GAO

United States General Accounting Office

A

Testimony

Before the Congressional Subcommittees

For Release on Delivery

Expected at 2:00 p.m. EDT

Wednesday, July 7, 2004

DEPARTMENT OF 

DEFENSE 

Long-standing Problems 

Continue to Impede 

Financial and Business 

Management 

Transformation 

Statement of Gregory D. Kutz

Director, Financial Management and Assurance

Keith A. Rhodes

Chief Technologist, Applied Research and Methodology 

Center for Engineering and Technology

GAO-04-907T
www.gao.gov/cgi-bin/getrpt?GAO-04-907T 

To view the full product, including the scope 

and methodology, click on the link above. 

For more information, contact Gregory Kutz, 

(202) 512-9505 (kutzg@gao.gov) or Keith 

Rhodes, (202) 512-6412 (rhodesk@gao.gov). 

 Highlights of GAO-04-907T, a testimony 

 before the Congressional Subcommittees 

July 7, 2004

DEPARTMENT OF DEFENSE 

Long-standing Problems Continue to 

Impede Financial and Business 

Management Transformation 

DOD’s leadership remains committed to transforming the department’s 

business operations. Overhauling decades-old financial management and 

business-related problems of one of the largest and most complex 

organizations in the world is a daunting challenge. DOD’s financial and 

business management weaknesses have resulted in billions of dollars in 

annual wasted resources in a time of increasing fiscal constraint. These 

weaknesses exist despite DOD requesting approximately $19 billion in fiscal 

year 2004 to operate, maintain, and modernize its reported 2,274 

nonintegrated business systems. At a March 2004, hearing, DOD’s 

Comptroller stated that the actual number of systems could be twice the 

number reported. 

DOD’s Fiscal Year 2004 $19 Billion Business System Budget Request 

As DOD continues to develop and implement a business enterprise 

architecture and establish control over its business systems investments, the 

underlying operational conditions remain unchanged. GAO found that DOD 

continues to spend billions of dollars on business systems that will not result 

in corporate solutions to its long-standing problems such as total asset 

visibility. GAO reviewed two such systems: the Defense Logistics Agency’s 

Business Systems Modernization project and the Army’s Logistics 

Modernization Program. GAO found that both projects encountered 

problems that, if not corrected, will result in two more nonintegrated 

systems that do not resolve DOD’s long-standing financial and business 

management problems. 

 

To improve the likelihood of meaningful, broad-based reform at DOD, GAO 

has previously testified that a senior management position should be 

established to manage and oversee DOD’s business transformation efforts. 

Further, in the report released today, GAO proposes that Congress shift the 

control and accountability for business system investments from the DOD 

components to the recently created functional areas known as domains. 

DOD disagrees with this concept, explaining that its portfolio management 

process would provide the appropriate control over business system 

investments. In GAO’s view, providing the funding to the domains would be 

one way of overcoming DOD’s embedded culture and parochial operations 

and help preclude spending billions on duplicative, nonintegrated systems. 

GAO has previously reported on 

the Department of Defense’s (DOD) 

financial management and business 

related problems and key elements 

necessary for successful reform. 

Although the underlying conditions 

remain fundamentally unchanged, 

DOD continues to be confronted 

with pervasive problems related to 

its systems, processes (including 

internal controls), and people 

(human capital). These problems 

impede DOD’s ability to operate its 

numerous business operations in 

an efficient and effective manner. 

The Subcommittees asked GAO to 

provide its views on (1) the impact 

that long-standing financial 

management and related business 

process weaknesses continue to 

have on DOD, (2) the underlying 

causes of DOD business 

transformation challenges, and 

(3) DOD’s business transformation 

efforts. The GAO report released 

today highlights the challenges and 

impediments facing the department 

as it continues to transform its 

financial and business management 

operations. 

In addition, GAO reiterates the key 

elements to successful reform: 

(1) an integrated business 

management transformation 

strategy, (2) sustained leadership 

and resource control, (3) clear lines 

of responsibility and 

accountability, (4) results-oriented 

performance, (5) appropriate 

incentives and consequences, 

(6) an enterprise architecture to 

guide reform efforts, and 

(7) effective monitoring and 

oversight. 
Page 1 GAO-04-907T 

Mr. Chairman and Members of the Subcommittees:

It is a pleasure to be here to discuss key aspects of business transformation 

efforts at the Department of Defense (DOD). At the outset, we would like to 

thank the Subcommittee for having this hearing and acknowledge the 

important role hearings such as this one serve. The involvement of these 

Subcommittees is critical to ultimately assuring public confidence in DOD 

as a steward that is accountable for its finances. DOD continues to 

confront pervasive decades-old financial management and business 

problems related to its systems, processes (including internal controls), 

and people (human capital). 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

 These problems preclude the department from producing accurate, 

reliable, and timely information to make sound decisions and to accurately 

report on its trillions of dollars of assets and liabilities. Further, DOD’s 

financial management deficiencies, taken together, continue to represent 

the single largest obstacle to achieving an unqualified opinion on the U.S. 

government’s consolidated financial statements. 

Today, we will provide our perspectives on (1) the impact that longstanding financial management and related business process weaknesses 

continue to have on DOD, (2) the underlying causes that have impeded the 

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

(4) DOD’s business systems transformation efforts. In addition, we will 

offer two suggestions for legislative consideration, which we believe 

improve the chances that DOD business systems transformation efforts 

will succeed. Our statement is based upon the report2

 being released at this 

hearing, as well as previous GAO reports and testimonies. 

1

 U.S. General Accounting Office, High-Risk Series: An Update, GAO-03-119 (Washington, 

D.C.: January 2003). The nine interrelated high-risk areas that represent the greatest 

challenge to DOD’s development of world-class business operations to support its forces 

are: contract management, financial management, human capital management, information 

security, inventory management, real property, systems modernization, support 

infrastructure management, and weapon systems acquisition. 

2

 U.S. General Accounting Office, 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 2 GAO-04-907T 

Summary DOD’s substantial long-standing business management systems and related 

problems adversely affect the economy, efficiency, and effectiveness of its 

operations, and have resulted in a lack of adequate accountability across all 

major business areas. These problems have left the department vulnerable 

to billions of dollars of fraud, waste, and abuse annually, at a time of 

increasing fiscal constraint. The following examples indicate the 

magnitude and severity of the problems.

• Ninety-four percent of mobilized Army National Guard soldiers from the 

six units we reviewed had pay problems. According to the individuals 

we interviewed, these problems distracted from their missions, imposed 

financial hardships on their families, and had a negative impact on 

retention. For example, the commander of one of the Army National 

Guard Special Forces case study units stated in January 28, 2004, 

testimony that 25 soldiers left his unit as a direct result of the pay 

problems they experienced and that another 15 asked for transfers to 

the inactive National Guard.

• DOD sold new Joint Service Logistics Integrated Suit Technology—

chem-bio suits—on the Internet for $3 while at the same time DOD was 

buying them for over $200.3

 Further, ineffective supply chain 

management resulted in thousands of defective suits being declared 

excess by DOD, and then improperly issued to local law enforcement 

agencies—which are likely to be first responders in case of a terrorist 

attack.4

• Asset visibility and other logistical support problems hampered mission 

readiness during Operation Iraqi Freedom, including cannibalization of 

vehicles for parts and duplication of requisitions.5

3

U.S. General Accounting Office, DOD Management: Examples of Inefficient and 

Ineffective Business Processes, GAO-02-873T (Washington, D.C.: June 25, 2002).

4

 U.S. General Accounting Office, DOD Excess Property: Risk Assessment Needed on Public 

Sales of Equipment That Could Be Used to Make Biological Agents, GAO-04-81TNI

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

5

U.S. General Accounting Office, Defense Logistics: Preliminary Observations on the 

Effectiveness of Logistics Activities during Operation Iraqi Freedom, GAO-04-305R

(Washington, D.C.: Dec. 18, 2003).
Page 3 GAO-04-907T 

Further evidence of DOD’s problems is the long-standing inability of any 

military service or major defense component to pass the test of an 

independent financial audit because of pervasive weaknesses in financial 

management systems, operations, and controls. 

Over the years, the department has initiated several broad-based reform 

efforts intended to fundamentally reform its business operations. 

However, these efforts have not resulted in the fundamental reform 

necessary to resolve the department’s long-standing management 

challenges because the department has not addressed the four underlying 

causes that have impeded meaningful reform:

• lack of sustained leadership and management accountability;

• deeply embedded cultural resistance to change, including military 

service parochialism and stovepiped operations; 

• lack of results-oriented goals and performance measures and 

monitoring; and 

• inadequate incentives and accountability mechanisms for business 

transformation efforts.

These four issues, to a large degree, have impeded DOD’s efforts to 

modernize its business systems—a critical factor in its transformation 

efforts. DOD’s stovepiped, duplicative, nonintegrated systems 

environment contributes to its operational problems and costs the 

taxpayers billions of dollars each year. For fiscal year 2004, DOD requested 

approximately $19 billion to operate, maintain, and modernize its reported 

2,274 business systems. The existing systems environment evolved over 

time as DOD components—each receiving their own funding—developed 

narrowly focused parochial solutions to their business problems. 

Unfortunately, however, these system solutions have not been 

implemented on time, within budget, and delivered the promised capability. 

The two systems—the Defense Logistics Agency’s Business Systems 

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

Program (LMP)—discussed in the report released today are no exception. 
Page 4 GAO-04-907T 

Successful reform of DOD’s fundamentally flawed financial and business 

management operations must simultaneously focus on its systems, 

processes, and people. While DOD has made some encouraging progress in 

addressing specific challenges, it is still in the very early stages of a 

departmentwide reform that will take many years to accomplish. Secretary 

Rumsfeld has made business transformation a priority. For example, 

through its Business Management Modernization Program (BMMP), DOD 

is continuing its efforts to develop and implement a business enterprise 

architecture (BEA) and establish effective management oversight and 

control over its business systems modernization investments. However, 

after about 3 years of effort and over $203 million in reported obligations, 

we have not seen significant change in the content of DOD’s architecture or 

in its approach to investing billions of dollars annually in existing and new 

systems. We have made numerous recommendations aimed at improving 

DOD’s plans for developing the next version of the architecture and 

implementing controls for selecting and managing business systems 

investments.6

 To date, DOD has not addressed 22 of our 24 

recommendations. 

The seriousness of DOD’s business management weaknesses underscores 

the importance of no longer condoning “status quo” business operations at 

DOD. To improve the likelihood that the department’s current business 

transformation efforts will be successful, we have previously suggested7

that a chief management official8 position be created. The individual would 

be responsible for overseeing key areas such as strategic planning, 

performance and financial management, and business systems 

modernization, while also facilitating the overall business transformation 

effort within the department. 

6

See Related Reports.

7

U.S. General Accounting Office, 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) and U.S. 

General Accounting Office, 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).

8

On September 9, 2002, GAO convened a roundtable of executive branch leaders and 

management experts to discuss the Chief Operating Officer concept. For more information 

see U.S. General Accounting Office, Highlights of a GAO Roundtable: The Chief Operating 

Officer Concept: A Potential Strategy to Address Federal Governance Challenges, GAO-03-

192SP (Washington, D.C.: Oct. 4, 2002).
Page 5 GAO-04-907T 

Further, in the report released today,9 we also suggest that to improve 

management oversight, accountability, and control of the department’s 

business system funding, Congress may wish to consider providing the 

funds to operate, maintain, and modernize DOD’s business systems to the 

functional areas, known as domains, rather than the military services and 

the defense agencies. Currently, each military service and defense agency 

receives its own funding and is largely autonomous in deciding how to 

spend these funds, thereby hindering the development of broad-based, 

integrated corporate system solutions to common DOD-wide problems. 

Transforming DOD’s business operations and making them more efficient 

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.

Background Because DOD is one of the largest and most complex organizations in the 

world, overhauling its business operations represents a huge management 

challenge. In fiscal year 2003, DOD reported that its operations involved 

over $1 trillion in assets, nearly $1.6 trillion in liabilities, approximately 3.3 

million military and civilian personnel, and disbursements of over $416 

billion. For fiscal year 2004, the department was appropriated more than 

$425 billion, which included approximately $65 billion for contingency 

operations. Execution of DOD operations spans a wide range of defense 

organizations, including the military services and their respective major 

commands and functional activities, numerous large defense agencies and 

field activities, and various combatant and joint operational commands 

that are responsible for military operations for specific geographic regions 

or theaters of operation. To execute these military operations, the 

department performs an assortment of interrelated and interdependent 

business processes, including logistics management, procurement, 

healthcare management, and financial management. 

9

GAO-04-615.
Page 6 GAO-04-907T 

Transformation of DOD’s business systems and operations is critical to the 

department providing Congress and DOD management with accurate and 

timely information for use in decision making. One of the key elements we 

have reported10 as necessary to successfully execute the transformation is 

establishing and implementing an enterprise architecture. In this regard, 

the department has undertaken a daunting challenge to modernize its 

existing business systems environment through the development and 

implementation of a business enterprise architecture (BEA)—a 

modernization blueprint. This effort is an essential part of the Secretary of 

Defense’s broad initiative to “transform the way the department works and 

what it works on.” Secretary Rumsfeld has estimated that successful 

improvements to DOD’s business operations could save the department 5 

percent of its budget a year, which equates to over $20 billion a year in 

savings.

Pervasive Financial 

and Business 

Management Problems 

Affect DOD’s 

Efficiency and 

Effectiveness

For several years, we have reported that DOD faces a range of financial 

management and related business process challenges that are complex, 

long-standing, pervasive, and deeply rooted in virtually all business 

operations throughout the department. As the Comptroller General 

testified in March 2004 and as discussed in our latest financial audit 

report,11 DOD’s financial management deficiencies, taken together, 

continue to represent the single largest obstacle to achieving an unqualified 

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

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

financial audit because of pervasive weaknesses in internal control and 

processes and fundamentally flawed business systems. 

10U.S. General Accounting Office, Department of Defense: Status of Financial 

Management Weaknesses and Progress Toward Reform, GAO-03-931T (Washington, D.C.: 

June 25, 2003).

11U.S. General Accounting Office, Fiscal Year 2003 U.S. Government Financial 

Statements: Sustained Improvement in Federal Financial Management Is Crucial to 

Addressing Our Nation’s Future Fiscal Challenges, GAO-04-477T (Washington, D.C.: Mar. 

3, 2004) and our report contained in the U.S. Department of the Treasury, Financial Report 

of the United States Government (Washington, D.C.: Feb. 27, 2004).
Page 7 GAO-04-907T 

In identifying improved financial performance as one of its five 

governmentwide initiatives, the President’s Management Agenda 

recognized that obtaining a clean (unqualified) financial audit opinion is a 

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

recognized that without sound internal control and accurate and timely 

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

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

of accountability for the American people. The Joint Financial Management 

Improvement Program (JFMIP)12 principals have defined certain measures, 

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

achieving financial management success. These additional measures 

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

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

control weaknesses or material noncompliance with laws and regulations; 

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

Improvement Act of 1996 (FFMIA).13 Unfortunately, DOD does not meet 

any of these conditions. For example, for fiscal year 2003, the DOD 

Inspector General (DOD IG) issued a disclaimer of opinion on DOD’s 

financial statements, citing 11 material weaknesses in internal control and 

noncompliance with FFMIA requirements.

Pervasive weaknesses in DOD’s financial management and related business 

processes and systems 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, as the following examples illustrate. 

12JFMIP 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.

13FFMIA, Pub. L. No. 104-208, div. A., §101(f), title VIII, 110 Stat. 3009, 3009-389 (Sept. 30, 

1996), requires the 23 major departments and agencies covered by the Chief Financial 

Officers Act of 1990, Pub. L. No. 101-576, 104 Stat. 2838 (Nov. 15, 1990) (as amended), to 

implement and maintain financial management systems that comply substantially with (1) 

federal financial management systems requirements, (2) applicable federal accounting 

standards, and (3) U.S. Standard General Ledger (SGL) at the transaction level. 
Page 8 GAO-04-907T 

• Of the 481 mobilized Army National Guard soldiers from six GAO case 

study Special Forces and Military Police units,14 450 had at least one pay 

problem associated with their mobilization. According to the individuals 

we interviewed, DOD’s inability to provide timely and accurate 

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

Iraq or Afghanistan missions, distracted them from their missions, 

imposed financial hardships on the soldiers and their families, and has 

had a negative impact on retention.15 More specifically, in January 28, 

2004 testimony, the commander of one unit stated that 25 soldiers left 

the unit as a direct result of the pay problems they experienced and that 

another 15 asked for transfers to the inactive National Guard. He also 

stated that because it would take an estimated 2 years and $250,000 to 

train each replacement, these losses have had a significant negative 

impact on the unit’s mission capability—one of only six such units in the 

nation. 

• DOD incurred substantial logistical support problems as a result of 

weak distribution and accountability processes and controls over 

supplies and equipment shipments in support of Operation Iraqi 

Freedom activities, similar to those encountered during the prior Gulf 

War. These weaknesses resulted in (1) supply shortages, (2) backlogs of 

materials delivered in theater but not delivered to the requesting 

activity, (3) a discrepancy of $1.2 billion between the amount of materiel 

shipped and that acknowledged by the activity as received, 

(4) cannibalization of vehicles, and (5) duplicate supply requisitions.16

14The six case study units reviewed include the Colorado B Company Special Forces, 

Virginia B Company Special Forces, West Virginia C Company Special Forces, Mississippi 

114th Military Police Company, California 49th Military Police Headquarters and 

Headquarters Detachment, and the Maryland 200th Military Police Company. In addition, our 

limited review of pay experiences of soldiers in the Colorado Army Guard’s 220th Military 

Police Company, which recently returned from Iraq, indicated that some of the same types 

of pay problems that we found in our case studies had also affected soldiers in this unit. 

15GAO-04-89.

16GAO-04-305R.
Page 9 GAO-04-907T 

• Our analysis of data on more than 50,000 maintenance work orders 

opened during the deployments of six battle groups indicated that about 

29,000 orders (58 percent) could not be completed because the needed 

repair parts were not available on board ship. This condition was a 

result of inaccurate ship configuration records and incomplete, 

outdated, or erroneous historical parts demand data. Such problems not 

only have a detrimental impact on mission readiness, they may also 

increase operational costs due to delays in repairing equipment and 

holding unneeded spare parts inventory.17 

• Inadequate asset visibility and accountability resulted in DOD selling 

new Joint Service Lightweight Integrated Suit Technology—the current 

chemical and biological protective garment used by our military 

forces—on the Internet for $3 each (coat and trousers) while at the 

same time buying them for over $200 each.18 DOD has acknowledged 

that these garments should have been restricted to DOD use only and 

therefore should not have been available to the public.

• Some DOD contractors have been abusing the federal tax system with 

little or no consequence, and DOD is not collecting as much in unpaid 

taxes as it could. Under the Debt Collection Improvement Act of 1996, 

DOD is responsible—working with the Treasury Department—for 

offsetting payments made to contractors to collect funds owed, such as 

unpaid federal taxes. However, we found that DOD had collected only 

$687,000 of unpaid taxes as of September 2003. We estimated that at 

least $100 million could be collected annually from DOD contractors 

through effective implementation of levy and debt collection programs. 

We also found numerous instances of abusive or potentially criminal 

activity19 related to the federal tax system during our audit and

17U.S. General Accounting Office, Defense Inventory: Opportunities Exist to Improve 

Spare Parts Support Aboard Deployed Navy Ships, GAO-03-887 (Washington, D.C.: Aug. 29, 

2003).

18GAO-02-873T.

19We characterized as “potentially criminal” any activity related to federal tax liability that 

may be a crime under a specific provision of the Internal Revenue Code. Depending on the 

potential penalty provided by statute, the activity could be a felony (punishable by 

imprisonment of more than 1 year) or a misdemeanor (punishable by imprisonment of 1 

year or less). Some potential crimes under the Internal Revenue Code constitute fraud 

because of the presence of intent to defraud, intentional misrepresentation or deception, or 

other required legal elements.
Page 10 GAO-04-907T 

investigation of 47 DOD contractor case studies. The 34 case studies 

involving businesses with employees had primarily unpaid payroll 

taxes, some dating to the early 1990s and some for as many as 62 tax 

periods.20 The other 13 case studies involved individuals who had 

unpaid income taxes dating as far back as the 1980s. Several of these 

contractors provided parts or services supporting weapons and other 

sensitive military programs.21

• Based on statistical sampling, we estimated that 72 percent of the over 

68,000 premium class airline tickets DOD purchased for fiscal years 

2001 and 2002 were not properly authorized and that 73 percent were 

not properly justified. During fiscal years 2001 and 2002, DOD spent 

almost $124 million on tickets that included at least one leg in premium 

class—usually business class. Because each premium class ticket costs 

the government up to thousands of dollars more than a coach class 

ticket, unauthorized premium class travel resulted in millions of dollars 

of unnecessary costs being incurred annually.22

• Control breakdowns resulted in DOD paying for airline tickets that were 

not used and not processed for refund—amounting to about 58,000 

tickets totaling more $21 million for fiscal years 2001 and 2002. DOD 

was not aware of this problem before our audit and did not maintain any 

data on unused tickets. Based on limited data provided by the airlines, it 

is possible that the unused value of the fully and partially unused tickets 

DOD purchased from fiscal years 1997 through 2003 with DOD’s 

centrally billed account could be at least $115 million.23

20A “tax period” varies by tax type. For example, the tax period for payroll and excise taxes 

is one quarter of a year. The taxpayer is required to file quarterly returns with IRS for these 

types of taxes, although payment of the taxes occurs throughout the quarter. In contrast, for 

income, corporate, and unemployment taxes, a tax period is 1 year.

21U.S. General Accounting Office, Financial Management: Some DOD Contractors Abuse 

the Federal Tax System with Little Consequence, GAO-04-95 (Washington, D.C.: Feb. 12, 

2004).

22U.S. General Accounting Office, Travel Cards: Internal Control Weaknesses at DOD Led to 

Improper Use of First and Business Class Travel, GAO-04-229T (Washington, D.C.: Nov. 6, 

2003), and U.S. General Accounting Office, Travel Cards: Internal Control Weaknesses at 

DOD Led to Improper Use of First and Business Class Travel, GAO-04-88 (Washington, 

D.C.: Oct. 24, 2003).

23U.S. General Accounting Office, DOD Travel Cards: Control Weaknesses Led to Millions of 

Dollars of Wasted on Unused Airline Tickets, GAO-04-398 (Washington, D.C.: Mar. 31, 2004).
Page 11 GAO-04-907T 

• We found that DOD sometimes paid twice for the same airline ticket—

first to the Bank of America for the monthly credit and bill, and second 

to the traveler, who was reimbursed for the same ticket. Based on our 

mining of limited data, the potential magnitude of the improper 

payments was 27,000 transactions for over $8 million. For example, 

DOD paid a Navy GS-15 civilian employee $10,000 for 13 airline tickets 

he had not purchased.24

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

problems, but also the importance of business systems modernization as a 

critical element in the department’s transformation efforts to improve the 

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

accountability to Congress and American taxpayers.

Underlying Causes of 

Financial and Related 

Business Process 

Transformation 

Challenges

Since May 1997, 25 we have highlighted in various reports and testimonies 

what we believe are the underlying causes of the department’s inability to 

resolve its long-standing financial management and related business 

management weaknesses and fundamentally reform its business 

operations. We found that one or more of these causes were contributing 

factors to the financial management and related business process 

weaknesses previously discussed. Over the years, the department has 

initiated several broad-based reform efforts intended to fundamentally 

reform its business operations and improve the reliability of information 

used in the decision-making process. Unfortunately, these initiatives have 

generally proven to be less successful than anticipated because DOD has 

not addressed the following four underlying causes:

• lack of sustained top-level leadership and management accountability 

for correcting problems;

• deeply embedded cultural resistance to change, including military 

service parochialism and stovepiped operations;

24 U.S. General Accounting Office, DOD Travel Cards: Control Weaknesses Resulted in 

Millions of Dollars of Improper Payments, GAO-04-576, (Washington, D.C.: June 9, 2004).

25U.S. General Accounting Office, DOD High-Risk Areas: Eliminating Underlying Causes 

Will Avoid Billions of Dollars in Waste, GAO/T-NSIAD/AIMD-97-143 (Washington, D.C.: May 

1, 1997).
Page 12 GAO-04-907T 

• lack of results-oriented goals and performance measures and 

monitoring; and

• inadequate incentives and accountability mechanisms relating to 

business transformation efforts.

If not properly addressed, these root causes, which I will now highlight, 

will likely result in the failure of current DOD transformation efforts and 

continue to hinder the department’s ability to produce accurate, reliable, 

and timely information to make sound decisions and to accurately report 

on its billions of dollars of assets, such as inventory.

Lack of Sustained 

Leadership and Adequate 

Accountability

Historically, DOD has not routinely assigned accountability for financial 

management performance to specific organizations or individuals who 

have sufficient authority to accomplish desired goals. For example, under 

the Chief Financial Officers Act of 1990,26 it is the responsibility of the 

agency Chief Financial Officer (CFO) to establish the mission and vision 

for the agency’s future financial management and to direct, manage, and 

provide oversight of financial management operations. However, at DOD, 

the Comptroller—who is by statute the department’s CFO—has direct 

responsibility for only an estimated 20 percent of the data relied on to carry 

out the department’s financial management operations. The remaining 80 

percent comes from DOD’s other business areas such as acquisition and 

personnel, which are not under the control and authority of the DOD 

Comptroller. 

26Chief Financial Officers Act of 1990, Pub. L. No. 101-576, 104 Stat. 2838, 2843 (Nov. 15, 

1990) (codified, as amended, in scattered sections of title 31, United States Code).
Page 13 GAO-04-907T 

Further, DOD’s past experience has suggested that top management has 

not had a proactive, consistent, and continuing role in integrating daily 

operations for achieving business transformation performance goals. It is 

imperative that major improvement initiatives have the direct, active 

support and involvement of the Secretary and Deputy Secretary of Defense 

to ensure that daily activities throughout the department remain focused 

on achieving shared, agencywide outcomes and success. While DOD 

leadership has demonstrated its commitment to reforming the 

department’s business operations, the magnitude and nature of day-to-day 

demands placed on these leaders, given the current world events 

associated with fighting the war on terrorism, clearly affect the level of 

oversight, commitment, and involvement they can devote to the 

transformation efforts. Given the importance of DOD’s business 

transformation efforts, it is imperative that it receives the sustained 

leadership needed to improve the economy, efficiency, and effectiveness of 

DOD’s business operations. Based on our surveys of best practices of 

world-class organizations,27 strong executive CFO and Chief Information 

Officer (CIO) leadership and centralized control over systems investments 

are essential to(1) making financial management an entitywide priority, 

(2) providing meaningful information to decision makers, (3) building a 

team of people that delivers results, and (4) effectively leveraging 

technology to achieve stated goals and objectives. 

Cultural Resistance and 

Parochialism

Cultural resistance to change, military service parochialism, and 

stovepiped operations have all contributed significantly to the failure of 

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

The department has acknowledged that it confronts decades-old problems 

deeply grounded in the bureaucratic history and operating practices of a 

complex, multifaceted organization and that many of these practices were 

developed piecemeal and evolved to accommodate different organizations, 

each with its own policies and procedures. Recent audits reveal that DOD 

has made only small inroads in addressing these challenges. For example,

27U.S. General Accounting Office, Executive Guide: Creating Value Through World-class 

Financial Management, GAO/AIMD-00-134 (Washington, D.C.: April 2000) and U.S. General 

Accounting Office, Executive Guide: Maximizing the Success of Chief Information 

Officers: Learning From Leading Organizations, GAO-01-376G (Washington, D.C.: 

February 2001).
Page 14 GAO-04-907T 

as discussed in our May 2004 report,28 DOD does not have the processes 

and controls in place to provide reasonable assurance that it is in 

compliance with the fiscal year 2003 defense authorization act,29 which 

requires the DOD Comptroller to review all system improvements with 

obligations exceeding $1 million. As a result, DOD was not able to satisfy 

our request for information on all obligations in excess of $1 million for 

system modernizations since passage of the act. Based upon a comparison 

of limited information provided by the military services and defense 

agencies for fiscal years 200330 and 2004, as of December 2003, we 

identified a total of $863 million in obligations that exceeded $1 million for 

system improvements that were not submitted to the DOD Comptroller for 

required review. 

Additionally, as discussed in the report31 released today, DOD continued to 

use a stovepiped approach to develop and fund its business system 

investments. As shown in table 1, DOD requested approximately 

$18.8 billion for fiscal year 2004 to operate, maintain, and modernize its 

reported 2,274 nonintegrated, duplicative, stovepiped business systems. 

The table also shows how business system funding is spread across various 

DOD components.

28U.S. General Accounting Office, 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). 

29 Subsection 1004 (d) of the Bob Stump National Defense Authorization Act for Fiscal Year 

2003, Pub. L. No. 107-314, 116 Stat. 2629 (Dec. 2, 2002), provides that any amount in excess 

of $1 million may be obligated for financial system improvements before approval of its 

enterprise architecture and a supporting transition plan only if the DOD Comptroller makes 

a determination that the improvement is necessary for (1) critical national security 

capability or critical safety and security requirements or (2) prevention of significant 

adverse effect on a project that is needed to achieve an essential capability. The act further 

provides that after the architecture is approved, the DOD Comptroller must determine 

before making obligations that exceed $1 million for system improvements that such 

improvements are consistent with the enterprise architecture and the transition plan. 

30We requested obligational data for fiscal year 2003 for the period December 2, 2002, the 

date of the enactment of the act, through September 30, 2003.

31GAO-04-615. 
Page 15 GAO-04-907T 

Table 1: DOD Fiscal Year 2004 Information Technology Budget Request for Business 

Systems by DOD Component

Source: GAO analysis based on DOD’s fiscal year 2004 IT budget request.

a The Defense Information Systems Agency provides DOD and other organizations with a wide range 

of information services, such as data processing, telecommunications services, and database 

management.

b

TRICARE is the health care system for DOD’s active duty personnel, their dependents, and retirees.

c

DLA is DOD’s logistics manager for all consumable and some repair items; its primary business 

function is providing supply support to sustain military operations and readiness.

d

Defense Finance and Accounting Service is the centralized accounting agency for DOD. 

e

Other DOD components include entities such as the Office of the Secretary of Defense and the 

Defense Contract Management Agency.

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. DOD’s ability to 

address its current “business-as-usual” approach to business system 

investments is further hampered by its lack of 

• a complete inventory of business systems—a condition we first 

highlighted in 1998. In fact, the DOD Comptroller testified in March 

200432 that the size of DOD’s actual systems inventory could be twice the 

size currently reported; 

Dollars in millions

Component Total

Army $3,652

Navy 3,778

Air Force 3,737

DISAa 3,938

TRICAREb 980

DLAc 774

DFASd 502

Other DOD componentse 1,440

Total $18,801

32U.S. General Accounting Office, 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 16 GAO-04-907T 

• a standard definition of what constitutes a business system; 

• a well-defined BEA; and 

• an effective approach for the control and accountability over business 

system modernization investments. 

Until DOD develops and implements an effective strategy for overcoming 

resistance, parochialism, and stovepiped operations, its transformation 

efforts will not be successful. Further, there can be little confidence that it 

will not continue to spend billions of dollars on duplicative, nonintegrated 

systems that do not optimize mission performance and support the 

warfighter. 

Lack of Results-Oriented 

Goals and Performance 

Measures

At a programmatic level, the lack of clear, linked goals and performance 

measures handicapped DOD’s past reform efforts. As a result, DOD 

managers lacked straightforward road maps showing how their work 

contributed to attaining the department’s strategic goals, and they risked 

operating autonomously rather than collectively. As of March 2004, DOD 

formulated departmentwide performance goals and measures and 

continues to refine and align them with the outcomes described in its 

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

The QDR outlined a new risk management framework, consisting of four 

dimensions of risk—force management, operational, future challenges, and 

institutional—to use in considering trade-offs among defense objectives 

and resource constraints. According to DOD’s Fiscal Year 2003 Annual 

Report to the President and the Congress, these risk areas are to form the 

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

performance results and will be linked to resources. As of March 2004, 

DOD was still in the process of implementing this approach on a 

departmentwide basis. 
Page 17 GAO-04-907T 

DOD currently has plans to institutionalize performance management by 

aligning management activities with the President’s Management Agenda. 

As part of this effort, DOD linked its fiscal year 2004 budget resources with 

metrics for broad program areas, e.g., air combat, airlift, and basic research 

in the Office of Management and Budget’s (OMB) Program Assessment 

Rating Tool.33 We have not reviewed DOD’s efforts to link resources to 

metrics; however, some of our recent work notes the lack of clearly defined 

performance goals and measures in the management of such areas as 

defense inventory and military pay.34 Further, without modern integrated 

systems and streamlined business processes, the accuracy and reliability of 

DOD’s performance data will be questionable.

One program that has yet to establish measurable, results-oriented goals is 

the BMMP.35 The BMMP is the department’s 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. 

Since DOD has yet to develop performance measures for the BMMP, it is 

difficult to evaluate and track, on an ongoing basis, specific program 

33 OMB developed the Program Assessment Rating Tool to strengthen the process for 

assessing the effectiveness of programs across the federal government. For fiscal year 2004, 

OMB rated the following 12 defense program areas: Air Combat; Airlift; Basic Research; 

Chemical Demilitarization; Communications Infrastructure; Defense Health; Energy 

Conservation Improvement; Facilities Sustainment, Restoration, Modernization, and 

Demolition; Housing; Missile Defense; Recruiting; and Shipbuilding. DOD linked metrics for 

these program areas, which represent 20 percent of the department’s fiscal year 2004 

budget; it linked another 20 percent in the 2005 budget and 30 percent in the 2006 budget, 

for a total of 70 percent.

34 In July 2003 we reported that DOD and the military services do not have an effective 

approach to prevent and mitigate equipment corrosion, and that DOD’s strategic plan should 

contain clearly defined goals, measurable, outcome-oriented objectives, and performance 

measures. (U.S. General Accounting Office, Defense Management: Opportunities to 

Reduce Corrosion Costs and Increase Readiness, GAO-03-753 (Washington, D.C.: July 7, 

2003)). Similarly, in January 2004 we testified that existing processes and controls used to 

provide pay and allowances to mobilized Army Guard personnel prevented DOD from being 

able to reasonably assure timely and accurate payroll payments. We stated that DOD needs 

to establish a unified set of policies and procedures, as well as performance measures in the 

pay area. (U.S. General Accounting Office, Military Pay: Army National Guard 

Personnel Mobilized to Active Duty Experienced Significant Pay Problems, GAO-04-413T

(Washington, D.C.: Jan. 28, 2004)).

35 GAO-04-731R. 
Page 18 GAO-04-907T 

progress, outcomes, and results, such as explicitly defining performance 

measures to evaluate the architecture’s quality, content, and utility of 

subsequent major updates. Given that DOD has reported obligations of 

over $203 million since architecture development efforts began 3 years ago, 

this is a serious performance management weakness. 

DOD recognizes that it needs to develop detailed plans and establish 

performance metrics to measure and track program progress to determine 

what it planned to accomplish by a certain point in time, what it actually 

accomplished at that point in time, and what has been spent thus far. In its 

March 15, 2004, progress report on the implementation of the BEA, DOD 

reported that it plans to establish an initial approved program metrics 

baseline to evaluate the cost, schedule, and performance of the program 

and that, beginning with the fourth quarter of fiscal year 2004, it plans to 

begin formal tracking and reporting of specific program goals, objectives, 

and measures. Without explicitly defined program baselines, detailed 

plans, and performance measures, it is difficult to validate or justify the 

$122 million requested for fiscal year 2005 and the $494 million estimated to 

be needed for fiscal years 2006 through 2009.

Lack of Incentives for 

Change

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

carry out needed fundamental reform has been the lack of incentives for 

making more than incremental change to existing “business-as-usual” 

operations, systems, and organizational structures. Traditionally, DOD has 

focused on justifying its need for more funding rather than on the outcomes 

its programs have produced. DOD has historically measured its 

performance by resource components such as the amount of money spent, 

people employed, or number of tasks completed. 

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

modernization area. Despite DOD’s acknowledgement that many of its 

systems are error prone, duplicative, and stovepiped, DOD continues to 

allow its component organizations to make their own investments 

independently of one another and implement different system solutions to 

solve the same business problems. These stovepiped decision-making 

processes have contributed to the department’s current complex, errorprone environment. For example, our March 2003 report36 noted that DOD 

36 GAO-03-465.
Page 19 GAO-04-907T 

had not effectively managed and overseen its planned investment of over 

$1 billion in four Defense Finance and Accounting Service (DFAS) system 

modernization efforts. One project’s estimated cost had increased by as 

much as $274 million, while the schedule slipped by almost 4 years. For 

each of these projects, DOD oversight entities—DFAS, the DOD 

Comptroller, and the DOD CIO—could not provide documentation that 

indicated they had questioned the impact of the cost increases and 

schedule delays, and allowed the projects to proceed in the absence of the 

requisite analytical justification. Such analyses provide the requisite 

justification for decision makers to use in determining whether to invest 

additional resources in anticipation of receiving commensurate benefits 

and mission value. Two of the four projects—the Defense Procurement 

Payment System and the Defense Standard Disbursing System—were 

terminated in December 2002 and December 2003, respectively, after an 

investment of approximately $179 million that did not improve the 

department’s business operations.

GAO and the DOD IG have identified numerous business system 

modernization efforts that are not economically justified on the basis of 

cost, benefits, and risk; take years longer than planned; and fall short of 

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

continues to invest billions of dollars in business systems modernization, 

while at the same time it lacks the effective management and oversight 

needed to achieve results. Without appropriate incentives to improve their 

project management, ongoing oversight, and adequate accountability 

mechanisms, DOD components will continue to develop duplicative and 

nonintegrated systems that are inconsistent with the Secretary’s vision for 

reform. 

Keys to Successful 

Reform

Successful reform of DOD’s fundamentally flawed financial and business 

management operations must simultaneously focus on its systems, 

processes, and people. While DOD has made some encouraging progress in 

addressing specific challenges, it is still in the very early stages of a 

departmentwide reform that will take many years to accomplish. At this 

time, it is not possible to predict when—or even whether—DOD’s reform 

effort will be successful. 

Our experience has shown 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 financial management problems. 
Page 20 GAO-04-907T 

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 and committed leadership by top management, 

including but not limited to the Secretary of Defense;

• establishing resource control over business systems investments;

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

• incorporating results-oriented performance measures and monitoring 

progress tied to key financial and business transformation objectives;

• providing appropriate incentives or consequences for action or inaction; 

• establishing an enterprise architecture to guide and direct business 

systems modernization investments; and 

• ensuring effective oversight and monitoring. 

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 and are consistent with those 

actions discussed in the department’s April 2001 financial management 

transformation report.37 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 has been slow. Further, as 

will be discussed in more detail later, we have not yet seen a 

comprehensive, cohesive 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. It appears as if these two key 

efforts are being conducted in a stovepiped manner.

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

Strategy for Change (Washington, D.C.: Apr. 13, 2001).
Page 21 GAO-04-907T 

DOD Business 

Transformation Efforts 

Over the years, we have given DOD credit for beginning numerous 

initiatives intended to improve its business operations. Unfortunately, 

most of these initiatives failed to achieve their intended objective in part, 

we believe, because they failed to incorporate key elements that in our 

experience are critical to successful reform. Today, we would like to 

discuss one very important broad-based initiative—the BMMP—that DOD 

currently has underway and, if properly developed and implemented, will 

result in significant improvements in DOD’s business systems and 

operations. 

Effectively managing and overseeing the department’s $19 billion 

investment in its business systems is key to the successful transformation 

of DOD’s business operations. The transformation also depends on the 

ability of the department to develop and implement business systems that 

provide users and department management with accurate and timely 

information on the results of operations and that help resolve the 

numerous long-standing weaknesses. As DOD moves forward with BMMP, 

it needs to ensure that the department’s business systems modernization 

projects—such as BSM and LMP, discussed in the report released today—

are part of a corporate solution to DOD long-standing business problems. 

To assist the department with it ongoing efforts, we would like to offer two 

suggestions for legislative consideration that we believe could significantly 

increase the likelihood of a successful business transformation effort at 

DOD.

Business Management 

Modernization Program

The BMMP, which the department established in July 2001 following our 

recommendation that DOD develop and implement an enterprise 

architecture,38 is vital to the department’s efforts to transform its business 

operations.39 The purpose of the BMMP is to oversee development and 

implementation of a departmentwide BEA, transition plan, and related 

efforts to ensure that DOD business systems investments are consistent 

with the architecture and provide world class mission support to the 

fighting force. A well-defined and properly implemented BEA can provide 

38 DOD has one Enterprise Information Environment Mission, and six departmental domains 

including (1) acquisition/procurement; (2) finance, accounting, and financial management; 

(3) human resource management; (4) logistics; (5) strategic planning and budgeting; and

(6) installations and environment. 

39 GAO-01-525. 
Page 22 GAO-04-907T 

assurance that the department invests in integrated enterprisewide 

business solutions and, conversely, can help move resources away from 

nonintegrated business system development efforts. 

However, we recently reported40 that since our last review,41 and after 

about 3 years of effort and over $203 million in reported obligations, we 

have not seen significant change in the content of DOD’s architecture or in 

DOD’s approach to investing billions of dollars annually in existing and new 

systems. Few actions have been taken to address the recommendations we 

made in our previous reports,42 which were aimed at improving DOD’s 

plans for developing the next version of the architecture and implementing 

the institutional means for selecting and controlling both planned and 

ongoing business systems investments. To date, DOD has not yet 

addressed 22 of our 24 recommendations.

Further, DOD has not yet developed either near-term or long-term plans for 

developing the architecture that explicitly identify and establish a baseline 

for the actions to be taken, milestones to be achieved, cost estimates to be 

met, and targeted outcomes to be achieved. DOD has adopted an 

incremental approach to developing the architecture, including the 

transition plan, and plans to refine and extend the architecture in three 

increments, the first of which includes in part the department’s efforts to 

obtain an unqualified audit opinion of DOD’s consolidated fiscal year 2007 

financial statements. 

However, it is unclear what the increments individually or collectively 

mean, and what they will provide or allow DOD to achieve in the near and 

long term, because, as previously discussed, DOD has yet to develop 

detailed performance measures. Although the three increments were 

identified in November 2003, program officials do not expect to have a plan 

for increment one until the next version of the transition plan is completed 

in August 2004. According to program officials, the goals and scope for the 

second and third increments were only recently approved and, therefore, 

detailed plans of action and milestones do not yet exist.

40 GAO-04-731R.

41 GAO-03-1018.

42GAO-03-458 and GAO-03-1018.
Page 23 GAO-04-907T 

Currently, DOD has three initiatives under way to support increment one. 

First, the program office is developing a plan of action for increment one 

and intends to complete the plan by August 2004. Second, the accounting 

and finance domain is conducting workshops to develop needed business 

rules and requirements for extending and evolving version 2.0 of the 

architecture. Last, DOD components are developing individual plans 

detailing their respective efforts for supporting increment one. However, 

there is no evidence that the program office is coordinating with the 

components and that the components are coordinating amongst 

themselves. Because there are not yet detailed plans guiding the program’s 

activities, it is unclear whether and how these activities support each other 

and whether they support the department’s goal of achieving an unqualified 

audit opinion in 2007.

As DOD moves forward with the BEA, it will be essential that the 

department have the management structure and processes in place to 

(1) improve the control and accountability over its billions of dollars of 

business systems investments; (2) develop corporate solutions to common 

business problems; and (3) implement system projects within budget, on 

time, and deliver the promised capability. The failure of the department to 

have the appropriate management structure and processes could result in 

billions of dollars continuing to be at risk of being spent on more systems 

that are duplicative, are not interoperable, cost more to maintain than 

necessary, and do not optimize mission performance and accountability.

Control and Accountability Over 

Business System Investments

As previously discussed, DOD continues to lack adequate control and 

accountability over its billions of dollars of business systems investments. 

Each DOD component continues to make its own investment decisions, 

which has led to the proliferation of systems. As shown in table 2, the 

department has reported that it has at least 2,274 business systems. For 

example, the department reportedly has 665 systems to support human 

resource management, 565 systems to support logistical functions,43 542 

systems to perform finance and accounting functions, and 210 systems to 

support strategic planning and budget formulation.

43 According to logistics domain officials, there are currently about 3,000 systems just within 

the logistics domain. Of that amount, about 1,900 systems have been validated by the DOD 

components as logistics systems—that is, they are not merely a spreadsheet or a report. 

Such a determination has not been made for the other 1,100.
Page 24 GAO-04-907T 

Table 2: Reported DOD Business Systems by Domain and Functional Area

Source: GAO analysis of BMMP data.

These numerous systems have evolved into the overly complex and errorprone operation that exists today, including (1) little standardization across 

DOD components, (2) multiple systems performing the same tasks, (3) the 

same data stored in multiple systems, (4) manual data entry into multiple 

systems, and (5) a large number of data translations and interfaces that 

combine to exacerbate problems with data integrity. The proliferation of 

systems has resulted because DOD components are largely autonomous 

and each receives its own business system funding.

DOD has recognized the need to improve its control and accountability of 

its business system investments and has various initiatives underway and 

planned. For example, in response to our recommendations,44 DOD issued 

a policy in March 2004 that assigns the domains the responsibility for IT 

portfolio management. However, the procedures to be followed to 

implement the policy are currently being developed and no time frames for 

completion have been provided. In addition, specific roles and 

responsibilities of the domains have not yet been formalized, standard 

criteria for performing the system reviews have not been developed, and 

explicit authority for fulfilling roles and responsibilities has not been 

assigned. Although DOD recognizes the need to clarify the roles and 

responsibilities associated with managing the domains’ portfolios of 

business systems and ensuring compliance with the architecture, it has not 

yet established time frames for completing these activities.

Domain Air Force Army

Navy/ Marine 

Corps DFAS Other Total

Acquisition 27 31 61 3 21 143

Accounting and finance 43 88 195 165 51 542

Human resource management 71 387 86 33 88 665

Installations and environment 12 98 9 1 8 128

Logistics 180 191 104 11 79 565

Strategic planning and budgeting 23 63 98 15 11 210

Enterprise information environment 1 5 2 3 10 21

Total 357 863 555 231 268 2,274

44 GAO-01-525 and GAO-03-458.
Page 25 GAO-04-907T 

While DOD is continuing to work toward establishing the structure and 

processes to manage its business systems investments, it has not yet 

conducted a comprehensive system review of its ongoing IT investments to 

ensure that they are consistent with its BEA efforts. Additionally, 

execution of a comprehensive review of all modernization efforts by DOD 

before billions of dollars have been invested will reduce the risk of 

continuing the department’s track record of business systems 

modernization efforts that cost more than anticipated, take longer than 

expected, and fail to deliver intended capabilities. 

Corporate Solutions to Common 

Problems

The department’s business transformation also depends on its ability to 

develop and implement business systems that provide corporate solutions 

to DOD’s numerous long-standing problems. This approach should help 

preclude the continued proliferation of duplicative, stovepiped systems 

and reduce spending on multiple systems that are supposed to perform the 

same function. However, as discussed in our report45 released today, DOD 

is still developing systems that are not designed to solve corporatewide 

problems. BSM and LMP were initiated in November 1999 and February 

1998, respectively, prior to DOD undertaking the BEA and establishing the 

domains. As such, they were not directed towards a corporate solution to 

the department’s long-standing weaknesses in the inventory and logistics 

management areas, such as total asset visibility. Rather, both projects are 

more focused on DLA’s and the Army’s respective inventory and logistics 

management operations. Today, I would like to focus on one of those 

issues—total asset visibility, because of its significant impact on DOD’s 

operational effectiveness.

In October 2002, a DLA official testified46 that BSM would provide 

improved control and accountability over the Joint Services Lightweight 

Integrated Suit Technology (JSLIST), which is a lightweight, two-piece 

garment—coat and trousers—designed to provide maximum protection 

against chemical and biological contaminants. Total asset visibility is 

critical for sensitive items such as the JSLIST. For example, tracking the 

specific location of each suit by lot number is necessary if for any reason 

45GAO-04-615.

46 Chemical and Biological Equipment: Preparing for a Toxic Battlefield: Hearing Before 

the House Committee on Government Reform, Subcommittee on National Security, 

Veterans Affairs and International Relations, 107th Cong. 119 (Oct. 1, 2002) (statement of 

Deputy Commander, Defense Supply Center Philadelphia, Mr. George H. Allen).
Page 26 GAO-04-907T 

they have to be recalled, as was the case with the JSLIST predecessor the 

Battle Dress Overgarment (BDO).

Over 700,000 of the BDOs were found to be defective and were recalled. 

Since DOD’s systems did not provide the capability to identify the exact 

location of each suit, a series of data calls were conducted, which proved to 

be ineffective. We reported in September 200147 that DOD was unable to 

locate approximately 250,000 of the defective suits and therefore was 

uncertain if the suits were still in the possession of the military forces, or 

whether they had been destroyed or sold. Subsequently, we found that 

DOD had sold many of these defective suits to the public as excess, 

including 379 that we purchased in an undercover operation.48 In addition, 

DOD may have issued over 4,700 of the defective BDO suits to local law 

enforcement agencies. This is particularly significant because local law 

enforcement agencies are most likely to be the first responders to a 

terrorist attack, yet DOD failed to inform these agencies that using these 

suits could result in death or serious injury. 

At the October 2002 hearing, the DLA official stated that JSLIST would be 

included in BSM at the earliest practicable date, which was estimated to be 

December 2003. BSM, however, is not designed to provide the corporate 

total asset visibility necessary to locate and track the suits throughout 

DOD’s supply chain. While the suits are expected to be included in a future 

deployment of BSM, at the time of our review program officials had not yet 

specified a date when they will be included. Even when the suits are 

included, BSM is designed to provide visibility over the suits only within 

the DLA environment—something DLA has stated already exists within its 

current system environment.

As we have previously reported,49 the lack of integrated systems hinders 

DOD’s ability to know how many JSLIST it has on hand and where they are 

located once they leave the DLA warehouse. For example, we found that 

military units that receive JSLIST from DLA warehouses maintained 

47 U.S. General Accounting Office, Chemical and Biological Defense: Improved Risk 

Assessment and Inventory Management Are Needed, GAO-01-667 (Washington, D.C.: Sept. 

28, 2001).

48 U.S. General Accounting Office, DOD Excess Property: Risk Assessment Needed on 

Public Sales of Equipment That Could Be Used to Make Biological Agents, GAO-04-81TNI

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

49 GAO-02-873T.
Page 27 GAO-04-907T 

inventory data in nonstandard, stovepiped systems that did not share data 

with DLA or other DOD systems. The methods used to control and 

maintain visibility over JSLIST at the units we visited ranged from standalone automated systems, to spreadsheet applications, to pen and paper. 

One military unit we visited did not have any inventory system for tracking 

JSLIST. BSM does not address asset visibility outside of DLA’s supply chain 

for the JSLIST, and thus cannot provide DOD with the capability to readily 

locate JSLIST for any reason, including any potential need for a recall of 

defective suits.

Similarly, the report released today50 also states that LMP will not provide 

the Army with total asset visibility until a suite of other systems has been 

developed and implemented. Specifically, Army officials have stated that 

LMP will require integration with other Army systems that are under 

development in order to achieve total asset visibility within the Army. 

These additional systems are the Product Lifecycle Management Plus 

(PLM+) and Global Combat Support System—Army (GCSS–A). According 

to the Army, PLM+ is to integrate LMP and GCSS–A to create end-to-end 

solution for Army logistics. However, time frames and cost estimates have 

not been developed for these two additional system initiatives. 

Further, to help provide for departmentwide total asset visibility, DLA is 

undertaking the implementation of the Integrated Data Environment (IDE) 

program. According to DLA, this initiative is intended to provide the 

capability for routing data from multiple systems within DLA and DOD into 

one system. According to DLA, IDE is expected to reach full operational 

capability in August 2007, with a current estimated cost of approximately 

$30 million. However, successfully meeting this completion date depends 

on other departmental efforts being completed on time, such as PLM+, for 

which a completion date had not been established.

Project Management and 

Oversight

While the success of BMMP and improved control and accountability of 

business system investments are critical aspects of the department’s 

transformation efforts, equally important is the ability of DOD to 

implement chosen systems solutions on time, within budget, and with the 

promised capability. The department has not demonstrated the ability to 

achieve these goals. The previously discussed DFAS system projects—

DPPS and DSDS—are a clear case in point. After several years of effort 

50 GAO-04-615.
Page 28 GAO-04-907T 

and an investment of $179 million, these two projects were terminated 

without any improvement in departmental operations. 

As discussed in the report51 released today, BSM and LMP have also 

experienced cost increases, schedule slippages, and did not deliver planned 

system capabilities in their first release. Our analysis indicated that many 

of the operational problems experienced by BSM and LMP can be 

attributed to DOD’s inability to effectively implement the disciplined 

processes necessary to reduce the risks associated with these projects to 

acceptable levels. Disciplined processes have been shown to reduce the 

risks associated with software development and acquisition efforts to 

acceptable levels and are fundamental to successful systems acquisition. 

Said another way, a disciplined software development and acquisition 

process can maximize the likelihood of achieving the intended results 

(performance) within established resources (costs) on schedule. 

Specifically, in the case of these two projects, they had significant 

deficiencies in defining requirements and testing—two areas that form the 

foundation for a project’s success or failure. In fact, DLA and Army 

program officials acknowledged that requirements and testing defects were 

factors contributing to the operational problems and stated that they are 

working to develop more effective processes. To their credit, DLA and the 

Army have decided that future deployments of BSM and LMP will not go 

forward until they have reasonable assurance that the deployed systems 

will operate as expected for a given deployment. Lacking disciplined 

processes exposes projects to the unnecessary risk that costly rework will 

be required, which in turn will continue to adversely affect a projects’ cost, 

schedule, and performance goals. Our analysis of selected BSM and LMP 

key requirements52 and testing processes found that (1) the functionality to 

be delivered was not adequately described or stated to allow for 

quantitative evaluation; (2) the traceability among the various process 

documents (e.g., operational requirements documents, functional or 

process scenarios, and test cases) was not maintained; and (3) system 

testing was ineffective. Historically, projects that experience the types of 

51 GAO-04-615. 

52 BSM and LMP have identified and documented 202 and 293 system requirements, 

respectively. For BSM, we reviewed 13 requirements related to finance, order fulfillment, 

planning, and procurement. For LMP, we reviewed 12 requirements related to planning and 

budget development, asset management, inventory management, and maintenance analysis 

and planning.
Page 29 GAO-04-907T 

requirements and testing process weaknesses found in BSM and LMP have 

a high probability of not meeting schedule, cost, and performance 

objectives.

The problems we identified in the areas of requirements management and 

testing contributed to BSM and LMP experiencing difficulties when they 

became operational.

• Army and DFAS officials reported that LMP’s operational difficulties at 

Communications and Electronics Command and Tobyhanna Army 

Depot have resulted in inaccurate financial management information. 

More specifically, the depot is not (1) producing accurate workload 

planning information; (2) generating accurate customer bills; and (3) 

capturing all repair costs, which is impeding the Army’s ability to 

calculate accurate future repair prices. These problems can also hinder 

the Army’s ability to accurately report the results of its depot operations 

and limit customers’ ability to develop accurate budget estimates.

• BSM experienced significant data conversion problems associated with 

purchase requisitions and purchase orders that were created in the 

Standard Automated Materiel Management System (SAMMS). Moving 

the data from SAMMS to BSM proved difficult because BSM required 

more detailed information, which was not identified during the 

requirements phase. This additional information needed to be manually 

entered into BSM, resulting in numerous errors that caused vendors not 

to be recognized and shipments from the depot to be rejected. As a 

result of these problems, additional tables, such as vendor master files, 

were created within BSM to process orders for the converted purchase 

requisitions and purchase orders. 

One of the long-standing problems within DOD has been the lack of 

integrated systems. This is evident in the many duplicative, stovepiped 

systems among the 2,274 that DOD reported as its systems environment. 

Lacking integrated systems, DOD will have a difficult time obtaining 

accurate and reliable information on the results of its business operations 

and will continue to rely on either manual reentry of data into multiple 

systems, convoluted system interfaces, or both. These system interfaces 

provide data that are critical to day-to-day operations, such as obligations, 

disbursements, purchase orders, requisitions, and other procurement 

activities. For BSM and LMP, we found that the system interfaces were not 

fully tested in an end-to-end manner, and therefore DLA and Army did not 
Page 30 GAO-04-907T 

have reasonable assurance that BSM and LMP would be capable of 

providing the intended functionality. 

We previously reported53 that Sears and Wal-Mart, recognized as leadingedge inventory management companies, had automated systems that 

electronically received and exchanged standard data throughout the entire 

inventory management process, thereby reducing the need for manual data 

entry. As a result, information moves through the data systems with 

automated ordering of inventory from suppliers; receiving and shipping at 

distribution centers; and receiving, selling, and reordering at retail stores. 

Unlike DOD, which has a proliferation of nonintegrated systems using 

nonstandard data, Sears and Wal-Mart do not allow individual systems 

development and require all components and subsidiaries to operate within 

a standard systems framework that results in an integrated system.

For the first deployment of BSM, DLA has had to develop interfaces that 

permit BSM to communicate with more than 23 systems, including 3 DFAS, 

6 DOD-wide, and 14 DLA systems. The Army has had to develop 215 

interfaces that permit LMP to communicate with more than 70 systems, 

including 13 DFAS, 6 DLA, 2 Navy, 5 Air Force, and over 24 Army systems. 

When BSM and LMP became operational, it became evident that the system 

interfaces were not working as intended. Such problems have led BSM, 

LMP, and organizations with which they interface—such as DFAS—to 

perform costly manual reentry of transactions, which can cause additional 

data integrity problems. While these numerous interfaces are necessary 

because of the existing stovepiped, nonintegrated systems environment, 

they should have been fully developed and tested prior to BSM and LMP 

being deployed. In moving forward with the future deployments of BSM 

and LMP, it is critical that program officials ensure that the numerous 

system interfaces are operating as intended. 

In commenting on the report54 released today, the department 

acknowledged that the initial implementation of BSM and LMP 

experienced problems that could be attributed to the lack of adequate 

requirements determination and system testing. To address these 

inadequacies, the department noted that requirements analysis had been 

expanded to include greater specificity and that the successful completion 

53 GAO-02-873T. 

54 GAO-04-615.
Page 31 GAO-04-907T 

of comprehensive testing would be required prior to further 

implementation of either system. 

Suggestions for Legislative 

Consideration

We would like to offer two suggestions for legislative consideration that we 

believe could contribute significantly to the department’s ability to not only 

address the impediments to DOD’s success but also to incorporate needed 

key elements to successful reform. These suggestions would include the 

(1) creation of a chief management official and (2) centralization of the 

funding business systems investments with the domain leaders responsible 

for the department’s various business areas, such as logistics and human 

resource management. We provided similar views in our testimonies on

March 23, 2004,55 before the Subcommittee on Readiness and Management 

Support, Senate Committee on Armed Services, and on March 31, 2004,56

before the Subcommittee on Terrorism, Unconventional Threats, and 

Capabilities, House Committee on Armed Services.

Chief Management Official I will now discuss our first matter for consideration. Previous failed 

attempts to improve DOD’s business operations illustrate the need for 

sustained involvement of DOD leadership in helping to assure that DOD’s 

financial and overall business process transformation efforts remain a 

priority. While the Secretary and other key DOD leaders have 

demonstrated their commitment to the current business transformation 

efforts, the long-term nature of these efforts requires the development of an 

executive position capable of providing strong and sustained executive 

leadership over a number of years and various administrations. 

55 GAO-04-551T.

56 GAO-04-626T.
Page 32 GAO-04-907T 

However, the tenure of the department’s top political appointees has 

generally been short in duration and as a result, it is sometimes difficult to 

maintain the focus and momentum that are needed to resolve the 

management challenges facing DOD. For example, the former DOD 

Comptroller, who was very supportive of the current transformation effort, 

and one of its principal leaders, served as the DOD Comptroller for slightly 

over 3 years. Further, the current Principal Deputy and the Deputy Under 

Secretary of Defense for Management Reform, within the office of the DOD 

Comptroller, will soon be leaving the department. He also was in that 

position for slightly over 3 years. Additionally, leadership voids have 

existed in other key positions such as the program manager for BMMP. 

From May 2003 to February 2004, there was no program manager to 

identify, direct, and execute program activities.57 The resolution of the 

array of interrelated business system management challenges that DOD 

faces is likely to span several administrations and require sustained 

leadership to maintain the continuity needed for success. One way to 

ensure sustained leadership over DOD’s business transformation efforts 

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

management official58 who would serve as the Principal Under Secretary of 

Defense for Management. This position would provide the sustained 

attention essential for addressing key stewardship responsibilities such as 

strategic planning, performance and financial management, and business 

systems modernization in an integrated manner. This position could be 

filled by an individual, appointed by the President and confirmed by the 

Senate, for a set term of 7 years with the potential for reappointment. Such 

an individual should have a proven track record as a business process 

change agent in large, complex, and diverse organizations—experience 

necessary to spearhead business process transformation across the 

department, and potentially administrations, 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. 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.

57 GAO-04-731R.

58 GAO-03-192SP.
Page 33 GAO-04-907T 

Functional Domain Control and 

Accountability Over Business 

System Investments

We have made numerous recommendations to DOD intended to improve 

the management oversight and control of its business systems investments. 

However, progress in achieving this control has been slow and, as a result, 

DOD has little or no assurance that current business systems investments 

are being spent in an economically efficient and effective manner. DOD’s 

current systems funding process has contributed to the evolution of an 

overly complex and error-prone information technology environment 

containing duplicative, nonintegrated, and stovepiped systems. Given that 

DOD spends billions of dollars annually on business systems and related 

infrastructure, it is critical that actions be taken to gain more effective 

control over such business systems funding. 

The second suggestion we have for legislative action to address this issue, 

as contained is the report59 released at today’s hearing and consistent with 

our open recommendations to DOD, is to establish specific management 

oversight, accountability, and control of funding with the “owners” of the 

various functional areas or domains. This legislation would define the 

scope of the various business areas (e.g., accounting, acquisition, logistics, 

and personnel) and establish functional responsibility for management of 

the portfolio of business systems in that area with the relevant Under 

Secretary of Defense for the six departmental domains and the CIO for the 

Enterprise Information Environment Mission (information technology 

infrastructure). For example, planning, development, acquisition, and 

oversight of DOD’s portfolio of logistics business systems would be vested 

in the Under Secretary of Defense for Acquisition, Technology and 

Logistics. 

We believe it is critical that funds for DOD business systems be 

appropriated to the domain owners in order to provide for accountability 

and the ability to prevent the continued parochial approach to systems 

investment that exists today. The domains would establish a hierarchy of 

investment review boards with DOD-wide representation, including the 

military services and defense agencies. These boards would be responsible 

for reviewing and approving investments to develop, operate, maintain, and 

modernize business systems for the domain portfolio, including ensuring 

that investments were consistent with DOD’s BEA. All domain owners 

would be responsible for coordinating their business systems investments 

with the chief management official who would chair the proposed Defense 

Business Systems Modernization Executive Committee and provide a 

59 GAO-04-615.
Page 34 GAO-04-907T 

cross-domain perspective. Domain leaders would also be required to 

report to Congress through the chief management official and the Secretary 

of Defense on applicable business systems that are not compliant with 

review requirements and to include a summary justification for 

noncompliance.

In commenting on our report, DOD stated that it did not agree with this 

funding concept. The department stated that the portfolio management 

process being established—to include investment review boards—would 

provide the appropriate control and accountability over business system 

investments. DOD also stated that beginning with the fiscal year 2006 

budget review process, the domains will be actively involved in business 

system investment decisions. DOD stated that the military services 

implement their own statutory authorities for acquisition and IT systems 

development in consultation with DOD. While the establishment of the 

investment review boards is consistent with our previous 

recommendations, we continue to believe that appropriating funds for 

DOD business systems to the domains, rather than the various DOD 

entities, will significantly improve accountability over business system 

investments. DOD’s comments indicate that the domains will be more 

accountable for making business system investment decisions, but unless 

they control the funding, they will not have the means to effect real change. 

Continuing to provide business system funding to the military services and 

defense agencies is an example of the department’s embedded culture and 

parochial operations. As a result of DOD’s intent to maintain the status 

quo, there can be little confidence that it will not continue to spend billions 

of dollars on duplicative, nonintegrated, stovepiped, and overly costly 

systems that do not optimize mission performance and accountability and, 

therefore, do not support the department’s transformation goals.

Conclusion The excellence of our military forces is unparalleled. However, that 

excellence is often achieved in the face of enormous challenges in DOD’s 

financial management and other business areas, which have serious and 

far-reaching implications related to the department’s operations and critical 

national defense mission. Our recent work has shown that DOD’s longstanding financial management and business problems have resulted in 

fundamental operational problems, such as failure to properly pay 

mobilized Army Guard soldiers and the inability to provide adequate 

accountability and control over supplies and equipment shipments in 

support of Operation Iraqi Freedom. Further, the lack of appropriate 

accountability across all business areas has resulted in fraud, waste, and 
Page 35 GAO-04-907T 

abuse and hinders DOD’s attempts to develop world-class operations and 

activities to support its forces. Additionally, DOD cannot provide Congress 

reasonable assurance that the billions of dollars spent annually on business 

systems modernizations are not being wasted on projects that will 

perpetuate the current costly, nonintegrated, duplicative systems 

environment. If DOD is unable to address the underlying causes that have 

resulted in the failure of previous broad-based reform efforts, 

improvements will remain marginal, confined to narrowly defined 

incremental improvements. 

As our nation continues to be challenged with growing budget deficits and 

increasing pressure to reduce spending levels, every dollar that DOD can 

save through improved economy and efficiency of its operations is 

important. DOD’s senior leaders have demonstrated a commitment to 

transforming the department and improving its business operations and 

have taken positive steps to begin this effort. We believe that 

implementation of our open recommendations and our suggested 

legislative initiatives would greatly improve the likelihood of meaningful, 

broad-based reform at DOD. 

The continued involvement and monitoring by congressional committees 

will also be critical to ensure that DOD’s transformation actions are 

sustained and extended and that the department achieves its goal of 

securing the best performance and highest measure of accountability for 

the American people. We commend the Subcommittees for holding this 

hearing and we encourage you to use this vehicle, on at least an annual 

basis, as a catalyst for long overdue business transformation at DOD. 

Mr. Chairman, this concludes our statement. We 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) 512-9505 or kutzg@gao.gov, or Keith A. Rhodes at (202) 512-

6412 or rhodesk@gao.gov. The following individuals contributed to the 

various reports and testimonies that were the basis for the testimony: 

Beatrice Alff, Molly Boyle, Art Brouk, Cherry Clipper, Mary Ellen 

Chervenic, Francine Delvecchio, Stephen Donahue, Francis Dymond, Eric 

Essig, Gayle Fischer, Geoff Frank, John Kelly, Randolph Hite, Cynthia 

Jackson, Neelaxi Lakhmani, Evelyn Logue, John Martin, Elizabeth Mead, 

Mai Nguyen, Michael Peacock, David Plocher, Gregory Pugnetti, 
Page 36 GAO-04-907T 

Cary Russell, John Ryan, Katherine Schirano, Darby Smith, Carolyn Voltz, 

Marilyn Wasleski, and Jenniffer Wilson.
Page 37 GAO-04-907T 

GAO Related Products

U.S. General Accounting Office, DOD Business Systems Modernization: 

Important Progress Made to Develop Business Enterprise Architecture, 

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

U.S. General Accounting Office, Business Systems Modernization: 

Summary of GAO’s Assessment of the Department of Defense’s Initial 

Business Enterprise Architecture, GAO-03-877R (Washington, D.C.: July 7, 

2003).

U.S. General Accounting Office, DOD Business Systems Modernization: 

Longstanding Management and Oversight Weaknesses Continue to Put 

Investments at Risk, GAO-03-553T (Washington, D.C.: Mar. 31, 2003).

U.S. General Accounting Office, DOD Business Systems Modernization: 

Continued Investment in Key Accounting Systems Needs to be Justified,

GAO-03-465 (Washington, D.C.: March 28, 2003).

U.S. General Accounting Office, DOD Business Systems Modernization: 

Improvements to Enterprise Architecture Development and 

Implementation Efforts Needed, GAO-03-458 (Washington, D.C.: Feb. 28, 

2003).

U.S. General Accounting Office, DOD Financial Management: Integrated 

Approach, Accountability, Transparency, and Incentives Are Keys to 

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

U.S. General Accounting Office, Information Technology: Architecture 

Needed to Guide Modernization of DOD’s Financial Operations, GAO-01-

525 (Washington, D.C.: May 17, 2001).

(192136) 
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