United States General Accounting Office

GAO Report to the Chairman, Subcommittee

on Military Readiness, Committee on

National Security, House of

Representatives

September 1998 DOD INFORMATION

SERVICES

Improved Pricing and

Financial Management

Practices Needed for

Business Area

GAO/AIMD-98-182

GAO United States

General Accounting Office

Washington, D.C. 20548

Accounting and Information

Management Division

B-278062 

September 15, 1998

The Honorable Herbert H. Bateman

Chairman, Subcommittee on Military Readiness

Committee on National Security

House of Representatives

Dear Mr. Chairman:

This report, one in a series1

 you requested on the financial operations of the Department of

Defense’s (DOD) working capital funds (WCF), addresses the Defense Information Services

business area. The business area provides a wide range of information technology products and

services to DOD and other federal agencies, including telecommunications services, mainframe

data processing, and database management. It operates under the working capital concept, in

which customers are to be charged the full costs of services provided, and is managed by the

Defense Information Systems Agency (DISA). For fiscal year 1998, DOD estimated that the

business area will have reported revenue of about $2.7 billion.

As you requested, this report discusses (1) DISA’s price-setting process, (2) DISA’s reimbursement

for services provided, and (3) the accuracy of DISA’s financial management information.

We are sending copies of this report to the Ranking Minority Member of your Subcommittee;

the Chairmen and Ranking Minority Members of the Senate Committee on Armed Services; the

House Committee on National Security; the Senate Committee on Appropriations,

Subcommittee on Defense; the House Committee on Appropriations, Subcommittee on National

Security; the Senate and House Committees on the Budget; the Senate Committee on

Governmental Affairs and House Committee on Government Reform and Oversight; the

Secretary of Defense; the Director of the Defense Information Systems Agency; and the Director

of the Defense Finance and Accounting Service. Copies will also be made available to others

upon request.

1

Navy Ordnance: Analysis of Business Area Price Increases and Financial Losses (GAO/AIMD/NSIAD-97-74, March 14, 1997); Navy

Ordnance: Analysis of Business Area Efforts to Streamline Operations and Reduce Costs (GAO/AIMD/NSIAD-98-24, October 15,

1997); and Air Force Supply Management: Analysis of Activity Group’s Financial Reports, Prices, and Cash Management

(GAO/AIMD/NSIAD-98-118, June 8, 1998).
B-278062 

Please contact me at (202) 512-6240 if you or your staff have any questions concerning this

report. Major contributors to this report are listed in appendix III.

Sincerely yours,

Jack L. Brock, Jr.

Director, Governmentwide and Defense

 Information Systems

Page 2 GAO/AIMD-98-182 DISA Pricing of Services
B-278062 

Page 3 GAO/AIMD-98-182 DISA Pricing of Services
Executive Summary

Purpose Over the past several years, GAO reports and testimonies have identified

management problems with the Defense Working Capital Funds (WCF) and

have been used by the Congress in exercising its oversight responsibility.

In view of the Defense Information Services business area’s importance to

Department of Defense (DOD) operations, the Chairman, Subcommittee on

Military Readiness, House Committee on National Security requested that

GAO (1) evaluate the Defense Information Systems Agency (DISA)

price-setting process, (2) ascertain if DISA is being reimbursed for the

services provided, and (3) ascertain the accuracy of DISA’s financial

management information.

Background The Defense Information Services business area consists of two

components—the Defense megacenters (DMC) and the Communications

Information Services Activity (CISA). The business area provides DOD and

other organizations a wide range of information services, such as data

processing, telecommunications services, and database management,

which are comparable to services found in the commercial sector. Data

processing-related services are provided by the 16 DMCs, which are located

throughout the United States. Telecommunications services are provided

through CISA by numerous offices located worldwide. For fiscal year 1998,

DOD estimates that these two components will have a combined reported

revenue of about $2.7 billion. As part of DOD’s ongoing efforts to reduce

infrastructure cost, DISA has efforts underway to reduce the number of

megacenters. Over the next 2 years, DISA plans to complete the

consolidation of its mainframe processing centers into six locations. DOD

estimates that the planned consolidation will result in savings over a

10-year period (fiscal years 1998 through 2007) of approximately

$1.5 billion.

For financing purposes, the business area is part of the WCF, a revolving

fund that relies on sales revenue to finance operations, much as sales

revenues are used in commercial enterprises. Defense working capital

funds are supposed to recover the full costs of services performed and

supplies acquired or used through the prices charged to their customers.

The business area generates revenue by billing customers at

predetermined prices as it performs agreed-upon work for those

customers. The business area prices are based on the estimated costs of

providing services at a projected level of work. In setting prices, it is

extremely important that the business area accurately estimate the work it

will perform and the cost of performing the work. However, this task is

Page 4 GAO/AIMD-98-182 DISA Pricing of Services
Executive Summary

difficult because the process that business areas use to develop prices is

tied to the budget process, which begins up to 2 years before the prices go

into effect.

Customers primarily use operations and maintenance appropriations to

pay for the requested services. Payments are then used to finance

subsequent operations. The business area is expected to operate within

the revenue it generates. Conceptually, this provides an incentive to

control costs and maximize efficiency. It is critical that the working capital

funds operate efficiently since every dollar spent inefficiently results in

fewer resources available for other defense spending priorities, such as

military readiness.

Results in Brief DISA has difficulty (1) setting prices for information technology services

that result in the recovery of the full cost of doing business, (2) getting

reimbursed for the services it provides and (3) producing reliable financial

information on the Defense Information Services business area. These

weaknesses impair the business area’s ability to focus management

attention on the full costs of carrying out operations and managing those

costs effectively.

DISA is embarking upon a major effort to consolidate its DMCs and increase

their efficiency by allowing them to specialize in mainframe processing

and thereby lower their prices. By consolidating the mainframe processing

from the current 16 DMC sites to 6 and optimizing mainframe operations,

DISA anticipates that planned savings will be passed on to its customers

through reduced prices. The initiative is in concert with DOD’s overall

efforts to reduce its infrastructure.

However, the reported cost of doing business varies considerably from

computer center to computer center. For example, the reported hourly

cost at the Columbus DMC is about 61 percent higher than that of the St.

Louis DMC. An analysis of the cost differences would provide management

the opportunity to understand the causes of the differences and thereby

help identify inefficiencies and make improvements in the services

provided.

In addition, the DMCs have difficultly accurately estimating future

workload. In fiscal year 1997, DOD’s records showed that the estimated

versus actual workload varied from 15 percent to 174 percent for

individual centers. Because the DMCs underestimated the amount of work

Page 5 GAO/AIMD-98-182 DISA Pricing of Services
Executive Summary

they would perform in fiscal year 1997 for IBM and UNISYS mainframe

services, they reported a net profit of $90 million—which is 13 percent of

the reported fiscal year 1997 revenue of approximately $682 million.

Accurate workload projections are essential to the business area in

developing prices that enable it to recover operating costs from its

customers.

In setting prices for telecommunications services, CISA did not incorporate

about $137 million of costs related to (1) transitioning independent

networks to DISA’s new common-user network, (2) prior-year losses, and

(3) overhead expenses. Because these costs were not included, the prices

charged for services were not based on the full costs incurred. Further, at

least $231 million of DISA’s appropriations supported business area

activities even though DOD working capital fund business areas are

supposed to recover the full cost of operations through the prices charged

customers. Since the Defense Information Systems business area costs

were offset by appropriations, its prices were further understated.

Further, DISA has not been promptly reimbursed for its services. As of

January 1998, DISA reports showed that 31 percent of the business area’s

receivables, or about $173 million, had been outstanding for more than 60

days. The timely collection of amounts owed is important to the financial

stability of the business area. Finally, weaknesses within DISA’s internal

control and accounting systems have hindered the development of

accurate financial reports. Meaningful and reliable financial reports are

essential to allow DISA to monitor the financial results of operations and

set realistic prices to charge customers. These weaknesses affect the

reliability of reported costs and revenue information for the business area.

Principal Findings

DMC Costs and Workload

Warrant Continued Review

One of the basic goals of DOD working capital funds is to break even over

time. To do so, funds should (1) set prices that accurately reflect a specific

activity’s cost of doing business and (2) accurately estimate future

workload. If prices represent an individual activity’s cost of doing

business, the business area can identify areas contributing to inefficient

operations and use these data to enhance performance. If prices are based

on accurate workload estimates, they can help the business area ensure

that it does not incur excessive profits or losses.

Page 6 GAO/AIMD-98-182 DISA Pricing of Services
Executive Summary

DISA anticipates that its major initiative to consolidate its DMCs will enable

it to be more efficient and lower its prices. In planning for the DMC

consolidation, DISA identified the overall cost of operations for the DMCs.

The cost data were one factor used to decide which DMCs would continue

to provide IBM and UNISYS mainframe services to DISA’s customers.

However, the reported cost of doing business varied considerably from

DMC to DMC. For example, during fiscal year 1998, the Denver DMC reported

a cost of about $68 an hour to provide UNISYS mainframe computer

processing services, while the reported cost at the San Antonio DMC was

about $11 an hour to provide the same service. DISA stated that it had not

undertaken a study of the cost difference between DMCs providing the

same or similar services. Taking the time now to analyze these differences

would give DISA management the opportunity to make fundamental

improvements in how the DMCs conduct business as DISA proceeds with the

DMC consolidation.

GAO also found that the DMCs have not been able to develop accurate

estimates of their workload. In fiscal year 1997, DISA’s workload execution

reports for the 15 DMCs providing IBM mainframe services showed that 7

overestimated their workload while 8 underestimated their workload. At 1

DMC, the reported usage was about 74 percent more than the projected

usage. In addition, the reported level of services at 5 of the 8 DMCs

providing UNISYS mainframe services were only 57 percent to 70 percent

of their projected amounts used to develop prices. Reasonably accurate

workload estimates are key to developing realistic prices.

Telecommunications

Prices Do Not Reflect the

Full Cost of Operations

GAO found that DISA did not include in its prices approximately $77 million

related to transitioning independent networks to the Defense Information

Systems Network (DISN). Although DISA offset DISN transition costs with

anticipated collections or gains from a vendor, its approach was not

consistent with DOD’s Financial Management Regulation. Realized gains

are generally to be reflected in offsetting adjustments to prices established

in subsequent fiscal years rather than offsetting anticipated gains against

current year prices. DISA also excluded approximately $60 million in costs

related to a prior-year loss and overhead from its fiscal year 1998

telecommunications prices.

DOD policy requires that the price charged the customer should include all

direct and indirect costs of doing business. Excluding applicable costs

from the prices could result in the business area failing to break even,

resulting in higher prices in future years. Additionally, working capital

Page 7 GAO/AIMD-98-182 DISA Pricing of Services
Executive Summary

funds are supposed to recover their cost of operation through billings to

customers and, therefore, generally do not receive appropriated funds to

finance day-to-day operations. However, at least $231 million of fiscal year

1998 appropriated funds are being used to support WCF operations, which

does not conform with the DOD WCF concept.

Reimbursement for

Services Provided Has

Been Slow and Incomplete

As of January 1998, a reported 31 percent of the business area’s accounts

receivable, or about $173 million, had been outstanding more than 60 days.

Since reimbursement for work performed is the principal means through

which the WCF receives funding, delays in reimbursement could impact the

WCF’s financial stability. The lack of timely reimbursement is further

compounded by DISA’s failure to bill customers for $115 million in services

provided in fiscal years 1996 and 1997. Part of the problem can be

attributed to DISA being directed to bill customers only up to the budgeted

amount. For example, in fiscal year 1996, DISA billed approximately

$101.6 million for services provided to the Defense Logistics Agency (DLA),

but the Office of the Secretary of Defense directed that DLA reimburse DISA

only $76 million—the amount DLA had budgeted. As a result, DISA was not

reimbursed for $25.6 million in incurred cost.

Effective Management

Requires Accurate

Financial Data

DISA, DOD, and the Congress have not received accurate information on the

financial operations of the Defense Information Services business area.

This problem is not unique to the Defense Information Services business

area but rather symptomatic of the long-standing problems DOD has

encountered in preparing accurate financial reports on the working capital

funds. GAO has reported on numerous occasions that the financial reports

on those funds were inaccurate and could not be used by management to

effectively monitor the operations. DOD has acknowledged that problems

exist and has cited actions that were being taken to resolve them.

However, GAO found that these actions were not always effective and, as a

result, the reporting problems continued to exist. Further, DFAS’ fiscal year

1997 Chief Financial Officers Act status report identified weaknesses with

the Industrial Fund Accounting System—which is used by the DMCs. The

report notes that the system cannot provide financial data that are

complete, reliable, consistent, timely, and responsive to the needs of

agency management. In addition, the Department of Defense Inspector

General (DOD IG) was unable to express an opinion on DISA’s fiscal year

1997 financial statements.

Page 8 GAO/AIMD-98-182 DISA Pricing of Services
Executive Summary

Recommendations GAO is recommending that the Director of the Defense Information

Systems Agency and the Under Secretary of Defense (Comptroller)

improve the operations, price-setting, and financial management practices

of the Defense Information Services business area by (1) setting prices

that include all costs incurred by the DMCs and CISA, (2) promptly collecting

amounts owed, and (3) recording amounts owed in accordance with

applicable accounting standards.

Agency Comments

and Our Evaluation

The Office of the Secretary of Defense provided written comments on a

draft of this report. DOD acknowledged that DISA was experiencing

difficulty in being reimbursed for all services provided. DOD also agreed

that the amounts owed to DISA were not always recorded in accordance

with applicable accounting standards. Accordingly, DOD agreed with the

recommendations made to the Under Secretary of Defense (Comptroller)

related to collecting and improving the quality of accounting data for

amounts owed.

However, DOD disagreed with the findings, conclusions, and

recommendations made to the Director of DISA that are aimed at improving

the price setting practices of the business area. DOD stated that GAO’s

report misstates, misinterprets, and misrepresents much of what DISA has

done to control the cost of operations and manage funds. DOD further

stated that the report does not adequately acknowledge past and current

actions DISA has taken to address the conditions reported by GAO. GAO

disagrees. The report was based on analyses of DISA costs, workload data,

pricing documentation, and accounting and budgetary information. These

data were provided by and discussed with responsible DISA management

officials and other DOD offices throughout GAO’s audit. For example, GAO’s

analyses of the information related to the (1) $11 million in overhead,

(2) $49 million loss, and (3) $77 million in DISN transition costs were

corroborated by DISA and Defense officials as not being included in

telecommunication prices. Further, the report identifies the progress DISA

has made in consolidating 194 processing centers into the current 16

centers. The report also discusses DISA’s efforts to further consolidate its

DMCs and develop more accurate workload estimates.

DOD also disagreed with GAO’s recommendation to provide the Congress

more detailed information on the use of appropriated funds supporting

WCF activities. This information will enable the Congress to decide whether

to continue funding DISA services, where applicable, through both

appropriations and the WCF. In this regard, House Report 105-532, dated

Page 9 GAO/AIMD-98-182 DISA Pricing of Services
Executive Summary

May 12, 1998, on the National Defense Authorization Act for Fiscal Year

1999, directs the Secretary of Defense, beginning with the fiscal year 2000

budget request, to more appropriately reflect and justify the DISA non-WCF

budget request. Satisfying the language in the House Report will meet the

intent of GAO’s recommendation.

DOD’s specific comments and GAO’s evaluation of the comments are

discussed in detail at the end of chapters 2 through 5.

Page 10 GAO/AIMD-98-182 DISA Pricing of Services
Page 11 GAO/AIMD-98-182 DISA Pricing of Services
Contents

Executive Summary 4

Chapter 1 

Introduction

16

Background 16

Objectives, Scope, and Methodology 19

Chapter 2 

DMCs’ Costs and

Workload Warrant

Continued Review

21

Differences in Reported Costs of Operations Between DMCs

Warrant Further Analysis

22

Accurate Workload Estimates Are a Key Element in Setting

Prices

24

Conclusions 27

Recommendations 28

Agency Comments and Our Evaluation 28

Chapter 3 

Telecommunications

Prices Do Not Reflect

the Full Cost of

Operations

31

Some Costs Not Included in Telecommunications Prices 31

Appropriated Funds Used to Pay for Some Costs 34

Conclusions 37

Recommendations 37

Agency Comments and Our Evaluation 38

Chapter 4 

DISA Not Reimbursed

for Services Provided

40

Accounts Receivable Not Collected in a Timely Manner 40

DMCs Classify Some Unpaid Amounts as Unbilled 42

Conclusions 44

Recommendations 44

Agency Comments and Our Evaluation 45

Chapter 5 

Effective Management

Requires Accurate

Financial Data

46

DOD IG Issues Disclaimer of Opinion on DISA Financial

Statements

46

Reliable Revenue and Cost Data Essential to Setting Accurate

Prices

48

DOD Efforts to Improve Accuracy of Financial Data 49

Conclusions 50

Agency Comments and Our Evaluation 50

Page 12 GAO/AIMD-98-182 DISA Pricing of Services
Contents

Appendixes Appendix I: Comments From the Department of Defense 52

Appendix II: Fiscal Year 1998 Appropriated Funds Supporting

Working Capital Fund Activities

63

Appendix III: Major Contributors to This Report 65

Tables Table 1.1: DMCs’ Reported Results of Operations for Fiscal Years

1995 Through 1997

17

Table 1.2: CISA’s Reported Results of Operations for Fiscal Years

1995 Through 1997

18

Table 2.1: Reported Fiscal Year 1998 Cost Per CPU Hour for IBM

and UNISYS at Individual DMCs

23

Table 2.2: Projected and Reported Usage of IBM CPU Hours by

DMC for Fiscal Year 1997

25

Table 2.3: Projected and Reported Usage of UNISYS Standard

Units of Processing by DMC for Fiscal Year 1997

26

Table 4.1: Reported Accounts Receivable More Than 60 Days Old

as of January 1998

41

Page 13 GAO/AIMD-98-182 DISA Pricing of Services
Contents

Abbreviations

ATM Asychronous Transfer Mode

AUTODIN Automatic Digital Network

CISA Communications Information Services Activity

CPU central processing unit

DBOF Defense Business Operations Fund

DCTF DISA Continuity of Operations and Test Facility

DFAS Defense Finance and Accounting Service

DII Defense Information Infrastructure

DISA Defense Information Systems Agency

DISN Defense Information System Network

DLA Defense Logistics Agency

DMC Defense megacenter

DMS Defense Message System

DOD Department of Defense

DOD IG Department of Defense Inspector General

DPAS Defense Property Accountability System

DSCS Defense Satellite Communications System

FAA Federal Aviation Administration

FASAB Federal Accounting Standards Advisory Board

FMFIA Federal Managers’ Financial Integrity Act

GAO General Accounting Office

JIEO Joint Interoperability Engineering Organization

IFAS Industrial Fund Accounting System

IT information technology

MICS MVS Information Control System

O&M Operations and Maintenance

SUPS standard units of processing

WCF working capital fund

Page 14 GAO/AIMD-98-182 DISA Pricing of Services
Page 15 GAO/AIMD-98-182 DISA Pricing of Services
Chapter 1 

Introduction

The Defense Information Systems Agency (DISA) is responsible for

managing the Defense Information Services business area. This business

area provides a wide range of services relating to computer center

operations and voice, data, and video telecommunications. For fiscal year

1998, DISA estimated that the business area will have revenues of about

$2.7 billion. Business area operations are financed as part of the

Defense-wide Working Capital Fund, which was formerly called the

Defense Business Operations Fund (DBOF). In December 1996, the Under

Secretary of Defense (Comptroller) dissolved DBOF and created four

working capital funds1

 (WCF) to clearly establish the military services’ and

DOD components’ responsibilities for managing the functional and financial

aspects of their respective business areas. As currently specified in the

Department of Defense’s (DOD) Financial Management Regulation, Volume

11B, Reimbursable Operations, Policy and Procedures-Defense Business

Operations Fund, the funds are to charge customers the full costs of

providing goods and services.

The primary goal of the working capital fund is to focus management’s

attention on the full costs of carrying out certain critical DOD business

operations and the management of those costs. Unlike a private sector

enterprise, which has a profit motive, the working capital funds are to

operate on a break-even basis over time by recovering the full costs

incurred in conducting business operations. Accomplishing this requires

DOD managers to become more conscious of operating costs and to make

fundamental improvements in how DOD conducts business. It is critical for

the working capital funds to operate efficiently since every dollar spent

inefficiently results in fewer resources available for other defense

spending priorities.

Background The Defense Information Services business area consists of two

components—the Defense megacenters (DMC) and the Communications

Information Services Activity (CISA). The DMCs’ primary mission is to

provide computer processing services to DOD and other federal

government agencies. The primary mission of CISA is to provide

telecommunications services to DOD and non-Defense customers. These

two entities differ markedly in mission, as highlighted in the following

sections.

1

The four are the Army, Navy, Air Force, and Defense-wide Working Capital Funds.

Page 16 GAO/AIMD-98-182 DISA Pricing of Services
Chapter 1 

Introduction

Defense Megacenters Mainframe processing comprises the core of the DMC services. DISA refers

to them collectively as A-Goal services, and they include data processing

on IBM and UNISYS mainframe computers, data transfers between

computers, and data storage. DMCs provide a variety of other services to

their customers, referred to collectively as C-Goal services, which include

mainframe processing on computers made by other manufacturers (such

as Burroughs), telecommunications, and database management.

Table 1.1 summarizes the DMCs’ reported revenues, cost of operations, and

the net operating results for fiscal years 1995 through 1997.

Table 1.1: DMCs’ Reported Results of

Operations for Fiscal Years 1995

Through 1997 Fiscal year

Dollars in thousands

1995 1996 1997 Total

Revenues $681,212 $693,596 $681,914 $2,056,722

Cost of operationsa 713,221 646,204 645,439 $2,004,864

Net operating resultsb ($32,009) $47,392 $36,475 $51,858

aThe cost of operations represents the cost incurred by the DMCs in providing services to their

customers.

bThe net operating results represent the difference between the revenue and the cost of

operations for that particular fiscal year.

Source: DISA’s financial statements for fiscal years 1995 through 1997. GAO did not

independently verify the information. The DOD IG was unable to render an opinion on DISA’s

financial statements for fiscal year 1997 when performing the audit required by the Chief Financial

Officers Act.

Currently, there are 16 megacenters located throughout the Unites States.2

DISA has designated DISA Western Hemisphere as the responsible entity for

managing the DMCs. As part of DOD’s ongoing efforts to reduce

infrastructure cost, DISA has efforts underway to further reduce the

number of megacenters. Over the next 2 years DISA plans to complete the

consolidation of its mainframe processing centers from 16 to 63

 and at the

2

The 16 Defense megacenters are located in Chambersburg, Pennsylvania; Columbus, Ohio; Dayton,

Ohio; Denver, Colorado; Huntsville, Alabama; Jacksonville, Florida; Mechanicsburg, Pennsylvania;

Montgomery, Alabama; Ogden, Utah; Oklahoma City, Oklahoma; Rock Island, Illinois; Sacramento,

California; San Antonio, Texas; San Diego, California; St. Louis, Missouri; and Warner Robins, Georgia.

The Sacramento DMC is scheduled to close as a result of the Base Realignment and Closure

Commission of 1995.

3

The six remaining centers will be located in Columbus, Ohio; Mechanicsburg, Pennsylvania; Ogden,

Utah; Oklahoma City, Oklahoma; San Antonio, Texas; and St. Louis, Missouri.

Page 17 GAO/AIMD-98-182 DISA Pricing of Services
Chapter 1 

Introduction

same time introduce Regional Information Services.4 This is a continuation

of DOD efforts to consolidate its computer center operations. Between

fiscal years 1990 and 1996, DOD consolidated workload and equipment

from 194 computer centers to 16 DISA DMCs.

While the remaining DMCs will provide mainframe processing services, the

Regional Information Services will concentrate on nonmainframe services,

such as local area network support and personal computer operations and

maintenance. According to DISA’s Defense Megacenter Business Strategy,

dated October 1997, DOD estimates that the planned consolidation will

result in savings over a 10-year period (fiscal years 1998 through 2007) of

approximately $1.5 billion. Of the $1.5 billion, approximately $1 billion will

accrue after fiscal year 2002.

Communication

Information Service

Activity

CISA is responsible for acquiring services that connect base-level and

deployed telecommunications networks within and between the

continental United States, Europe, Pacific, and the Caribbean. These

services are provided within the United States primarily through leased

telecommunications lines and overseas by a mixture of

government-owned and leased lines. Table 1.2 provides information on

CISA’s reported revenues, cost of operations, and net operating results for

fiscal years 1995 through 1997.

Table 1.2: CISA’s Reported Results of

Operations for Fiscal Years 1995

Through 1997 Fiscal year

Dollars in thousands

1995 1996 1997 Total

Revenues $1,805,093 $2,102,346 $1,996,114 $5,903,553

Cost of operations 1,820,181 2,150,534 2,014,644 $5,985,359

Net operating results ($15,088) ($48,188) ($18,530) ($81,806)

Source: DISA’s financial statements for fiscal years 1995 through 1997. GAO did not

independently verify the information. The DOD IG was unable to render an opinion on DISA’s

financial statements for fiscal year 1997 when performing the audit required by the Chief Financial

Officers Act.

CISA can provide its customers—DOD and other federal entities, such as the

Federal Aviation Administration—all forms of secure and nonsecure voice,

data, video, and bulk transmission telecommunications. If CISA is unable to

provide the requested services directly, it will contract, on behalf of the

4

Regional Information Services will be located at the 15 locations remaining after the closure of the

Sacramento DMC.

Page 18 GAO/AIMD-98-182 DISA Pricing of Services
Chapter 1 

Introduction

requesting activity, with the commercial sector or another federal entity to

provide the services. For example, some voice services are provided by

the General Services Administration under its FTS-2000 contract for

services not available through CISA.

Objectives, Scope,

and Methodology

The objectives of our review were to (1) evaluate DISA’s processes for

establishing the prices DMCs and CISA charge for the services provided to

customers of the Defense Information Services business area, (2) ascertain

if DISA is being reimbursed for all services provided, and (3) ascertain the

accuracy of DISA’s financial management information.

To evaluate the price-setting process for the DMCs and CISA, we reviewed

the policies and procedures DOD established for setting prices. We

identified the cost elements included in the prices and determined

whether these elements are in conformance with the guidance set forth in

DOD’s Financial Management Regulation, Volume 11B, Reimbursable

Operations, Policy and Procedures-Defense Business Operations Fund. We

also collected and analyzed workload data obtained from DISA-WESTHEM.

We discussed the reliability of this data on DMC operations with

DISA-WESTHEM and determined the difference between the projected and

actual workload for IBM and UNISYS mainframe services for fiscal year

1997. In addition, we obtained and reviewed a study performed by a

private contractor related to CISA’s pricing of services.

To determine if the information service business area is being reimbursed

for all services provided, we collected, reviewed, and analyzed selected

financial information related to collections, disbursements, and accounts

receivable. We determined whether DISA pursued collection of accounts

receivable in accordance with the guidance set forth in DOD’s Financial

Management Regulation. We also contacted DISA customers to discuss

amounts they owed DISA for services provided. In addition, through our

discussion with DISA personnel, review of the financial reports, and review

of relevant federal accounting standards,5

 we determined whether

amounts owed DISA were being properly recorded.

5

In October 1990, the Federal Accounting Standards Advisory Board (FASAB) was established by the

Secretary of the Treasury, the Director of the Office of Management and Budget (OMB), and the

Comptroller General of the United States to consider and recommend accounting standards to address

the financial and budgetary information needs of the Congress, executive agencies, and other uses of

federal financial information. Once FASAB recommends accounting standards, the Secretary of the

Treasury, the Director of OMB, and the Comptroller General decide whether to adopt the

recommended standards. The Standards that are adopted are published as Statements of Federal

Financial Accounting Standards by OMB and GAO.

Page 19 GAO/AIMD-98-182 DISA Pricing of Services
Chapter 1 

Introduction

To evaluate the accuracy of DISA’s financial management information we

(1) obtained and analyzed the Defense Working Capital Fund Accounting

Reports and (2) DISA’s Chief Financial Officer Annual Financial Statement

for FY 1996. We also reviewed the DOD IG’s audit report on the business

area financial statements for fiscal year 1997, to identify any problems they

found with the business area’s financial information. We also reviewed

DOD’s fiscal year 1997 Federal Managers’ Financial Integrity Act (FMFIA)

report and the Defense Finance and Accounting Service (DFAS) Chief

Financial Officer’s Financial Management Status Report and Five Year

Plan 1997-2001 to identify any accounting and reporting weaknesses

related to DISA.

The quantitative financial information used in this report was produced by

DOD’s systems, which have long been reported to generate unreliable data.

We did not independently verify the data. The DOD IG was unable to render

an opinion on DISA’s financial statements for fiscal year 1997.

We performed our work at the Office of the Under Secretary of Defense

(Comptroller), Washington, D.C.; DISA Headquarters, Arlington, Virginia;

DFAS Headquarters, Crystal City, Virginia; DISA-WESTHEM, Denver, Colorado;

Defense Logistics Agency, Ft. Belvior, Virginia; Federal Aviation

Administration, Washington, D.C.; and the Department of State,

Washington, D.C.. Our work was performed from August 1997 through

August 1998, in accordance with generally accepted government auditing

standards. We requested comments on a draft of this report from the

Secretary of Defense. The Office of the Secretary of Defense provided

written comments on a draft of this report that are discussed in chapters 2,

3, 4, and 5 and are reprinted in appendix I. DOD also provided technical

comments on the draft report, which we have incorporated where

appropriate, but have not included.

Chapter 2 of this report discusses pricing issues related to the Defense

megacenters. Chapter 3 discusses issues primarily related to pricing

telecommunications services offered by CISA. Chapter 4 discusses DISA’s

ability to be reimbursed in a timely manner for services provided and the

nonreimbursement for services provided to customers. Chapter 5

discusses the accuracy and reliability of DISA’s financial management

information.

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One of the goals of the working capital fund is to break even over time. To

achieve this, prices are supposed to include all direct and indirect costs

incurred in providing services to the customers. To ensure that customers

have sufficient funds to pay for the requested services, prices are to be

established before the start of the fiscal year and remain in effect for the

entire year. In order to set prices that will enable the business area to

operate on a break-even basis, it is extremely important that the business

area accurately estimate the work it will perform and the cost of

performing that work. This task is made more difficult because the

process that business areas use to develop prices begins up to 2 years

before the prices go into effect.

In developing prices for mainframe processing services, each DMC collects

cost data on direct labor, depreciation, contracts, software, and the

indirect cost incurred by the DMC and headquarters (such as base support

costs and centralized contract administration) to arrive at the activity’s

estimated cost of doing business. The workload data are derived through

discussions with customers and utilization data collected by DISA. Once the

cost and workload data are accumulated, the individual DMC price is

determined by allocating the estimated total cost over the estimated

workload to arrive at a cost per hour. Currently the DMCs use a uniform

price structure which results in all customers being charged the same

price regardless of where the work is performed. Our review disclosed

that the cost of doing business varied considerably from DMC to DMC. As

DISA proceeds with its consolidation effort, analyzing the cost differences

between the DMCs should enable managers to seek ways to become more

efficient and effective, thereby reducing the cost of operations and

lowering prices charged to the customers.

We also found that the DMCs had difficulty developing accurate workload

estimates. For example, at the Columbus DMC, the actual reported

workload was about 74 percent more than the projected workload, while

at the Warner Robins DMC, the actual reported workload was

approximately 81 percent of the projected workload. While DISA has put

into place mechanisms to better identify the current workload, additional

efforts are needed to ensure that DISA receives accurate estimates on new

workload requirements.

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Differences in

Reported Costs of

Operations Between

DMCs Warrant

Further Analysis

DOD has recognized that its computer centers have been operating

inefficiently and that they need to adopt new technologies in order to

continue supporting DOD’s large and complex information infrastructure.

The planned DMC consolidation is aimed at reducing DOD’s infrastructure

costs, thereby lowering the price charged to customers for IBM and

UNISYS mainframe services. The House Appropriation Committee report

104-208, directed the Under Secretary of Defense (Comptroller) to

determine the feasibility of outsourcing DOD’s megacenters. A cost analysis

was completed in February 1996 that detailed the overall cost of operating

the DMCs.1

 Although the analysis was used as a factor in evaluating which

DMCs would continue to provide mainframe services, it did not identify the

specific costs of operating each DMC.

Our analysis of the reported cost of doing business disclosed that the cost

varied considerably from DMC to DMC for both IBM and UNISYS work. The

IBM costs, for example, ranged from a low of $40 per hour at the Ogden

DMC to a high of $275 per hour at the San Diego DMC. Table 2.1 shows the

reported fiscal year 1998 cost per central processing unit (CPU) hour for

IBM and UNISYS platforms at individual DMCs.

1

Strategy for Defense Information Services, February 9, 1996.

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Table 2.1: Reported Fiscal Year 1998

Cost Per CPU Hour for IBM and

UNISYS at Individual DMCs

Estimated Cost Per CPU Hour

DMC IBM UNISYS

Chambersburg $97.16 b

Columbus 83.76 b

Dayton 220.38 b

Denver 105.72 $67.53

Huntsville 90.43 b

Jacksonville 184.01 28.71

Mechanicsburg 59.83 b

Montgomery a 11.60

Ogden 40.35 22.20

Oklahoma City 126.05 22.14

Rock Island 150.64 b

Sacramento 129.05 b

San Antonio 79.00 10.59

San Diego 274.55 22.91

St. Louis 51.96 b

Warner Robins 106.73 17.97

aMontgomery does not operate IBM platforms.

bThese DMCs do not operate UNISYS platforms.

Source: Defense Information Systems Agency. We did not independently verify this information.

The primary goal of the WCF financial structure is to focus the attention of

all levels of management on the full costs of carrying out certain critical

DOD business operations and the management of those costs. Analysis of

the reported cost differences would be in accordance with this goal.

However, DISA personnel stated that a formal analysis has not been

conducted to determine the causes of DMC cost differences.

This analysis is especially critical for the six centers that are supposed to

remain after the consolidation effort. These centers report wide variances

in the cost per CPU hour. For instance, at the Ogden DMC, the IBM cost per

CPU hour is approximately $40; at the Oklahoma City DMC, it is $126, over

three times higher. By taking time now to analyze the cost differences at

these and the other four remaining facilities, DISA managers can assess the

causes of such variances and thereby identify inefficient operations and

make fundamental improvements in how the centers conduct business

before consolidation efforts are completed.

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Accurate Workload

Estimates Are a Key

Element in Setting

Prices

Projecting workload accurately is a key element in setting prices that will

help a business area to break even over time. Too high a workload

estimate could result in the business area operating at a loss. Conversely,

if the workload estimate is too low, the business area could have a profit.

Although DISA has initiated efforts over the past several years to develop

accurate workload estimates, it continues to struggle. For example, at the

Columbus DMC, the reported actual workload was about 74 percent more

than the projected workload, while at the Warner Robins DMC, the actual

reported workload was approximately 19 percent less than the projected

workload. The establishment of accurate workload estimates was one of

the issues discussed in DOD’s September 1997 plan to improve the

operations of the WCFs. 2

 The improvement plan notes that synchronizing

customer funding and workload estimates is critical to ensure that WCF

prices are based on realistic workload estimates and customer purchases

are adequately funded. The plan noted that this does not always occur.

More Accurate Workload

Estimates Are Needed

In fiscal year 1994, DISA began identifying system utilization and developing

projections of future customer workload requirements based on

information provided by DMCs. However, according to DISA, this

information has frequently been misclassified because clear definitions for

customer identification codes—which identify the workload below the

major command level—are lacking. In order to improve the reliability of

customer projections, DISA validated customer identification codes for DMC

customers in fiscal year 1997. DISA also took steps to capture the utilization

data by installing measurement systems on IBM, UNISYS, and other

hardware platforms. Data from these systems are fed to the MVS

Information Control System (MICS), which now serves as DISA’s workload

reporting and invoicing system.

DISA has also gathered information from DMC staff on conditions that could

have an impact on future requirements, such as missing data, changes in

customer codes, and differences between historical and future volumes

caused by workload migrations. However, despite these efforts, the

inability to reasonably estimate the volume of services was the primary

reason the mainframe services—IBM and UNISYS—had a reported net

profit of approximately $90 million for fiscal year 1997. This profit was

approximately 13 percent of the DMCs’ reported revenue of about

$682 million.

2

A Plan to Improve the Management and Performance of the Department of Defense Working Capital

Funds, September 1997.

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Our analysis of DISA’s workload execution reports showed that 7 of the 15

DMCs providing IBM mainframe services overestimated their CPU hour

usage during fiscal year 1997, while 8 underestimated usage. For example,

at the Columbus DMC, the actual usage was about 74 percent more than the

projected usage. Further, our analysis of UNISYS workload reports also

showed that actual processing at 5 of the 8 DMCs providing UNISYS3

mainframe services was 57 percent to 70 percent of projected amounts. At

one of the DMCs, however, the actual reported workload was almost

66 percent more than projected. Tables 2.2 and 2.3 show the projected and

actual amounts of processing for IBM and UNISYS systems in fiscal year

1997.

Table 2.2: Projected and Reported Usage of IBM CPU Hours by DMC for Fiscal Year 1997

DMC

Projected IBM CPU

hours

Reported usage

of IBM CPU hours Difference

Percent of actual

to projected usage

Chambersburg 152,598 137,198 (15,400) 89.91

Columbus 237,598 412,421 174,823 173.58

Dayton 56,211 53,984 (2,227) 96.04

Denver 135,913 171,894 35,981 126.47

Huntsville 126,656 110,102 (16,554) 86.93

Jacksonville 15,483 20,413 4,930 131.84

Mechanicsburg 501,228 524,799 23,571 104.70

Ogden 257,676 172,186 (85,490) 66.82

Oklahoma City 98,838 149,155 50,317 150.91

Rock Island 84,639 140,382 55,743 165.86

Sacramento 41,853 6,469 (35,384) 15.46

San Antonio 81,512 66,036 (15,476) 81.01

San Diego 11,976 20,177 8,201 168.48

St. Louis 250,118 274,937 24,819 109.92

Warner Robins 56,264 45,420 (10,844) 80.73

Source: Budget Execution and Monitoring System Industrial Fund Workload Execution Reports for

fiscal year 1997. We did not independently verify this information.

3

UNISYS workload is measured in standard units of processing (SUPS). SUPS include CPU processing

time and the amount of time taken for data input/output transfer functions. In contrast, IBM workload

is measured in CPU hours alone and does not include transfer time.

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Table 2.3: Projected and Reported Usage of UNISYS Standard Units of Processing (SUPS) by DMC for Fiscal Year 1997

DMC

Projected UNISYS

SUPS

Reported usage of

UNISYS SUPS Difference Percent

Denver 79,428 50,671 (28,757) 63.79

Jacksonville 268,875 446,097 177,222 165.91

Montgomery 915,960 602,740 (313,220) 65.80

Ogden 486,096 402,170 (83,926) 82.73

Oklahoma City 452,278 406,147 (46,131) 89.80

San Antonio 1,197,204 797,753 (399,451) 66.63

San Diego 163,779 114,106 (49,673) 69.67

Warner Robins 569,292 322,545 (246,747) 56.66

Source: Budget Execution and Monitoring System Industrial Fund Workload Execution Report for

fiscal year 1997. We did not independently verify the information.

In discussing the workload fluctuations with DISA-WESTHEM personnel, we

were informed that although they are responsible for estimating future

requirements for DMC services, the accuracy of these estimates depends

heavily on information provided by DISA customers. According to

DISA-WESTHEM personnel, systems have been installed which enable DISA to

determine the amount of services actually provided to DMC customers.

However, DISA-WESTHEM cannot easily identify all of the factors that could

cause a change in future customer needs. For example, the current DOD

initiatives to standardize systems have led to widespread migration of

workloads from numerous older systems to new systems. Central Design

Activities are responsible for maintaining existing systems and for working

with customers on the development of replacement systems. Decisions

concerning the types of data to be maintained by the new systems and

specific program operations affect the types and amounts of DMC services

required, such as data storage and the number of input/output operations

that will occur during program execution. In addition, the actual pace of

progress made in developing, testing, installing, and implementing the new

systems affects the volume of processing that will continue to be done on

the legacy systems. For example, the Chief of the Resource Management

Branch in the Denver DMC Business Management Division stated that the

CPU hours for the Defense Civilian Pay System were 46 percent higher than

projected in fiscal year 1997 because of an increase in accounts migrated

from legacy systems requiring mainframe processing services.

DISA-WESTHEM officials also confirmed that this issue is continuing to hinder

their ability to develop accurate workload estimates. For example,

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Continued Review

DISA-WESTHEM was recently notified that the planned migration of the Base

Level Personnel System workload from DISA to Randolph Air Force Base

on September 30, 1998, has been delayed until fiscal year 2000. As a result,

DISA will be providing about $7 million in services during fiscal year 1999

that were not included in its customer projections or factored into DISA’s

prices for the fiscal year. DISA-WESTHEM officials further noted that the

workload for the Defense Transportation Reporting System is now four

times the fiscal year 1997 projected level. DISA only received 30 days notice

of the increased workload. Because of the long lead time to develop

prices, which is tied to preparing the budget, this additional workload will

not be reflected in the fiscal year 1999 prices. All these factors impact the

DMCs’ ability to accurately estimate their workload. Without sound

workload estimates, the credibility of the prices being charged is

questionable.

DOD Improvement Plan

Recognizes Importance of

Accurate Workload

Estimates

In response to the National Defense Authorization Act for Fiscal Year

1997, DOD developed a plan to improve the operation of the WCFs. One of

the issues discussed in the plan was the importance of accurate workload

estimates and the potential effect of inaccurate estimates on the results of

operations. The plan points out that revolving fund activity workload and

customer funding should be synchronized. This synchronization is critical

to ensure that prices are based on realistic workload estimates and

expected purchases are adequately funded. The plan points out that this

does not always occur. In the case of the DMCs, the higher than anticipated

workload in fiscal year 1997 was a primary reason the IBM and UNISYS

mainframe services reported a net profit of $90 million in fiscal year 1997.

Within DOD, the Office of the Comptroller is the one entity that should

have, or be able to obtain, information on the workload estimates

contained in customers’ budget request and the revolving fund activity

estimates of workload to be performed for customers. As part of its

program budget review process, in which the prices are finalized, the

Comptroller’s office could use the information to review and resolve

workload differences between DISA and its customers. A more accurate

workload estimate should help reduce the problem of customers not being

able to pay for all services provided, which is discussed in further detail in

chapter 4.

Conclusions DOD has recognized the need to continue reducing the cost of its computer

centers’ operations through consolidations. Over the next 2 years, DISA

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plans to complete the consolidation of its mainframe processing centers

from 16 to 6 locations. In planning the consolidation effort, DISA identified

the cost of operating the DMCs and used these data in the decision making

process. However, by not analyzing significant differences between the

reported cost of operations at the DMCs that will remain after the

consolidation is completed, DOD is forgoing an opportunity to further

enhance the efficiency of DMC operations and make fundamental

improvements in the services provided. Further, until DOD improves its

workload projections, it will continue to experience difficulty in setting

accurate prices and, in turn, ensuring that the DMCs do not incur excessive

profits or losses.

Recommendations We recommend that the Director of DISA

• analyze the cost differences in the estimated cost per CPU hour at the DMCs

as part of the consolidation effort and identify improvements needed in

how they conduct business and

• compare forecasted workload estimates to actual work received and

consider these trends in developing the workload estimates and prices to

charge customers for the services provided.

We also recommend that as part of the price-setting process, the Under

Secretary of Defense (Comptroller) ensure the workload estimates in DISA

and customer budgets agree.

Agency Comments

and Our Evaluation

DOD did not agree with our recommendations that DISA (1) analyze the cost

differences at the DMCs and identify improvements needed in how they

conduct business and (2) compare forecasted workload estimates to

actual work received and consider these trends in developing the

workload estimates and prices to charge customers for the services

provided. DOD agreed with our recommendation that the Under Secretary

of Defense (Comptroller), as part of the price-setting process, ensure the

workload estimates in DISA and customer budgets agree.

In its response, DOD stated that analyses of cost differences have been

made and provided to DISA management and that along with other analyses

they were used to plan the ongoing consolidation of the DMCs. Our report

fully recognizes the efforts DISA put forth in planning the consolidation and

the importance the February 1996 cost analysis played in the

decision-making process. However, our analysis disclosed that there were

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considerable differences in the reported cost of doing business between

the DMCs. Our conclusion that opportunities for savings exist is based in

part on the magnitude of the DMC operating cost differences which now

exist—the reported variance per CPU hour is $40.35 to $274.55. Further, in

an August 1998 meeting, the Acting Deputy Comptroller and the Resource

Manager, Operations Directorate, stated that DISA has not formally

analyzed the reasons for the cost differences between the DMCs.

Furthermore, a DISA official acknowledged that DISA had not studied the

differences in costs between DMCs providing the same or similar service.

This evidence clearly indicates to us that despite earlier analyses, a more

rigorous study of costs is warranted to determine and correct the

underlying causes of these differences.

DOD also disagreed with our characterization of the need for improvements

in the estimation of the workload performed by the DMCs. DOD noted that

given the changes brought on by the consolidation effort, it is difficult to

develop accurate workload estimates. DOD also noted that as discussed in

the report, the process of developing workload starts 2 years before the

prices go into effect. DOD further stated that regardless of the quality of the

estimated workload, the customers will inevitably change workload

requirements to meet their current situation.

The report recognizes the efforts that DISA has undertaken to improve the

accuracy and reliability of its workload estimates, the obstacles it faces in

doing so, and the difficulty involved in precisely estimating the workload

to be performed. Indeed, there will always be some variance between the

estimated workload and the actual work performed by the DMCs. However,

the extent of the reported workload variance for IBM CPU hours (from

about 74 percent more than the projected workload at Columbus DMC to

about 19 percent less than the projected workload at the Warner Robins

DMC) is much greater than would normally be expected. The DMCs posted a

$90 million net profit for mainframe services in fiscal year 1997 primarily

because workload volumes were substantially higher than anticipated.

Since the volume of workload is one factor in determining the CPU hourly

price, the accuracy and reliability of the workload estimate is critical in

establishing an hourly CPU price. Conceptually, the larger the volume of

work to be performed the lower the price because the cost of operations

can be spread across more CPU hours. Therefore, for fiscal year 1997, a

more accurate workload estimate for the DMCs would have resulted in a

lower CPU hourly price for IBM mainframe services and a higher hourly

price for UNISYS mainframe service. A lower hourly IBM mainframe price

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may have afforded some customers, such as DFAS, the opportunity to pay

for more of the services DISA provided.

Further, as discussed in the report, DISA personnel developing mainframe

projections stated that they rely heavily on data gathered on past workload

levels and that these data do not necessarily reflect future requirements.

They emphasized that outside customers, such as the Central Design

Activities, should have the most immediate knowledge of application

systems run at the DMCs and the times when workloads will be moved from

one platform to another.

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the Full Cost of Operations

In addition to the DMC pricing concerns discussed in chapter 2, our analysis

of the Defense Information Services business area also disclosed that DISA

was not recovering the full costs incurred in providing

telecommunications services. Recovering the full cost of operations is one

of the basic underpinnings of the working capital fund (WCF). Not

including the full cost of operations in developing prices understates the

prices charged customers for the services provided. Our review disclosed

that DISA did not include in its prices approximately $77 million related to

transitioning independent networks to the Defense Information Systems

Network (DISN) in accordance with DOD’s Financial Management

Regulation. Further, we found approximately $60 million of costs that

were not incorporated in DISA’s computation of its fiscal year 1998

telecommunications prices.

In addition, while reviewing DISA’s fiscal year 1998 telecommunications

prices, we identified at least $231 million in appropriated funds that

supported WCF activities. However, based upon our review of DISA’s fiscal

year 1998 budgetary request, the rationale for financing WCF-related costs

through the use of appropriations was not clear. Normally, costs are

recovered through customer billings and, in most instances, the WCF

generally does not receive appropriations for financing day-to-day

operations. Since the Defense Information Services business area prices

do not take into consideration the use of appropriated funds, this further

understates the prices charged for services offered by DISA. Furthermore, a

recent pricing study1

 performed by a private contractor concluded that

while overall workload estimates were accurate for existing services,

DISA’s telecommunications costs were supported by appropriations and

thus were excluded from its telecommunications prices.

Some Costs Not

Included in

Telecommunications

Prices

DOD policy requires business activities to identify the direct and indirect

costs of doing business and to incorporate these costs into their prices. To

ensure that WCF customers have enough funds to pay for the services they

need to sustain their readiness, DOD policy requires that prices be

established before the start of the fiscal year and remain in effect for the

entire year. The process for establishing telecommunications prices

generally is finalized about 10 months before the prices go into effect with

CISA developing workload projections for each service offered for the

budget year based on customer input.

1

DISN Business Process, Cost, and Methodology Review (Price Waterhouse, January 29, 1998).

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the Full Cost of Operations

In establishing CISA prices, cost data are collected related to (1) network

operations, (2) network management, (3) provisioning, (4) systems

development, (5) network transition, (6) equipment, and (7) prior year

profits or losses. The prices charged customers vary based on service

offering, data versus voice usage, calling area, precedence capability,

bandwidth, and usage. In instances where usage data are not available,

DISA may allocate the cost based on the average cost of using the service or

attempt to establish prices that are competitive with the commercial

sector or other federal entities. In addition, DISA adds a surcharge to each

customer’s bill to recover general and administrative overhead expenses.

Although DISA went through this process, our analysis disclosed that CISA’s

telecommunications prices did not always include the total costs. For

example, $77 million for transitioning telecommunications networks was

not recognized in the prices charged customers. Further, for fiscal year

1998, we found that $49 million for a prior year loss and $11 million of

overhead were not included.

Transition Costs Not

Included in

Telecommunications

Prices

To improve the effectiveness and efficiency of its military communications

services, DOD began in 1991 to plan and implement DISN to serve as the

department’s worldwide telecommunications and information transfer

network to support national security and defense operations. DOD’s

strategy focuses on replacing its older data communications systems using

emerging technologies and cost-effective strategies that provide secure

and interoperable voice, data, video, and imagery communications

services in support of military operations. DISN is a subset of the Defense

Information Infrastructure (DII), which is a combination of communication

networks, computers, software, databases, and other services. As stated in

the WCF FY 1999 Amended Budget Estimates, dated February 1998, DISA is

responsible for the pricing of DISN through the CISA business activity.

According to DISA’s WCF charter, the responsibilities of the WCF expanded

with the formulation of DII in order to create a seamless, transparent, and

protected end-to-end information transfer capability.

Although DISA is responsible for the pricing of DISN through CISA, it

excluded approximately $77 million related to transitioning independent

networks to DISN from its telecommunications prices.2

 According to the

Chief of the Revolving Funds Division, transition costs were expected to

2

Initially, we were informed that the transition costs—costs due to DISN implementation delays and

running dual networks—were approximately $117 million. In August 1998, DISA officials stated that

the transition costs had increased to $127 million. On November 25, 1996, the Under Secretary of

Defense (Comptroller) had approved the exclusion of $50 million in transition costs from future year

prices.

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the Full Cost of Operations

be offset by revenues generated from new customers, contract savings,

discounts and DISA appropriations.3

 For example, in developing the prices

for fiscal year 1998, transition costs were reduced by the amount of the

collections that DISA anticipated receiving from a contractor because of

savings and volume discounts. DISA’s offsetting of costs in this manner is

not in accordance with the DOD’s Financial Management Regulation,

4

which states that realized gains are generally reflected in offsetting

adjustments to prices established in subsequent fiscal years.

In addition, this method of accounting for costs and revenue understates

the actual cost incurred in providing services to the customer. If the full

costs are not identified, the primary goal of the WCF financial

structure—focusing attention on the full costs of operations and on

managing those costs—cannot be met and management is not in a position

to act. Further, WCF prices should recover operating expenses (full costs)

to be incurred in the applicable fiscal year unless an exception is granted

by the Under Secretary of Defense (Comptroller).

In discussing this matter with the Office of the Under Secretary of Defense

(Comptroller), we were informed that the office was not aware that the

transition costs had increased to $127 million. The office also believed that

DISA’s method of accounting for the costs and revenues was inappropriate

and that all costs, other than a one-time $50 million cost exclusion, should

have been included within the appropriate year’s price computation.

Fiscal Year 1996

Telecommunications Loss

Not Included in Prices

Our review of CISA’s fiscal year 1998 telecommunications prices disclosed

that losses from telecommunications operations were not recovered in

accordance with DOD policy. In keeping with DOD’s policy, the reported

accumulated operating loss at the end of fiscal year

1996—$49 million—should have been included in fiscal year 1998 prices,

but it was not. In discussions with DISA and the Office of the Under

Secretary of Defense (Comptroller), we pointed out that the $49 million

was reported in DOD’s financial reports at the end of fiscal year 1996 and

therefore should have been considered in developing the prices for fiscal

year 1998. While the Comptroller’s office agreed, it was unable to explain

why the $49 million loss from fiscal year 1996 had not been incorporated

into the fiscal year 1998 prices. We verified that the financial results of

operation for fiscal year 1997 had been incorporated into prices for fiscal

year 1999.

3

During fiscal years 1996 and 1997, DISA paid approximately $10 million of DISN transition costs from

its appropriations.

4

DOD Financial Management Regulation, Volume 11B, Chapters 50, 61, and 62.

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the Full Cost of Operations

Overhead Costs Not

Included in

Telecommunications

Prices

Normally, WCF prices should recoup all costs of doing business, including

overhead costs. In this regard, DOD WCF requirements allow for surcharges

to be used to recover general and administrative costs. To recoup its

telecommunications overhead cost, CISA applies a 2 percent surcharge to

the total cost of each customer’s bill. According to the revolving fund

manager, the percentage factor is applied because it is less complicated

than determining the actual amount of overhead cost related to each

specific service.

For fiscal year 1998, we found that the 2 percent surcharge will generate

$44 million in revenue, which is $11 million less than the estimated

overhead costs of $55 million. This shortfall is the result of not including

all overhead costs when the fiscal year 1998 prices were developed.

According to the Chief of the Revolving Fund Division, DISA is establishing

additional surcharges to recover all overhead costs for the various services

CISA offers. It is anticipated that these additional surcharges will be

effective for fiscal year 2000.

Appropriated Funds

Used to Pay for Some

Costs

DOD’s WCF statute requires that the full costs of services or work performed

be recovered through prices charged customers and recognizes that the

fund may also receive appropriations for the purpose of providing capital

as have been specifically authorized by law.5

 Our review of DISA’s

information technology (IT) budget for fiscal year 1998 identified many

instances in which the Congress appropriated non-WCF funds that can be

used to subsidize the cost of the Defense Information Services business

area. DISA’s fiscal year 1998 budgetary request did not clearly delineate the

rationale for using appropriated funds to finance WCF-related services.

Since DISA does not include the costs paid for by appropriations within the

prices, customers are not charged the full cost of services offered.

As the central manager for the Defense Information Infrastructure, DISA

annually receives appropriations for (1) Operations and Maintenance

(O&M), (2) Procurement, and (3) Research, Develop, Test and Evaluation,

along with authority for its working capital budgets. DISA’s appropriations

may be spent for various purposes, including (1) establishing new

services, (2) paying for program and technical activities, and

(3) maintaining the communications and computer infrastructure. Our

analysis of the budget request showed that at least $231 million of fiscal

year 1998 appropriations support the WCF, including the following.

5

10 U.S.C. 2208. DOD’s working capital fund regulations note that occasionally the funds will receive

funding from an appropriation or transfer to cover a loss. (DOD Financial Management Regulation,

Volume 11B, 50.A.1.h and 52.C).

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Appendix II provides additional details regarding DISA IT appropriated

funding being used to support WCF activities.

• Approximately $87 million of DISA’s fiscal year 1998 O&M and $19 million of

Procurement authority were used to enhance DISA’s information systems

security. The information systems security program was established to

reduce the vulnerability of DOD’s existing telecommunications networks

and data processing centers, including the systems operated as part of the

WCF, to intrusion. DISA estimates that approximately 25 percent of its

information systems security appropriations is used for improving the

security of systems under the working capital fund.

• Approximately $34 million of O&M and $43 million of Procurement

authority were used to cover the cost of replacing the current messaging

service, the Automatic Digital Network (AUTODIN), with the Defense

Message System (DMS). The objectives of DMS are to reduce cost, reduce

staffing requirements, improve security, and improve DOD messaging

services. For fiscal year 1998, the costs for AUTODIN and the network

management and operational costs for DMS were funded through the CISA

activity.

• Approximately $60 million of O&M authority was provided to DISA for

implementing DISN, which as discussed previously, is replacing legacy

telecommunications systems. Although DISA’s information infrastructure

plan states that DISN operates on a fee-for-service or working capital basis,

only the long haul component is currently paid for through the WCF.

Further, our analysis of DISA’s O&M fiscal year 1998 budget identified the

following instances in which appropriated funding was provided to

organizational components supporting WCF activities.

• Approximately $138 million of DISA’s fiscal year 1998 O&M appropriation

was designated for the Joint Interoperability and Engineering Organization

(JIEO). JIEO’s mission is to ensure the interoperability of the Defense

Information Infrastructure which includes those systems that are funded

through DISA’s WCF. In addition, JIEO provides engineering support for all

information transfer and network control systems managed by DISA. For

example, the JIEO’s Center for Application Engineering is responsible for

message handling for both DMS and AUTODIN—current components of the

WCF. According to the Deputy Director for Strategic Plans and Policy, at

least $6 million of the $138 million could be transferred from the O&M

appropriation to the WCF.

• The DISN Service Center (DSC) mission is to manage provisioning,

implementation, and operational control of telecommunications services

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under CISA. However, according to the Resource Manager for DISA

operations, DSC is funded for fiscal year 1998 operations through the

working capital fund and DISA’s O&M appropriation. For fiscal year 1998,

DSC received approximately $7.7 million in O&M funds to cover mission

support and customer service activity. Mission support and customer

service costs include civilian salaries, rents, utilities, travel, and training.

• Approximately $7 million of DISA’s fiscal year 1998 O&M authority was used

to cover the cost of operating DISA-Western Hemisphere, which is

responsible for overseeing the operations of the DMCs. In addition,

approximately $17 million and $5 million of DISA’s fiscal year 1998 O&M and

Procurement authority, respectively, were used for the DISA Continuity of

Operations and Test Facility (DCTF). DCTF provides innovative and

integrated services for the DMCs, including disaster contingency planning.

The DMCs are part of the WCF.

• After conducting a review of civilian salaries paid from its O&M

appropriation, DISA identified at least $12 million of the $172 million

authorized for fiscal year 1998 that could be transferred to the WCF. In

addition, DISA stated that a portion of the $21 million authorized for travel

would also need to be adjusted for those civilians who could be realigned

to the WCF.

According to DISA’s Acting Deputy Comptroller and the Chief of the

Revolving Funds Division, the development of new DISA services has

traditionally been paid for with appropriated funds. New services are not

incorporated into the WCF until they are operational and a customer base

has been identified. However, according to DOD working capital

regulations,6

 reinvestment in the infrastructure of business areas in order

to improve product and service quality and timeliness, reduce costs, and

foster comparable and competitive business operations is the primary goal

of the WCF Capital Investment Program, whose use applies to all activities

or groups of activities within the defense agencies, including DISA.

We also noted that DISA was using military departments’

telecommunications components to supplement its telecommunications

architecture. Because the military departments pay for these components,

they were not included in DISA’s prices. For example, the Defense Satellite

Communication System (DSCS) is owned, operated, and paid for by the Air

Force and Army but used by CISA—more specifically, DISN—in providing

services to its customers. According to DISA, though some

telecommunications traffic does pass over the DSCS, DOD has kept both

operation and life-cycle replacement of DSCS, as well as other military

6

DOD Financial Management Regulation, Volume 11B, Chapter 58.

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satellite communication systems, out of the WCF by policy. For fiscal year

1998, DISA estimated that its DSCS usage would cost approximately

$46 million annually if procured from the commercial sector.

Further, a recent study7

 performed by a private contractor at DISA’s request

concluded that while the overall workload estimates for existing services

are accurate, DISA’s telecommunications prices were supported by

appropriated funds which were excluded from the prices charged

customers. The study states that excluding costs understates the true

costs of operations. For example, the study stated that DISA’s Asychronous

Transfer Mode (ATM) prices were considered more competitive than

commercial prices. However, our review showed that DISA’s ATM price

excluded the cost for base support, such as floor space and power. The

study also found that the WCF paid for some unique military capabilities. In

commenting on the study, DISA’s Deputy Director for Strategic Plans and

Policy acknowledged that in some instances appropriated funds are

supporting the WCF. He further stated that DISA was reviewing its pricing

structure to identify those costs that should be part of the WCF.

Conclusions Working capital funds can break even over time by ensuring that all direct

and indirect costs of conducting business are incorporated into their

prices. Yet, DISA has been excluding from its telecommunications prices

millions of dollars related to transitioning independent networks to the

new common-user network, prior-year losses, and overhead expenses. In

addition, significant costs associated with providing data processing and

telecommunications services through the WCF are not being recovered

through the prices charged, but rather, are paid for by appropriations.

DISA’s budgetary request does not clearly state why appropriated funds are

necessary to finance WCF-related services. Using appropriated funds

further understates DISA’s WCF prices and undermines business area

managers’ abilities to focus on their operating costs and to make

fundamental improvements in their operations.

Recommendations We recommend that the Director, DISA,

• ensure that transition costs and revenues are considered when computing

telecommunications prices, in accordance with the criteria set forth in

DOD’s Financial Management Regulation, and

7

See footnote 1.

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• as part of DISA’s fiscal year 2000 budget, identify (1) all appropriations used

in support of WCF activities and (2) the specific reason(s) the appropriated

funds are being used to support the activities of the WCF.

Agency Comments

and Our Evaluation

DOD did not concur with our recommendations to ensure that transition

costs and revenues are considered within the computation of

telecommunications prices in accordance with the criteria set forth in

DOD’s Financial Management Regulation. DOD also disagreed with our

recommendation that DISA, as part of its fiscal year 2000 budget, identify

(1) all appropriations used in support of WCF activities and (2) the specific

reason(s) the appropriated funds are being used to support the activities

of the WCF. DOD further commented that all costs—more specifically the

$137 million discussed in the report—related to the telecommunications

services have been considered in developing the prices charged

customers.

DISA may have considered these costs in the development of the prices, but

the $137 million was either (1) not included in the fiscal year 1998 prices

or (2) not considered within the framework of DOD’s Financial

Management Regulation. For example, in a July 30, 1998, meeting with DOD

and DISA officials, a DISA representative told us that the $11 million in

overhead costs were not included within the prices for fiscal year 1998.

This statement supports our analysis of the fiscal year 1998 price

computation, which disclosed that the $11 million was not included. Our

review showed that the revenue was approximately $44 million, whereas

the cost was $55 million. Further, as discussed in the report, the Chief of

the Revolving Fund Division acknowledged that there was an overhead

shortfall in fiscal year 1998. To recover these costs, additional surcharges

will be used starting in fiscal year 2000. In addition, according to the Office

of the Under Secretary of Defense (Comptroller), although the $49 million

loss discussed in the report should have been included within the prices

for fiscal year 1998, it was not. Therefore, there is much evidence to

indicate that $60 million of the $137 million was not included in the fiscal

year 1998 prices charged customers.

Further, as stated in the report, DISA’s methodology for accounting for the

$77 million in transition costs is inconsistent with DOD’s Financial

Management Regulation. The regulation clearly states that all estimated

costs of providing the customer with goods and services should be

included in the prices charged customers. It also stipulates that any

realized gains should be used to offset the estimated costs in subsequent

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fiscal years. In addition, the Office of the Under Secretary of Defense

(Comptroller) stated that it is DOD policy to treat transition costs as

operating expenses and, therefore, these costs should be included in the

price charged customers. However, as discussed previously, DISA did not

adhere to this prescribed policy, thus understating the full cost of

operations in a given fiscal year.

We disagree with DOD’s position that it is not necessary to provide the

Congress more detailed information on the use of appropriated funds in

support of the WCF. Our review of DISA’s fiscal year 1998 budgetary request

found that it did not delineate the rationale for using appropriated funds to

finance WCF-related services. Significant costs associated with providing

data processing and telecommunications services through the WCF are

being subsidized by appropriations. Using appropriated funds further

understates DISA’s WCF prices. The intent of our recommendation is to

provide the Congress with information that will enable it to decide

whether to continue funding DISA services, where applicable, through both

appropriations and the WCF. In this regard, House Report 105-532, dated

May 12, 1998, on the National Defense Authorization Act for Fiscal Year

1999, directs the Secretary of Defense, beginning with the fiscal year 2000

budget request, to more appropriately reflect and justify the DISA non-WCF

budget request. Satisfying the language in the House Report will meet the

intent of our recommendation.

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WCF activities rely on prompt reimbursement to be financially stable.

Customer payments are used to finance subsequent operations, much as

sales revenues are used in commercial enterprises. However, we found

that DISA customers were not promptly paying for services provided.

Additionally, in fiscal years 1996 and 1997, the DMCs did not bill customers

$115 million for services provided.1

 Further, these amounts were not

recorded in DISA’s accounting records in accordance with federal

accounting standards.

Accounts Receivable

Not Collected in a

Timely Manner

DOD Financial Management Regulation, Volume 4, provides that

“procedures shall be established for the routine aging of all amounts

overdue so that appropriate actions can be taken to affect their collection.

The aggressive and efficient management of receivables in the Department

of Defense is an important element of DOD stewardship over public funds.”

Our review of DISA WCF accounts receivable showed that DISA was not being

promptly reimbursed millions of dollars for services it provided. As of

January 1998, 31 percent of the reported accounts receivable, or about

$173 million, was reported outstanding for over 60 days. Of the

$173 million in receivables, $19.3 million was related to the DMCs and

$154 million to CISA. The DMC accounts receivables were generally due from

DOD customers, while CISA’s accounts receivables were generally due from

other federal government entities. The following table provides aging

information on DISA’s accounts receivable over 60 days old.

1

This information was provided by DISA. It comes from the Budget Formulation and Execution

Monitoring System and the MVS Information Control System. We did not independently verify the

accuracy of these data.

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Table 4.1: Reported Accounts

Receivable More Than 60 Days Old as

of January 1998 Aging of accounts receivable (in days)

Dollars in thousands

Business activity 61-90 91-120 Over 120 Total

DMC

DOD customers $14,806 $156 $4,046 $19,008

Other federal customers 0 0 322 322

Public 0 0 0 0

Subtotal $14,806 $156 $4,368 $19,330

CISA

DOD Customers $16,720 $16,576 $24,711 $58,007

Other federal customer 18,368 17,726 59,472 95,566

Public 12 11 322 345

Subtotal $35,100 $34,313 $84,505 $153,918

Total $49,906 $34,469 $88,873 $173,248

Source: Data provided by DISA and DFAS. We did not independently verify this information.

Examples of the information service business area receivables that have

not been promptly reimbursed follow.

• As of January 1998, the Federal Aviation Agency (FAA) had not reimbursed

DISA approximately $50 million for telecommunications services. The

entire $50 million was over 60 days old, with $16 million over 120 days old.

According to FAA personnel, there is an approximately 2-month cycle for

billing and paying for DISA telecommunications services. DISA’s Acting

Comptroller and FAA personnel stated that they are discussing the use of

electronic payments in order to reimburse DISA in a more timely manner.

• As of January 1998, DISA had not been reimbursed approximately

$12 million for telecommunications services provided to the Department

of State. Approximately $11 million was over 120 days old. Although DISA

had routinely sent out past due notices for amounts owed, it had not

inquired why State had not paid. Officials within State’s Office of the

Comptroller acknowledged that the amounts were owed to DISA.

• A July 10, 1996, memo from the Director, Resource Management,

DFAS-Denver Center, stated that DFAS-Headquarters had directed it to hold

data processing costs constant by not reimbursing the DMCs for fiscal year

1996 data processing services beyond the amount paid in fiscal year 1995.

As a result, the DMCs were not reimbursed approximately $3 million in

fiscal year 1996 for data processing services.

• DISA had not reimbursed itself for approximately $11 million in DMC

services and $9 million in telecommunications services as of January 1998.

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Both amounts were over 60 days old. According to DISA DMC officials, at a

minimum, it takes 2 months to process a payment voucher, ask DFAS to

make the transfer, and liquidate the internal receivable. DISA is currently

working with DFAS to shorten its internal funds transfer process. In

addition, according to DISA telecommunications officials, DISA had not

collected amounts owed by its internal customers because these

customers had failed to provide correct funding information.

Since most of the receivables are from government entities and constitute

the primary source of revenue for the WCF, these amounts should be

collected.

DMCs Classify Some

Unpaid Amounts as

Unbilled

Our review of DISA documentation indicated that the DMCs performed

approximately $115 million of billable work during fiscal years 1996 and

1997 for which they were not reimbursed. This represents about 8 percent

of the DMC revenues for the 2 fiscal years. DISA performed this work

without receiving the required funding document from its customers. DOD

Financial Management Regulation, Volume 11B, Chapter 61, states that as

a general rule, no work or services should be performed by a business

activity unless a reimbursable order is received and accepted. Such orders

constitute obligations of federal government ordering activities or

advances from nonfederal government entities. Further, DISA’s method of

accounting for the $115 million was not in accordance with federal

accounting standards.

Based upon information provided by DISA, as of November 1997, DFAS had

not reimbursed DISA $11.7 million and $32.3 million in fiscal years 1996 and

1997, respectively, for work performed. According to the DOD

Comptroller’s office, DFAS did not reimburse DISA for all service provided in

fiscal year 1996 because the amount DFAS budgeted was less than the cost

incurred. DFAS stated that the primary cause for nonpayment in fiscal year

1997 was that work had been reclassified into a different category which

resulted in a higher price for the service. DFAS noted that this occurred

after its fiscal year 1997 budget had been set and its level of funding

approved. In discussing this issue with the Office of the Under Secretary of

Defense (Comptroller), we were informed that discussions are being held

with DFAS and DISA to determine the most appropriate means to resolve the

nonpayment issues.

Under DOD’s policy, prices are set at the beginning of the fiscal year and

are to remain in effect for the entire year. Similarly, customer budgets are

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to include sufficient funds to pay for the services requested. This process

should result in the WCF breaking even. However, during fiscal year 1997,

DISA initiated efforts to better define the cost associated with its IBM and

UNISYS mainframe processing. The specific services that DISA determined

not to be related to mainframe processing were placed in another

category. According to DFAS personnel, DFAS was charged a higher price for

work as a result of the reclassification, and these higher prices were not

anticipated when its fiscal year 1997 budget was developed, about 2 years

prior to the start of the fiscal year.

DISA’s efforts to reclassify its work is consistent with the WCF concept

because it will result in more costs being aligned with the appropriate

customers. Further, this effort should provide for a more accurate

accumulation of DISA’s cost of operations and thereby enable DISA to

develop more realistic prices for its services. However, DISA’s efforts were

not coordinated with the overall WCF budget-setting process. As a result of

reclassifying of the work to a higher cost category, the DFAS budget

approved by the Office of the Secretary of Defense (Comptroller) was not

sufficient to pay for the higher cost incurred.

We also found other instances in which DISA was not reimbursed for all

services provided.

• According to information provided by the Defense Logistics Agency (DLA),

it did not reimburse DISA approximately $25.6 million during fiscal year

1996 for services provided. For fiscal year 1996, DISA billed DLA

approximately $101.6 million, but DLA had only budgeted $76 million to

reimburse DISA. According to DLA, the Office of the Secretary of Defense

decided that DLA would have to reimburse DISA only the budgeted amount

and DISA would have to absorb the $25.6 million shortfall. A similar

shortfall occurred during fiscal year 1997. In an August 7, 1997, memo,

signed by DISA’s Acting Comptroller and DLA’s Comptroller, it was agreed

that DLA’s billing for fiscal year 1997 would be capped at $82 million—the

maximum amount DLA would have to pay for the services DISA provided.

According to DLA, the billings from DISA would have been about

$108 million if the cap had not been in place. In addition, the funding

shortages can be attributed to (1) workload projections not being available

when the fiscal years 1996 and 1997 budgets were developed and (2) DLA’s

approved funding not being commensurate with prices charged by DISA.

• The Marine Corps did not reimburse DISA $1 million in fiscal year 1996 and

$6 million in fiscal year 1997. According to the Marine Corps official

responsible for the information technology budget, DISA formally agreed to

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bill the Marine Corps up to the amount budgeted for each fiscal year.

However, for each fiscal year, DISA’s actual cost incurred in providing

services to the Marines Corps exceeded the budgeted amount. As a result

of the agreement, DISA was not reimbursed for total costs it incurred.

Further, DOD’s Financial Management Regulation prohibits the recognition

of revenue and the corresponding recording of accounts receivable in the

absence of the requesting activity having funding authority.2

 Therefore,

DISA did not report the $115 million for unbilled work for fiscal years 1996

and 1997 as part of its accounts receivable. Instead, DISA reported the

$115 million through a work-in-process account. Federal accounting

standards require that accounts receivable be established when a federal

entity establishes a claim based on goods or services provided.3

Conclusions Being reimbursed for work performed is essential to the Defense

Information Services business area’s financial stability since this is the

principal means through which it receives the funds needed to cover

operating expenses. Since virtually all of the receivables are from

government activities, it seems reasonable to expect that they should be

collected. Nevertheless, about one-third of the business area’s accounts

receivable have been outstanding for more than 60 days. While the lack of

prompt reimbursement is a concern, the failure to be reimbursed for

services provided is a more pressing issue to be addressed.

Recommendations We recommend that the Under Secretary of Defense (Comptroller) direct

• DOD activities to follow existing DOD Financial Management Regulation by

providing funding documents to DISA for the amount of services being

requested before DISA begins work,

• DOD activities to reimburse DISA for the full amount of services provided,

and

• DISA to record amounts it is owed for services provided in accordance with

federal accounting standards.

2

DOD Financial Management Regulation, Volume 11B, Chapter 61, Section A. 7a.

3

FASAB Volume I Original Statements: Statements of Federal Financial Accounting Concepts and

Standards (GAO/AIMD 21.1.1 March 1997).

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Agency Comments

and Our Evaluation

DOD agreed with our recommendations to direct (1) DOD activities to

provide DISA funding documents for the amount of services requested prior

to work beginning, (2) DOD activities to reimburse DISA for the full amount

of services provided, and (3) DISA to record amounts it is owed for services

provided in accordance with federal accounting standards.

However, DOD stated that we did not recognize DISA’s progress in obtaining

quicker reimbursement for the services provided by aggressively following

up on outstanding amounts and using electronic payments. In July 1998,

we contacted FAA to inquire about the progress being made in establishing

an electronic payment process with DISA. A FAA representative stated that

although discussions had been held with DISA concerning this matter,

nothing had been finalized. Further, DISA-WESTHEM informed us that as of

July 1998, it was estimating that DFAS will not reimburse DISA

approximately $40 million for services provided in fiscal year 1998. Based

upon these representations, it is not clear how much progress has actually

been made.

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Financial Data

Meaningful and reliable financial reports are essential to allow DISA to

monitor the financial results of operations and set realistic prices to

charge the customer. Reliable financial reports are also necessary to

enable the Congress to exercise its oversight responsibility. However,

weaknesses within DISA’s internal control and accounting systems have

hindered the development of accurate financial reports. The primary cause

of these weaknesses is the Industrial Fund Accounting System (IFAS),

which is used by the DMCs.

As noted in DOD’s Chief Financial Officer’s status report for fiscal year

1997,1 IFAS cannot provide financial data that are complete, reliable,

consistent, timely, and responsive to the needs of agency management.

Because of these weaknesses, the DOD IG was unable to express an

opinion on DISA’s fiscal year 1997 financial statements.

These problems are not unique to DISA. Since the concept of DBOF was put

forth in February 1991, we have continually reported that DOD has

experienced difficulty with accurately reporting on the results of

operations for the WCFs.2

 Because the financial reporting problems and

other inefficiencies in the operations of the WCFs, the National Defense

Authorization Act for Fiscal Year 1997 required DOD to develop an

improvement plan by September 30, 1997. In its response, DOD

acknowledged that “[s]ystem deficiencies are a major reason for unreliable

and unsupported accounting information.”3

DOD IG Issues

Disclaimer of Opinion

on DISA Financial

Statements

Because of system deficiencies that resulted in unverifiable account

balances and inadequate audit trails, the DOD IG was unable to render an

opinion on DISA’s financial statements for fiscal year 1997. The DOD IG

found that (1) undistributed collections and disbursements were posted to

accounts receivable and payable, respectively, and could not be verified

and (2) beginning and ending balances for property, plant, and equipment

could not be reconciled.

1

Chief Financial Officer’s Financial Management Status Report and Five-Year Plan 1997-2001, Defense

Finance and Accounting Service, Fiscal Year 1997.

2

Air Force Supply Management: Analysis of the Activity Group’s Financial Reports, Prices, and Cash

Management (GAO/AIMD/NSIAD-98-118, June 8, 1998); Defense Business Operations Fund:

Management Issues Challenge Fund Implementation (GAO/AIMD-95-79, March 1, 1995); Defense

Business Operations Fund: Improved Pricing Practices and Financial Reports Are Needed to Set

Accurate Prices (GAO/AIMD-94-132, June 22, 1994); and Financial Management: Status of the Defense

Business Operations Fund (GAO/AIMD-94-80, March 9, 1994).

3

A Plan to Improve the Management and Performance of the Department of Defense Working Capital

Funds, September 1997.

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Conceptually, collections and disbursements are considered undistributed

when they have been made and reported to the Treasury but not recorded

in DOD’s accounting records. Therefore, DOD adjusts the (1) accounts

receivable balances based on the difference between the collections

recorded in the accounting system’s general ledger and the collections

reported to the Treasury and (2) accounts payable balance based on the

difference between the disbursements recorded in the accounting system’s

general ledger and the disbursements reported to the Treasury.

In accordance with DOD guidance—Financial Management Regulation,

Volume 11B, Chapter 54—the DMCs’ undistributed collections and

disbursements were transferred to accounts receivable and payable and

reported in the financial statements at the end of fiscal year 1997. These

transfers resulted in accounts receivable and payable being reduced by

$98 million and $337 million, respectively. In conducting its audit of DISA’s

financial statements for fiscal year 1997, the DOD IG was unable to verify

the accuracy and reliability of these adjustments. Furthermore, in the case

of accounts payable, the reduction resulted in an abnormal debit balance

of $50 million. Although DFAS and DISA are aware of the problem, they have

not identified the specific cause. Moreover, federal accounting standards

do not provide for offsetting undistributed transactions to accounts

receivable and payable.

Further, because of system interface problems between IFAS and the

Defense Property Accountability System (DPAS), the DOD IG was unable to

audit the property, plant, and equipment line item. These problems

resulted in incorrect postings to depreciation and fixed asset accounts. In

addition, regular periodic reconciliations were not performed to correct

the errors. The amount reported for DMC property, plant, and equipment

($198.7 million) in DISA’s Statement of Financial Position represents

23 percent of total assets.

Our September 1997 report4

 identified similar problems between IFAS and

DPAS. We identified over $100 million in differences between property and

accounting records and found that procedures were not adequate to

control rejected transactions and ensure that discrepancies were

corrected promptly. This situation occurred because the required

reconciliations were not performed.

4

Financial Management: DOD’s Approach to Financial Control Over Property Needs Structure

(GAO/AIMD-97-150, September 30, 1997).

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The inability to accurately account for property, plant, and equipment

could affect the accuracy of DMC prices because depreciation is a major

cost element included in the prices. For fiscal year 1998, the amount of

depreciation included in DMC prices was 14 percent for IBM and 8 percent

for UNISYS. Given the myriad of problems discussed above, there is no

assurance that the amount for depreciation is accurate. If the accuracy of

a major cost element is questionable, the accuracy of the price being

charged is questionable.

Reliable Revenue and

Cost Data Essential to

Setting Accurate

Prices

Our analysis of DISA’s fiscal year 1997 financial data disclosed numerous

instances in which the revenue and cost for nonmainframe services were

not accurately reported. Overall, we identified (1) 11 DMCs that reported

revenues without any corresponding cost for 19 C-Goal categories of

service and (2) 12 DMCs that reported cost without any related revenue for

20 categories of service. Revenue without corresponding cost totaled

approximately $5 million, while cost for which no corresponding revenue

was recorded totaled about $3 million. Examples of each condition are as

follows.

• Ogden DMC reported revenues with no costs, including approximately

$1.5 million in revenue for Direct Customer Support, $169,000 for Network

Control, and $58,000 for services provided to a specific customer.

• Montgomery DMC reported no costs for four of the five categories of

service with revenues totaling $823,000.

• Chambersburg DMC reported costs with no revenues for four of the eight

services, including about $627,000 for Defense Information Integrated

Engineering, $96,000 for Information Systems Support, $91,000 for Output

Distribution, and $69 for Network and Program Management.

DISA-WESTHEM officials acknowledged that the accounting for DMC revenues

and costs has been unreliable. They further stated that DISA has focused

much of its attention on the management of the mainframe processing

workload and has little overall visibility over the other types of services

the DMCs were providing to their customers. These services included

computer repair and local area network operations that are not associated

with mainframe operations. As part of DISA’s DMC consolidations, these

services will be offered by the Regional Information Services locations.

DISA has initiated efforts to improve its oversight over C-Goal services. For

example, the Resource Management Branch has developed new unit

identification codes to reduce the risk of misclassifying revenue and cost

Page 48 GAO/AIMD-98-182 DISA Pricing of Services
Chapter 5 

Effective Management Requires Accurate

Financial Data

and new budgeting and accounting procedures manuals, including

guidance for pricing nonmainframe services. DISA-WESTHEM also appointed

a project manager who has begun efforts to standardize categories of

services being offered. Standardizing services is an important first step in

gaining visibility and oversight of the various services being offered. The

outcome of these efforts should improve DISA’s ability to develop accurate

projections of operating costs and prices and to evaluate operating results.

Additionally, the accurate recording of revenues and costs is important to

the successful operations of the Regional Information Services locations

which are a part of DISA’s overall plan to further consolidate its megacenter

operations. According to DISA’s consolidation plan, each regional location

must be self-sustaining as required by the WCF. Further, an official within

the Office of the Under Secretary of Defense (Comptroller) stated that

locations operating at a loss will be closed.

DOD Efforts to

Improve Accuracy of

Financial Data

The types of problems identified by the DOD IG and discussed in DOD’s

fiscal year 1997 Federal Managers’ Financial Integrity Act (FMFIA) report,

and the DFAS Status Report are not unique to DISA. Since the concept of

DBOF was put forth in February 1991, we have repeatedly identified

weaknesses with the accuracy and reliability of the financial reports

prepared on the results of operations. DOD itself has also recognized the

inadequacies in financial reports—in the Acting Comptroller’s February 2,

1993, letter to the congressional Defense committees; the September 24,

1993, Defense Business Operations Fund improvement plan; and DOD’s

February 2, 1994, response to our October 1993 letter on concerns we had

with the Defense Business Operations Fund improvement plan. Further,

DOD’s fiscal year 1997 FMFIA report noted deficiencies with WCF accounting

and reporting. More specifically, DOD’s CFO Status Report notes that IFAS

cannot provide financial data that are complete, reliable, consistent,

timely, and responsive to the needs of agency management. To resolve

these problems, DOD stated that it has undertaken an alternative analysis to

determine the most cost effective means of implementing a compliant

system. However, DOD has not specified a date for completion of the

analysis.

Because of congressional concern over DOD’s inability to resolve these

long-standing problems, the National Defense Authorization Act for Fiscal

Year 1997 directed DOD to prepare a plan to improve the management and

operations of the WCFs. Among other things, the act specifically required

DOD to address the issue involving financial reporting. As discussed in our

Page 49 GAO/AIMD-98-182 DISA Pricing of Services
Chapter 5 

Effective Management Requires Accurate

Financial Data

recent report,5 DOD’s September 30, 1997, response clearly articulated the

problems hindering accurate financial reporting and discussed the

decisions made to resolve the problems. However, the plan does not

(1) identify the specific tasks that need to be performed, (2) establish

accountability for ensuring that the tasks are completed when more than

one DOD organizational entity is involved, and (3) establish milestones for

ensuring that the tasks are completed promptly. Our report recommended

that DOD develop a detailed implementation plan that (1) identifies the

specific actions that need to be taken, (2) establishes milestones, and

(3) clearly delineates responsibilities for performing the specific tasks. In

his May 14, 1998, response to our report, the Under Secretary of Defense

(Comptroller) concurred with the overall findings and recommendations.

The Comptroller noted that the Office of the Secretary of Defense

Revolving Fund Directorate has established three working groups that will

develop specific implementation and execution plans and procedures for

financial reporting.

Conclusions Accurate and credible financial data are essential for DISA managers to

ascertain if realistic prices are being established. Reliable financial

information is also necessary to enable the Congress to exercise its

oversight responsibilities. Although DOD has acknowledged accounting and

reporting problems and developed various improvement plans, the

financial reporting problems confronting the WCF today are essentially the

same as they were since their inception. Until the accuracy and reliability

of the financial reports improve, DISA will continue to be in the untenable

position of attempting to manage and fulfill its fiduciary responsibility

based on questionable data.

Agency Comments

and Our Evaluation

DOD expressed concern that our findings related to DISA and that the report

does not recognize the systemic nature of the deficiencies in DOD. We

disagree. The report states that these problems were not unique to DISA

and that since the concept of DBOF was put forth in February 1991, we have

continually reported on DOD’s difficulties in reporting accurately on the

results of operations for the working capital funds. Further, the report also

recognizes that the responsibility for resolving these problems rests with

DOD, not DISA.

In addition, some of the financial reporting weaknesses discussed above

are the result of DISA personnel not following procedures in the recording

5

GAO/AIMD/NSIAD-98-118, June 8, 1998.

Page 50 GAO/AIMD-98-182 DISA Pricing of Services
Chapter 5 

Effective Management Requires Accurate

Financial Data

of revenue and cost at the DMCs. As noted in our report, the DMCs have

experienced difficulty in accurately recording revenues and costs. DISA

management needs to ensure that such weaknesses do not continue and

contribute to overall weaknesses within DOD’s accounting systems.

Page 51 GAO/AIMD-98-182 DISA Pricing of Services
Appendix I 

Comments From the Department of Defense

Note: GAO comments

supplementing those in the

report text appear at the

end of this appendix.

See comment 1.

Page 52 GAO/AIMD-98-182 DISA Pricing of Services
Appendix I 

Comments From the Department of Defense

See comment 1.

Page 53 GAO/AIMD-98-182 DISA Pricing of Services
Appendix I 

Comments From the Department of Defense

Page 54 GAO/AIMD-98-182 DISA Pricing of Services
Appendix I 

Comments From the Department of Defense

Page 55 GAO/AIMD-98-182 DISA Pricing of Services
Appendix I 

Comments From the Department of Defense

Page 56 GAO/AIMD-98-182 DISA Pricing of Services
Appendix I 

Comments From the Department of Defense

Page 57 GAO/AIMD-98-182 DISA Pricing of Services
Appendix I 

Comments From the Department of Defense

See comment 1.

Now on page 28.

Page 58 GAO/AIMD-98-182 DISA Pricing of Services
Appendix I 

Comments From the Department of Defense

Now on page 28.

See comment 1.

Now on page 28.

Now on page 37.

See comment 1.

Page 59 GAO/AIMD-98-182 DISA Pricing of Services
Appendix I 

Comments From the Department of Defense

Now on page 38.

See comment 1.

Now on page 44.

Now on page 44.

Now on page 44.

Page 60 GAO/AIMD-98-182 DISA Pricing of Services
Appendix I 

Comments From the Department of Defense

Page 61 GAO/AIMD-98-182 DISA Pricing of Services
Appendix I 

Comments From the Department of Defense

The following is GAO’s comment on the Department of Defense’s letter

dated September 2, 1998.

GAO Comment 1. Discussed in “Agency Comments and Our Evaluation” sections of

chapters 2 through 5.

Page 62 GAO/AIMD-98-182 DISA Pricing of Services
Appendix II 

Fiscal Year 1998 Appropriated Funds

Supporting Working Capital Fund Activities

Dollars in thousands

DISA PROGRAM

Appropriated amounts for

WCF activities with

existing customer base

Appropriated amounts

supporting WCF related

activities

Operations & Maintenance (IT Budget)

The Defense Message System is replacing the legacy messaging service,

AUTODIN. AUTODIN costs are recovered by the working capital fund. $34,110 $34,110

The information security program was established to secure DOD networks

including those funded by the WCF from intrusion. DISA estimates that 25

percent of its $86.5 million annual appropriated amount relates to systems

under the working capital fund. $21,635 $21,635

The Defense Information System Network includes the base, long-haul, and

deployed blocks. DISA is responsible for (1) operational management,

(2) system design, (3) performance standards, (4) interoperable interface

standards, (5) connection requirements, (6) approval for DISN

procurement, (7) test and evaluation, (8) billings through the WCF, and

(9) security measures. $60,077 $60,077

The DISA Continuity of Operations and Test Facility mission includes

providing continuity of operations support to the megacenters and testing

Defense Information Infrastructure components such as DISN. $16,978 $16,978

Engineering Standards encompasses exchange standards necessary for

vital command and control functions, including voice and data

communication systems that are components of the WCF.

Portion pertaining

to megacenters and

DISN unknown $18,847

IT core computing includes programs that will deliver and implement

Defense Information Infrastructure building block components. Specific

projects include IT core DMC engineering. DMCs operate under the WCF.

Portion pertaining

to megacenters

unknown $28,482

Subtotal $132,800 $180,129

Procurement

Mobile Satellite System Technologies is an emerging technology with the

capability to support low rate voice and data services. Current voice and

data services are funded through the working capital fund. $9,769 $9,769

The information security program was established to secure DOD networks

including those funded by the WCF from intrusion. Budget justification

generally relate fund usage to WCF components. $19,151 $19,151

Continuity of Operations funds are to establish a state of the art lab at

DISA’s Continuity of Operations and Test Facility. This lab provides

integrated services to the DMCs. DMCs are funded by the WCF. $4,534 $4,534

The Defense Message System is replacing the legacy messaging service

AUTODIN. AUTODIN costs are recovered by the WCF. $43,485 $43,485

Subtotal $76,939 $76,939

Research, Development, Test and Evaluation

Interoperability provides test and evaluation of major DOD programs, such

as DMS and DISN, by certifying that critical requirements are supported by

interoperable functionalities. $5,942 $5,942

Defense Information Infrastructure engineering and integration services and

tools support key DISA programs and initiatives such as DMS, DISN, ATM,

and information security. $1,388 $1,388

(continued)

Page 63 GAO/AIMD-98-182 DISA Pricing of Services
Appendix II 

Fiscal Year 1998 Appropriated Funds

Supporting Working Capital Fund Activities

Dollars in thousands

DISA PROGRAM

Appropriated amounts for

WCF activities with

existing customer base

Appropriated amounts

supporting WCF related

activities

Long-haul communications program funds system engineering and test and

evaluation for DISN. $13,693 $13,693

Subtotal $21,023 $21,023

Total $230,762 $278,091

Page 64 GAO/AIMD-98-182 DISA Pricing of Services
Appendix III 

Major Contributors to This Report

Accounting and

Information

Management Division

Washington, D.C.

Darby W. Smith, Assistant Director

Miguel A. Castillo, Senior Information Systems Analyst

Cristina Chaplain, Communications Analyst

Denver Field Office Peggy A. Hegg, Senior Information Systems Analyst

(511639) Page 65 GAO/AIMD-98-182 DISA Pricing of Services
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