald W. Reagan 

National Defense Authorization Act for Fiscal Year 200541 has placed a 

limitation on continued preparation or implementation of DOD’s financial 

improvement initiative pending a report to congressional defense 

committees containing the following: (1) a determination that BEA and the 

transition plan have been developed, as required by section 332 of the act, 

(2) an explanation of the manner in which fiscal year 2005 operation and 

maintenance funds will be used by DOD components to prepare or 

implement the midrange financial improvement plan, and (3) an estimate of 

future year costs for each DOD component to implement the plan. DOD 

Comptroller staff acknowledged that their goal was ambitious, but believed 

that they were in the process of laying a framework, which they believe 

would address our issues, to facilitate movement towards sustainable 

40 Business rules are statements of fact, policy, law, regulation, or a combination of these 

that drive business activities.

41 Pub. L. No. 108-375, §352. 
Page 25 GAO-05-140T 

financial management improvements and eventually obtain an unqualified 

audit opinion. 

Interim Initiatives In contrast to its broad-based initiatives, DOD has incorporated many of 

the key elements for successful reform in its interim initiatives. As the 

following examples demonstrate, leadership, real incentives, 

accountability, and oversight and monitoring were clearly key elements in 

DOD’s efforts to improve its operations. For example, the former DOD 

Comptroller developed a Financial Management Balanced Scorecard that 

is intended to align the financial community’s strategy, goals, objectives, 

and related performance measures with the departmentwide risk 

management framework established as part of DOD’s Quadrennial Defense 

Review, and with the President’s Management Agenda. To effectively 

implement the balanced scorecard, the DOD Comptroller has cascaded the 

performance measures down to the military services and defense agency 

financial communities, along with certain specific reporting requirements. 

At the departmentwide level, certain financial metrics are selected, 

consolidated, and reported to the top levels of DOD management for 

evaluation and comparison. These “dashboard” metrics are intended to 

provide key decision makers, including Congress, with critical 

performance information at a glance, in a consistent and easily 

understandable format. 

DFAS has been reporting the metrics cited below for several years, which 

under the leadership of DFAS’s Director and DOD’s Comptroller, have 

reported improvements including the following.

• From April 2001 to September 2004, DOD reduced its commercial pay 

backlogs (payment delinquencies) by 72 percent.

• From March 2001 to September 2004, DOD reduced its payment 

recording errors by 77 percent.

• From September 2001 to September 2004, DOD reduced its delinquency 

rate for individually billed travel cards from 9.4 percent to 4.3 percent.

Using DFAS’s metrics, management can quickly see when and where 

problems are arising and can focus additional attention on those areas. 

While these metrics show significant improvements from 2001 to today, our
Page 26 GAO-05-140T 

report last year on DOD’s metrics program42 included a caution that, 

without modern integrated systems and the streamlined processes they 

engender, reported progress may not be sustainable if workload is 

increased.

DOD and the military services have also acted to improve their oversight 

and monitoring of the department’s purchase card program and have taken 

actions, that when fully implemented, should effectively address all of our 

109 recommendations. For example, they issued policy guidance on 

monitoring charge card activity and disciplinary actions that will be taken 

against civilian or military employees who engage in improper, fraudulent, 

abusive, or negligent use of a government charge card. In addition, they 

substantially reduced the number of purchase cards issued. According to 

the General Services Administration records, DOD had reduced the total 

number of purchase cards from about 239,000 in March 2001 to about 

131,875 in June 2004. These reductions have the potential to significantly 

improve the management of this program. 

Further, the DOD IG and the Navy have prototyped and are now expanding 

a data-mining capability to screen for and identify high-risk transactions 

(such as potentially fraudulent, improper, and abusive use of purchase 

cards) for subsequent investigation. On April 28, 2004, the DOD IG 

testified43 on ways the department could save money through the prudent 

use of government purchase cards. The testimony highlighted 

improvements made in the management of the department’s purchase card 

program and areas for which additional improvements are needed. 

Specifically, the testimony identified actions the DOD IG had taken to 

partner with the DOD purchase card program management offices so that 

DOD could more proactively identify and prevent potential fraud, waste, 

and mismanagement. However, more still needs to be done because the 

testimony also discussed more than $12 million in fraudulent, wasteful, or 

abusive purchases identified by the DOD IG. 

42 GAO, Financial Management: DOD’s Metrics Program Provides Focus for Improving 

Performance, GAO-03-457, (Washington, D.C.: Mar. 28, 2003).

43 Department of Defense, Office of the Inspector General, Statement of David K. Steensma, 

Assistant Inspector General, Contract Management, COL William J. Kelley, Program 

Director, Data Mining Division, Office of the Inspector General of the Department of 

Defense to the Senate Committee Governmental Affairs on How to Save the Taxpayers 

Money Through Prudent Use of the Purchase Card, D-2004-076-T (Arlington, VA: Apr. 28, 

2004).
Page 27 GAO-05-140T 

In addition to the oversight and monitoring performed by DOD over these 

business areas, we believe that consistent congressional oversight played a 

major role in bringing about these improvements in DOD’s purchase and 

travel card programs. From 2001 through 2004, 10 separate congressional 

hearings were held on DOD’s purchase and travel card programs. 

Numerous legislative initiatives aimed at improving DOD’s management 

and oversight of these programs also had a positive impact. Most recently, 

the fiscal year 2005 Defense Appropriations Act44 reduced DOD’s 

appropriation by $100 million to “limit excessive growth” in DOD’s travel 

expenses.

Another important initiative under way at the department pertains to the 

quarterly financial statement review sessions held by the DOD Comptroller, 

which have led to the discovery and correction of numerous recording and 

reporting errors. Under the leadership of DOD’s former Comptroller, and 

continuing under its new leadership, DOD is working to instill discipline 

into its financial reporting processes to improve the reliability of the 

department’s financial data. Specifically, the DOD Comptroller requires 

DOD’s major components to prepare quarterly financial statements along 

with extensive footnotes that explain any improper balances or significant 

variances from previous year quarterly statements. All of the statements 

and footnotes are analyzed by Comptroller office staff and reviewed by the 

Comptroller. In addition, the midyear and end-of-year financial statements 

must be briefed to the DOD Comptroller by the military service Assistant 

Secretary for Financial Management or the head of the defense agency. 

Under DOD’s former Comptroller, GAO and the DOD IG were invited to 

observe several of these briefings and noted that the practice of preparing 

and explaining interim financial statements has improved the reliability of 

reported information through more timely discovery and correction of 

numerous recording and reporting errors. Although these meetings are 

continuing under the current Comptroller, GAO and the DOD IG have not 

been invited to attend. 

Suggestions for Legislative 

Consideration

I would like to reiterate two suggestions for legislative consideration that I 

discussed in my testimony last March, which I believe could further 

improve the likelihood of successful business transformation at DOD. Most 

of the key elements necessary for successful transformation could be 

44 Department of Defense Appropriations Act, 2005, Pub. L. No. 108-287, §8141, 118, Stat. 

951, 1003 (Aug. 5, 2004).
Page 28 GAO-05-140T 

achieved under the current legislative framework; however, addressing 

sustained and focused leadership for DOD business transformation and 

funding control will require additional legislation. These suggestions 

include the creation of a chief management official and the appropriation 

of business system investment funding to the approval authorities 

responsible and accountable for business system investments under 

provisions enacted by the Ronald W. Reagan National Defense 

Authorization Act for Fiscal Year 2005.45 

Chief Operating Officer/Chief 

Management Official

While the Secretary and other key DOD leaders have demonstrated their 

commitment to the current business transformation efforts, in our view, the 

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

of an executive position capable of providing strong and sustained 

executive leadership—over a number of years and various administrations. 

The day-to-day demands placed on the Secretary, the Deputy Secretary, and 

others make it difficult for these leaders to maintain the oversight, focus, 

and momentum needed to resolve the weaknesses in DOD’s overall 

business operations. This is particularly evident given the demands that the 

Iraq and Afghanistan postwar reconstruction activities and the continuing 

war on terrorism have placed on current leaders. Likewise, the breadth and 

complexity of the problems preclude the under secretaries, such as the 

DOD Comptroller, from asserting the necessary authority over selected 

players and business areas while continuing to fulfill their other 

responsibilities.

While sound strategic planning is the foundation upon which to build, 

sustained and focused leadership is needed for reform to succeed. One way 

to ensure sustained leadership over DOD’s business transformation efforts 

would be to create a full-time executive-level II position for a chief 

operating officer or chief management official (COO/CMO), who would 

serve as the Principal Under Secretary of Defense for Management.46 This 

position would elevate, integrate, and institutionalize the attention 

45 Pub. L. No. 108-375, §332.

46On September 9, 2002, GAO convened a roundtable of government leaders and 

management experts to discuss the chief operating officer concept. For more information 

see GAO, Highlights of a GAO Roundtable: The Chief Operating Officer Concept: A 

Potential Strategy to Address Federal Governance Challenges, GAO-03-192SP (Washington, 

D.C.: Oct. 4, 2002) and The Chief Operating Officer Concept and its Potential Use as a 

Strategy to Improve Management at the Department of Homeland Security, GAO-04-876R

(Washington, D.C.: June 28, 2004).
Page 29 GAO-05-140T 

essential for addressing key stewardship responsibilities, such as strategic 

planning, human capital management, performance and financial 

management, acquisition and contract management, and business systems 

modernization, while facilitating the overall business transformation 

operations within DOD. 

The COO/CMO concept is consistent with the commonly agreed-upon 

governance principle that there needs to be a single point within agencies 

with the perspective and responsibility—as well as authority—to ensure 

the successful implementation of functional management and 

transformation efforts. Governments around the world, such as the United 

Kingdom and Ireland, have established term appointed positions, similar to 

the COO/CMO concept we propose, that are responsible for advancing and 

continuously improving agency operations.

The DOD COO/CMO position could be filled by an individual, appointed by 

the President and confirmed by the Senate, for a set term of 7 years with 

the potential for reappointment. Articulating the roles and responsibilities 

of the position in statute helps to create unambiguous expectations and 

underscores Congress’ desire to follow a professional, nonpartisan 

approach to the position. In that regard, such an individual should have a 

proven track record as a business process change agent in large, complex, 

and diverse organizations—experience necessary to spearhead business 

process transformation across the department and serve as an integrator 

for the needed business transformation efforts. In addition, this individual 

would enter into an annual performance agreement with the Secretary that 

sets forth measurable individual goals linked to overall organizational goals 

in connection with the department’s business transformation efforts. 

Measurable progress towards achieving agreed-upon goals would be a 

basis for determining the level of compensation earned, including any 

related bonus. In addition, this individual’s achievements and 

compensation would be reported to Congress each year. 

Funding Control over System 

Investments

DOD’s current systems investment process in which system funding is 

controlled by DOD components has contributed to the evolution of an 

overly complex and error-prone information technology environment 

containing duplicative, nonintegrated, and stovepiped systems. We have 

made numerous recommendations to DOD intended to improve the 

management oversight and control of its business systems modernization 

investments. However, as previously mentioned, progress in achieving this
Page 30 GAO-05-140T 

control has been slow. Recent legislation,47consistent with the suggestion I 

made in my prior testimony, established specific management oversight 

and accountability with the “owners” of the various functional areas or 

domains. The legislation defined the scope of the various business areas 

(e.g., acquisition, logistics, finance and accounting) and established 

functional approval authority and responsibility for management of the 

portfolio of business systems with the relevant under secretary of defense 

for the departmental domains and the Assistant Secretary of Defense for 

Networks and Information Integration (information technology 

infrastructure). For example, the Under Secretary of Defense for 

Acquisition, Technology, and Logistics is now responsible and accountable 

for any defense business system intended to support acquisition activities, 

logistics activities, or installations and environment activities for DOD. 

The legislation also requires that the responsible approval authorities 

establish a hierarchy of investment review boards with DOD-wide 

representation, including the military services and Defense agencies. The 

boards are responsible for reviewing and approving investments to 

develop, operate, maintain, and modernize business systems for their 

business area portfolio, including ensuring that investments are consistent 

with DOD’s BEA. 

Although the new legislation clearly assigns responsibility and 

accountability for system modernization to designated approval 

authorities, control over system investment funding remains at the DOD 

component level. As a result, DOD continues to have little or no assurance 

that its business systems modernization investment money is being spent in 

an economical, efficient, and effective manner. Given that DOD spends 

billions on business systems and related infrastructure each year, we 

believe it is critical that funds for DOD business systems be appropriated to 

those responsible and accountable for business system improvements. 

However, implementation may require review of the various statutory 

authorities for the military services and other DOD components. Control 

over the funds would improve the capacity of DOD’s designated approval 

authorities to fulfill their responsibilities and transparency over DOD 

investments, and minimize the parochial approach to systems development 

that exists today. In addition, to improve coordination and integration 

activities, we suggest that all approval authorities coordinate their business 

system modernization efforts with the chief management official who 

47 Pub. L. No. 108-375, §332.
Page 31 GAO-05-140T 

would chair the Defense Business Systems Management Committee. 

Cognizant business area approval authorities would also be required to 

report to Congress through the chief management official and the Secretary 

of Defense on applicable business systems that are not compliant with 

review requirements and to include a summary justification for 

noncompliance.

Conclusion The United States is facing large and growing long-term fiscal pressures 

created by the impending retirement of the baby boom generation, rising 

health care costs, increased homeland security and defense commitments, 

and a reduction in federal revenues. These pressures not only sharpen the 

need to look at competing claims on existing federal budgetary resources 

and emerging new priorities, they underscore the need for transparent and 

reliable information upon which to base decisions at all levels within the 

federal government. This includes timely, useful, and reliable financial and 

management information that demonstrates what results are being 

achieved and what risks are being incurred by various government 

programs, functions, and activities. As I have discussed, DOD lacks the 

efficient and effective financial management and related business 

operations, including processes and systems, to support the war fighter, 

DOD management, and Congress. With a large and growing fiscal 

imbalance facing our nation, achieving tens of billions of dollars of annual 

savings through successful DOD transformation is increasingly important. 

DOD’s senior leaders have demonstrated a commitment to transforming 

the department and improving its business operations. Recent legislation 

pertaining to defense business systems, enterprise architecture, 

accountability, and modernization, if properly implemented, should 

improve oversight and control over DOD’s significant system investment 

activities. However, DOD’s transformation efforts and legislation to date 

have not adequately addressed key underlying causes of past reform 

failures. Successful transformation will require an effective transformation 

plan; adequate human capital; effective processes and transformation 

tools, such as a BEA; and results-oriented performance measures that link 

institutional, unit, and individual personnel goals and expectations. 

Reforming DOD’s business operations is a monumental challenge and many 

well-intentioned efforts have failed over the last several decades. Lessons 

learned from these previous reform attempts include the need for sustained 

and focused leadership at the highest level, with appropriate authority over 

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

business transformation-related funding with the designated approval 

authorities assigned responsibility for transformation activities within their 
Page 32 GAO-05-140T 

specific business process areas. This leadership could be provided through 

the establishment of a Chief Operating Officer/Chief Management Official. 

Absent this leadership, authority, and control of funding, the current 

transformation efforts are likely to fail. 

I commend the Subcommittee for holding this hearing and I encourage you 

to use this vehicle, on an annual basis, as a catalyst for long overdue 

business transformation at DOD. 

Mr. Chairman, this concludes my statement. I would be pleased to answer 

any questions you or other members of the Subcommittee may have at this 

time.

Contacts and 

Acknowledgments

For further information about this testimony, please contact Gregory D. 

Kutz at (202) 512-9095 or kutzg@gao.gov, Randolph C. Hite at (202) 512-

3439 or hiter@gao.gov, Sharon Pickup at (202) 512-9619 or 

pickups@gao.gov, or Evelyn Logue at (202) 512-3881 or loguee@gao.gov. 

Other key contributors to this testimony include Catherine Baltzell, Sandra 

Bell, Molly Boyle, Peter Del Toro, Francine DelVecchio, Bill Doherty, Abe 

Dymond, Cynthia Jackson, John Kelly, Neelaxi Lakhmani, Elizabeth Mead, 

Chris Mihm, Mai Nguyen, John Ryan, Lisa Shames, Darby Smith, and 

Marilyn Wasleski.

(192149)
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