United States Government Accountability Office

GAO Testimony 

Before the Subcommittee on Federal Financial 

Management, Government Information, and 

International Security, Committee on Homeland 

Security and Governmental Affairs, U.S. Senate 

DEPARTMENT OF 

DEFENSE 

Sustained Leadership Is 

Critical to Effective 

Financial and Business 

Management 

Transformation 

Statement of David M. Walker 

Comptroller General of the United States 

For Release on Delivery

Expected at 2:30 p.m. EDT

Thursday, August 3, 2006 

 

GAO-06-1006T 
What GAO Found

United States Government Accountability Office

Why GAO Did This Study

Highlights

Accountability Integrity Reliability

August 3, 2006

DEPARTMENT OF DEFENSE 

Sustained Leadership Is Critical to 

Effective Financial and Business 

Management Transformation 

Highlights of GAO-06-1006T, a testimony 

before the Subcommittee on Federal 

Financial Management, Government 

Information and International Security, 

Committee on Homeland Security and 

Governmental Affairs, U.S. Senate

The Department of Defense (DOD)

bears sole responsibility for eight 

DOD-specific high-risk areas and 

shares responsibility for six 

governmentwide high-risk areas. 

These high-risk areas reflect the 

pervasive weaknesses that cut 

across all of DOD’s major business

operations. Several of the high-risk 

areas are inter-related, including, 

but not limited to, financial 

management, business systems 

modernization, and DOD’s overall 

approach to business 

transformation. Billions of dollars 

provided to DOD are wasted each 

year because of ineffective 

performance and inadequate

accountability. DOD has taken 

some positive steps to successfully 

transform its business operations 

and address these high-risk areas, 

but huge challenges remain. 

This testimony discusses 

(1) pervasive, long-standing

financial and business management

weaknesses that affect DOD’s 

efficiency; (2) some examples that 

highlight a need for improved 

business systems development and

implementation oversight;

(3) DOD’s key initiatives to 

improve financial management,

related business processes, and

systems; and (4) actions needed to

enhance the success of DOD’s 

financial and business

transformation efforts.

DOD’s pervasive financial and business management problems adversely 

affect the economy, efficiency, and effectiveness of its operations, and have 

resulted in a lack of adequate accountability across all major business areas. 

These problems have left the department vulnerable to billions of dollars of 

fraud, waste, and abuse annually, at a time of increasing fiscal constraint. 

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

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

independent financial audit because of pervasive weaknesses in financial 

management systems, operations, and controls. The following examples

indicate the magnitude and severity of the problems. 

Illustrative Weaknesses in DOD’s Financial Management and Business Operations

Business area Problem identified 

Military personnel Hundreds of separated battle-injured soldiers were

pursued for collection of military debts incurred through no 

fault of their own. Overpayment of pay and allowances 

(entitlements), pay calculation errors, and erroneous leave 

payments caused 73 percent of the reported debts. 

Inventory The Army had not maintained accurate accountability over

inventory shipped to repair contractors. 

Financial management DOD’s processes for recording and reporting costs for the 

Global War on Terrorism were inadequate, raising

significant concerns about the overall reliability of DOD’s

reported cost data. 

Source: GAO.

To support its business operations, DOD invests billions of dollars each year 

to operate, maintain, and modernize its business systems. But despite this

significant annual investment, GAO has continued to identify business 

system projects that have failed to be implemented on time, within budget, 

and with the promised capability. For example, in January 2006, GAO 

reported on problems with the implementation of the Defense Travel 

System—a project that was initiated in September 1998. 

DOD’s many high-risk challenges are years in the making and will take time 

to effectively address. Top management has demonstrated a commitment to 

transforming the department’s business processes. In December 2005, DOD 

issued its Financial Improvement and Audit Readiness Plan to guide its 

financial management improvement efforts. Also, DOD has developed an 

initial Standard Financial Information Structure, which is DOD’s 

enterprisewide data standard for categorizing financial information. Because 

of the complexity and long-term nature of DOD transformation efforts, GAO 

would like to reiterate two missing critical elements that need to be in place

if DOD’s transformation efforts are to be successful. First, DOD should 

develop and implement a comprehensive, integrated, and enterprisewide

business transformation plan. Second, GAO continues to support the 

creation of a chief management officer, with the right skills and at the right 

level within the department, to provide the needed sustained leadership to 

oversee the department’s overall business transformation process. 

www.gao.gov/cgi-bin/getrpt?GAO-06-1006T.

To view the full product, click on the link 

above. For more information, contact McCoy 

Williams at (202) 512-9095 or 

williamsm1@gao.gov. 
Mr. Chairman and Members of the Subcommittee: 

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

transformation efforts at the Department of Defense (DOD). At the outset, 

I would like to thank the Subcommittee for having this hearing and 

acknowledge the important role hearings such as this one serve. The 

involvement of this Subcommittee is critical to ultimately ensuring public 

confidence in DOD as a steward that is accountable for its finances. DOD 

continues to confront pervasive, decades-old financial management and 

business problems related to its systems, processes (including internal 

controls), and people (human capital). Of the 26 areas on GAO’s 

governmentwide “high-risk” list, 8 are DOD program areas, and the 

department shares responsibility for 6 other high-risk areas that are 

governmentwide in scope.1

 These problems serve to, among other things, 

preclude the department from producing accurate, reliable, and timely 

information with which to make sound decisions and accurately report on

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

management deficiencies continue to represent the single largest obstacle 

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

financial statements. In an effort to better manage DOD’s resources, the 

Secretary of Defense has appropriately placed a high priority on

transforming key business processes to improve their efficiency and

effectiveness in supporting the department’s military mission.

As per your request, my testimony will touch on three of the high-risk 

areas—financial management, business systems modernization, and 

DOD’s overall approach to business transformation. I will provide 

perspectives on (1) some of the pervasive, long-standing financial and

business management weaknesses that affect DOD’s efficiency; (2) some 

examples that highlight a need for improved business systems 

development and implementation oversight; (3) DOD’s key initiatives to 

improve financial management, related business processes, and systems; 

and (4) actions needed to enhance the success of DOD’s financial and 

 1

 GAO, GAO’s High-Risk Program, GAO-06-497T (Washington, D.C.: Mar. 15, 2006). DOD

bears responsibility for the following eight high-risk areas: (1) DOD’s overall approach to

business transformation, (2) business systems modernization, (3) financial management,

(4) the personnel security clearance process, (5) supply chain management, (6) support

infrastructure management, (7) weapon systems acquisition, and (8) contract management. 

The department shares responsibility for the following six governmentwide high-risk areas: 

(1) disability programs, (2) interagency contracting, (3) information systems and critical 

infrastructure, (4) information sharing for homeland security, (5) human capital, and (6) 

real property.

Page 1 GAO-06-1006T 
business transformation efforts. My statement is based on our previous 

reports and testimonies. Our work was performed in accordance with 

generally accepted government auditing standards. 

DOD’s pervasive financial and business management problems adversely 

affect the economy, efficiency, and effectiveness of its operations, and 

have resulted in a lack of adequate accountability across all major 

business areas. These problems have left the department vulnerable to 

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

increasing fiscal constraint. Further evidence of DOD’s problems is the 

long-standing inability of any military service or major defense component 

to pass the test of an independent financial audit because of pervasive 

weaknesses in financial management systems, operations, and controls. 

The following examples indicate the magnitude and severity of the 

problems. 

Summary 

• We found that hundreds of separated battle-injured soldiers were 

pursued for collection of military debts incurred through no fault of 

their own, including 74 soldiers whose debts had been reported to 

credit bureaus, private collection agencies, and the Treasury Offset 

Program. Overpayment of pay and allowances (entitlements), pay 

calculation errors, and erroneous leave payments caused 73 percent of 

the reported debts.2

• We found numerous problems with DOD’s processes for recording and 

reporting costs for the Global War on Terrorism (GWOT), raising 

significant concerns about the overall reliability of DOD’s reported cost 

data. As noted in our September 2005 report, neither DOD nor 

Congress know how much the war was costing and how appropriated 

funds were spent, or have historical data useful in considering future 

funding needs.3

 In at least one case, the reported costs may have been 

materially overstated. Specifically, DOD’s reported obligations for 

mobilized Army reservists in fiscal year 2004 were based primarily on 

estimates rather than actual information and differed from related 

payroll information by as much as $2.1 billion, or 30 percent of the 

 2

 GAO, Military Pay: Hundreds of Battle-Injured GWOT Soldiers Have Struggled to 

Resolve Military Debts, GAO-06-494 (Washington, D.C.: Apr. 27, 2006).

3

 GAO, Global War on Terrorism: DOD Needs to Improve the Reliability of Cost Data and 

Provide Additional Guidance to Control Costs, GAO-05-882 (Washington, D.C.: Sept. 21,

2005). 

Page 2 GAO-06-1006T 
amount DOD reported in its cost report. 

Additionally, the department invests billions of dollars each year to 

operate, maintain, and modernize its business systems. But despite this 

significant annual investment, the department has been continually 

confronted with the difficult task of implementing business systems on 

time, within budget, and with the promised capability. For example, in 

December 2005,4

 we reported that the Army had not economically justified

its investment in the Transportation Coordinators’ Automated Information 

for Movement System (TC-AIMS) II, on the basis of reliable estimates of 

costs and benefits. TC-AIMS II was intended to be the single integrated 

system to automate transportation management function areas for the 

military services. As noted in our report, the most recent economic 

justification included cost and benefit estimates based on all four military 

services using the system. However, the Air Force and the Marine Corps 

have stated that they do not intend to use TC-AMIS II. Even with costs and 

benefits for all four services included, the analysis showed a marginal 

return on investment; that is, for each dollar spent on the system, slightly 

less than one dollar of benefit would be returned. The Army estimates the 

total life cycle cost of TC-AIMS II to be $1.7 billion over 25 years, including 

$569 million for acquisition and $1.2 billion for operation and

maintenance. The Army reports that it has spent approximately $751 

million on TC-AIMS II since its inception in 1995. 

This example and others highlight the need for improved oversight of the 

billions of dollars DOD invests annually in the operation, maintenance, 

and modernization of its business systems. Further, in the past the 

department has also struggled with developing a business enterprise 

architecture to guide its business system development efforts. We reported 

in July 2005, that DOD, after almost 4 years and investing approximately 

$318 million, the architecture was not sufficient to effectively guide and 

constrain ongoing and planned systems investments.5

 To its credit, DOD 

has recognized these weaknesses and taken actions to improve its 

management control and accountability over business system investments. 

 4

 GAO, DOD Systems Modernization: Uncertain Joint Use and Marginal Expected Value

of Military Asset Deployment System Warrant Reassessment of Planned Investment, 

GAO-06-171 (Washington, D.C.: Dec. 15, 2005). 

5

 GAO, DOD Business Systems Modernization: Long-standing Weaknesses in Enterprise

Architecture Development Need to Be Addressed, GAO-05-702 (Washington, D.C.: July 22,

2005). 

Page 3 GAO-06-1006T 
Successful reform of DOD’s fundamentally flawed financial and business 

management operations must simultaneously focus on its systems, 

processes, and people. DOD’s top management has demonstrated a 

commitment to transforming the department and has launched key 

initiatives to improve its financial management processes and related 

business systems. For example, in December 2005, DOD issued its 

Financial Improvement and Audit Readiness (FIAR) Plan, to guide 

financial improvement and financial audit efforts within the department. 

Also, DOD has developed an initial Standard Financial Information 

Structure (SFIS), which is DOD’s enterprisewide data standard for 

categorizing financial information. While DOD has made some 

encouraging progress in addressing specific challenges, it is still in the 

very early stages of a departmentwide reform that will take many years to

accomplish. 

DOD continues to make progress in several areas in its overall business 

transformation efforts. For example, DOD established the Defense 

Business System Management Committee (DBSMC) as DOD’s primary 

transformation leadership and oversight mechanism, and created the 

Business Transformation Agency (BTA) to support the DBSMC. However, 

I believe that DOD still lacks several key elements that are needed to 

ensure a successful and sustainable transformation effort. In this regard, I

would like to reiterate two critical elements needed if DOD is to succeed. 

First, as we have previously recommended, DOD should develop and 

implement an integrated and strategic business transformation plan. The 

lack of a comprehensive, integrated, enterprisewide action plan linked 

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

weakness in DOD’s business management transformation. Second, we 

continue to support the creation of a chief management officer (CMO) at 

the right level of the organization to provide the sustained leadership 

needed to achieve a successful and sustainable transformation effort. The

CMO would serve as a strategic integrator to elevate and institutionalize 

the attention essential for addressing key stewardship responsibilities, 

such as strategic planning, enterprise architecture development and 

implementation, business systems, and financial management, while 

facilitating the overall business management transformation within DOD. 

DOD is a massive and complex organization. Overhauling its business 

operations will take years to accomplish and represents a huge 

management challenge. In fiscal year 2005, the department reported that

its operations involved $1.3 trillion in assets and $1.9 trillion in liabilities, 

more than 2.9 million military and civilian personnel, and $635 billion in 

Background 

Page 4 GAO-06-1006T 
net cost of operations. For fiscal year 2005, the department was 

appropriated approximately $525 billion.6

Large differences between the net cost of operations and amounts 

appropriated for any given fiscal year are not unusual in DOD. For the 

most part, they are attributed to timing differences. For example, net cost 

is calculated using an accrual basis of accounting (revenues and expenses

are recorded when earned and owed, respectively) whereas 

appropriations are recorded on a cash basis (revenues and expenses are 

recorded when cash is received or paid.) Using the accrual basis versus 

the cash basis can result in DOD’s reporting of revenues and expenses in 

different periods. For instance, DOD may have received in 2005 an 

appropriation for the acquisition of a weapon system but may not incur 

expenses or make payments from the appropriation until several years 

later. Also, DOD’s net cost of operations includes non-cash expenses, such 

as depreciation related to buildings and equipment that will not require 

cash outlays until several years after the funds were appropriated. In 

addition, the department’s recording of expenses related to environmental 

cleanups and pension and retiree health cost liabilities can occur many 

years before the appropriations to fund payment of those liabilities are 

received. 

Execution of DOD’s operations spans a wide range of defense 

organizations, including the military services and their respective major 

commands and functional activities, numerous large defense agencies and 

field activities, and various combatant and joint operational commands 

that are responsible for military operations for specific geographic regions 

or theaters of operation. To support DOD’s operations, the department 

performs an assortment of interrelated and interdependent business 

functions—using more than 3,700 business systems—related to major 

business areas such as weapon systems management, supply chain

management, procurement, health care management, and financial 

management. The ability of these systems to operate as intended affects 

the lives of our warfighters both on and off the battlefield. For fiscal year 

2006, Congress appropriated approximately $16 billion to DOD to operate, 

maintain, and modernize these business systems, and for fiscal year 2007,

DOD has requested another $16 billion for this purpose. 

 6

 Of the fiscal year 2005 appropriation, approximately $78 billion was for the Global War on 

Terrorism and tsunami and hurricane relief efforts and about $39 billion was for permanent

indefinite appropriations for retiree pensions and health care. 

Page 5 GAO-06-1006T 
To assist DOD in addressing its modernization management challenges, 

Congress included provisions in the Ronald W. Reagan National Defense 

Authorization Act for Fiscal Year 2005 7

 that were consistent with our 

recommendations for establishing and implementing effective business 

system investment management structures and processes. During the past

year, DOD has embarked on a series of efforts to transform its business 

operations and further comply with the act. In February 2005, DOD 

chartered the DBSMC to oversee transformation. As the senior most 

governing body overseeing business transformation, the DBSMC consists 

of senior leaders who meet monthly under the personal direction of the 

Deputy Secretary of Defense to set business transformation priorities and 

recommend policies and procedures required to attain DOD-wide 

interoperability of business systems and processes. 

In October 2005, DOD also established the BTA that is intended to advance 

DOD-wide business transformation efforts in general, but particularly with 

regard to business systems modernization. DOD believes it can better 

address agencywide business transformation—which includes planning, 

management, organizational structures, and processes related to all key 

business areas—by first transforming business operations that support the 

warfighter while also enabling financial accountability across DOD. The 

BTA reports directly to the vice chair of the DBSMC—the Under Secretary 

of Defense for Acquisition, Technology and Logistics—and includes an 

acquisition executive who is responsible for 28 DOD-wide business 

projects, programs, systems, and initiatives. The BTA is responsible for 

integrating and supporting the work of the Office of the Secretary of 

Defense principal staff assistants, some of whom function as the approval 

authorities and who chair the business system investment review boards 

(IRB). The IRBs serve as the oversight and investment decision-making 

bodies for those business capabilities that support activities in their 

designated areas of responsibility. 

 7

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

108-375, § 332, 118 Stat. 1811, 1851-1856 (Oct. 28, 2004) (codified in part at 10 U.S.C. §

2222). 

Page 6 GAO-06-1006T 
Since the first GAO report on the financial statement audit of a major DOD 

component over 16 years ago,8

 we have repeatedly reported that 

weaknesses in business management systems, processes, and internal 

controls not only adversely affect the reliability of reported financial data, 

but also the management of DOD operations. In March 2006,9 I testified 

that DOD’s financial management deficiencies, taken together, continue to 

represent the single largest obstacle to achieving an unqualified opinion on

the U.S. government’s consolidated financial statements. These issues 

were also discussed in the latest consolidated financial audit report.10 To 

date, none of the military services or major DOD components has passed 

the test of an independent financial audit because of pervasive weaknesses 

in internal control and processes and fundamentally flawed business 

systems. 

Pervasive Financial 

and Business 

Management 

Problems Affect 

DOD’s Efficiency and 

Effectiveness 

DOD’s financial management problems are pervasive, complex, longstanding, deeply rooted in virtually all of its business operations, and 

challenging to resolve. The nature and severity of DOD’s financial 

management, business operations, and system deficiencies not only affect

financial reporting, but also impede the ability of DOD managers to receive 

the full range of information needed to effectively manage day-to-day 

operations. Such weaknesses have adversely affected the ability of DOD to 

control costs, ensure basic accountability, anticipate future costs and 

claims on the budget, measure performance, maintain funds control, and 

prevent fraud, as the following examples illustrate. 

• We found that hundreds of separated battle-injured soldiers were 

pursued for collection of military debts incurred through no fault of 

their own, including 74 soldiers whose debts had been reported to 

credit bureaus, private collection agencies, and the Treasury Offset 

Program. Overpayment of pay and allowances (entitlements), pay 

calculation errors, and erroneous leave payments caused 73 percent of 

 8

 GAO, Financial Audit: Air Force Does Not Effectively Account for Billions of Dollars of

Resources, GAO/AFMD-90-23 (Washington, D.C.: Feb. 23, 1990). 

9

 GAO, Fiscal Year 2005 U.S. Government Financial Statements: Sustained Improvement 

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

Condition and Long-term Fiscal Imbalance, GAO-06-406T (Washington, D.C.: Mar. 1,

2006). 

10 Department of the Treasury, 2005 Financial Report of the United States Government

(Washington, D.C.: Dec. 15, 2005). 

Page 7 GAO-06-1006T 
the reported debts.11

• We identified numerous problems with DOD’s processes for recording 

and reporting costs for the Global War on Terrorism raising significant 

concerns about the overall reliability of DOD’s reported cost data. As 

discussed in our September 2005 report, neither DOD nor Congress 

know how much the war was costing and how appropriated funds were 

spent, or have historical data useful in considering future funding 

needs. 12 In at least one case, the reported costs may have been 

materially overstated. Specifically, DOD’s reported obligations for 

mobilized Army reservists in fiscal year 2004 were based primarily on 

estimates rather than actual information and differed from related 

payroll information by as much as $2.1 billion, or 30 percent of the 

amount DOD reported in its cost report. 

• In March 2006, we reported that DOD’s policies and procedures for 

determining, reporting, and documenting cost estimates associated 

with environmental cleanup or containment activities were not 

consistently followed. Further, none of the military services had 

adequate controls in place to help ensure that all identified 

contaminated sites were included in their environmental liability cost 

estimates. DOD’s reported liability of $64 billion is primarily for the 

cleanup of hazardous wastes at training ranges, military bases, and 

former defense sites; disposal of nuclear ships and submarines; and 

disposal of chemical weapons. These weaknesses not only affected the 

reliability of DOD’s environmental liability estimate, but also that of the 

federal government as a whole. Uncertainties in environmental 

liabilities could materially affect the ultimate cost and timing of 

cleanup activities.13

• In December 2005, we reported that the Army had not maintained 

accurate accountability over inventory shipped to repair contractors, 

thereby placing these assets at risk of loss or theft. Although DOD 

policy requires the military services to confirm receipt of all assets 

shipped to contractors, we found that the Army did not consistently 

record shipment receipts in its inventory management systems. In an 

 11 GAO-06-494. 

12 GAO-05-882. 

13 GAO, Environmental Liabilities: Long-Term Fiscal Planning Hampered by Control 

Weaknesses and Uncertainties in the Federal Government’s Estimates, GAO-06-427 

(Washington, D.C.: Mar. 31, 2006). 

Page 8 GAO-06-1006T 
analysis of fiscal year 2004 shipment data obtained from two Army 

inventory control points, we could not reconcile shipment records with 

receipt records for 42 percent of the unclassified secondary repair item 

shipments, with a value of $481.7 million, or for 37 percent of the 

classified secondary repair item shipments, with a value of $8.1 million. 

These weaknesses in the Army’s ability to account for inventory 

shipped to repair contractors increase the risk of undetected loss or 

theft because the Army cannot ensure control over assets after they 

have been shipped from its supply system. Moreover, inaccurate and 

incomplete receipt records diminish asset visibility and can distort onhand inventory balances, leading to unnecessary procurement of 

items.14

• Over the years, DOD recorded billions of dollars of disbursements and 

collections in suspense accounts because the proper appropriation 

accounts could not be identified and charged. Because documentation 

needed to resolve these payment recording problems could not be 

found after so many years, DOD requested and received authority to 

write off certain aged suspense transactions. While DOD reported that 

it wrote off an absolute value of $35 billion or a net value of $629 

million using the legislative authority, neither of these amounts 

accurately represents the true value of all the individual transactions 

that DOD had not correctly recorded in its financial records. Many of 

DOD’s accounting systems and processes routinely offset individual 

disbursements, collections, adjustments, and correction entries against 

each other and, over time, amounts might even have been netted more 

than once. This netting and summarizing misstated the total value of 

the write-offs and made it impossible for DOD to identify what

appropriations may have been under- or overcharged or to determine 

whether individual transactions were valid.15

• In May 2006, we reported that some DOD inventory management 

centers had not followed DOD-wide and individual policies and 

procedures to ensure they were retaining the right amount of 

contingency retention inventory. While policies require the centers to 

(1) use category codes to describe why they are retaining items in 

contingency inventory, (2) hold only those items needed to meet 

 14 GAO, Defense Inventory: Army Needs to Strengthen Internal Controls for Items 

Shipped to Repair Contractors, GAO-06-209 (Washington, D.C.: Dec. 13, 2005). 

15 GAO, DOD Problem Disbursements: Long-standing Accounting Weaknesses Result in

Inaccurate Records and Substantial Write-offs, GAO-05-521 (Washington, D.C.: June 2,

2005). 

Page 9 GAO-06-1006T 
current and future needs, and (3) perform annual reviews of their 

contingency inventory decisions, one or more centers had not followed 

these policies. For example, the Army’s Aviation and Missile Command 

was not properly assigning category codes that described the reasons 

they were holding items in contingency inventory because the 

inventory system was not programmed to use the codes. We found that 

items valued at $193 million did not have codes to identify the reasons 

why they were being held, and therefore we were unable to determine 

the items’ contingency retention category. We also found that some 

inventory centers have held items such as gears, motors, and electronic 

switches, even though there have been no requests for some of them by 

the services in over 10 years. By not following policies for managing 

contingency inventory, DOD’s centers may be retaining items that are 

needlessly consuming warehouse space, and they are unable to know if 

their inventories most appropriately support current and future 

operational needs.16

• In June 2006, we reported that the military services had not 

consistently implemented DOD’s revised policy in calculating 

carryover.17 Instead, the military services used different methodologies 

for calculating the reported actual amount of carryover and the 

allowable amount of carryover since DOD changed its carryover policy 

in December 2002. Specifically, (1) the military services did not 

consistently calculate the allowable amount of carryover that was 

reported in their fiscal year 2004, 2005, and 2006 budgets because they 

used different tables (both provided by DOD) that contained different 

outlay rates for the same appropriation; (2) the Air Force did not follow 

DOD’s regulation on calculating carryover for its depot maintenance 

activity group, which affected the amount of allowable carryover and

actual carryover by tens of millions of dollars as well as whether the 

actual amount of carryover exceeded the allowable amount as reported 

in the fiscal year 2004, 2005, and 2006 budgets; and (3) the Army depot 

maintenance and ordnance activity groups’ actual carryover was 

understated in fiscal years 2002 and 2003 because carryover associated 

with prior year orders was not included in the carryover calculation as 

required. As a result, year-end carryover data provided to decision 

 16 GAO, Defense Inventory: Actions Needed to Improve Inventory Retention Management, 

GAO-06-512 (Washington, D.C.: May 25, 2006). 

17 Carryover is the dollar value of work that has been ordered and funded (obligated) by 

customers but not completed by working capital fund activities at the end of the fiscal year. 

Carryover consists of both the unfinished portion of work started but not completed as 

well as requested work that has not yet commenced. 

Page 10 GAO-06-1006T 
makers who review and use the data for budgeting were erroneous and 

not comparable across the three military services.18

The department is provided billions of dollars annually to operate, 

maintain, and modernize its stovepiped, duplicative, legacy business 

systems. Despite this significant investment, the department is severely 

challenged in implementing business systems on time, within budget, and 

with the promised capability. The Clinger-Cohen Act of 199619 and Office 

of Management and Budget guidance provide an effective framework for 

information technology (IT) investment management. They emphasize the 

need to have investment management processes and information to help 

ensure that IT projects are being implemented at acceptable costs and 

within reasonable and expected time frames and that they are contributing

to tangible, observable improvements in mission performance. Effective 

project management and oversight will be critical to the department’s 

success in transforming its business management systems and operations. 

Many of the problems related to DOD’s inability to effectively implement 

its business systems on time, within budget, and with the promised 

capability can be attributed to its failure to implement the disciplined 

processes20 necessary to reduce the risks associated with these projects to

acceptable levels.21 Disciplined processes have been shown to reduce the 

risks associated with software development and acquisition efforts and are 

fundamental to successful systems acquisition. While the department 

invests billions of dollars annually in its business systems, the following 

examples highlight the continuing problem faced by the department in 

successfully implementing business systems. 

Improved Oversight 

of DOD Business

Systems Needed 

• Logistics Modernization Program (LMP). In May 2004, we first 

reported our concerns with the requirements management and testing 

 18 GAO, Defense Working Capital Fund: Military Services Did Not Calculate and Report 

Carryover Amounts Correctly, GAO-06-530 (Washington, D.C.: June 27, 2006). 

19 Pub. L. No. 104-106, div. E, 110 Stat. 186, 679 (Feb. 10, 1996). 

20 Disciplined processes include a wide range of activities, including project planning and 

management, requirements management, risk management, quality assurance, and testing. 

21 Acceptable levels refer to the fact that any systems acquisition effort will have risks and 

will suffer the adverse consequences associated with defects in the processes. However, 

effective implementation of disciplined processes reduces the possibility of the potential 

risks actually occurring and prevents significant defects from materially affecting the cost, 

timeliness, and performance of the project.

Page 11 GAO-06-1006T 
processes used by the Army in the implementation of LMP and the 

problems being encountered after it became operational in July 2003.22

At the time of our initial report, the Army decided that future 

deployments would not occur until it had reasonable assurance that the 

system would operate as expected for a given deployment. However, as 

we reported in June 2005, the Army’s inability to effectively address the 

requirements management and testing problems hampered its ability to 

field LMP to other locations.23 Our analysis disclosed that LMP could 

not properly recognize revenue or bill customers. Furthermore, data 

conversion problems resulted in general ledger account balances not 

being properly converted when LMP became operational in July 2003. 

These differences remained unresolved almost 18 months later. These 

weaknesses adversely affected the Army’s ability to set the prices for 

the work performed at the Tobyhanna Army Depot. In addition, data 

conversion problems resulted in excess items being ordered and 

shipped to Tobyhanna. As noted in our June 2005 report, three 

truckloads of locking washers (for bolts) were mistakenly ordered and 

received and subsequently returned because of data conversion 

problems. At the request of the Chairman and Ranking Minority 

Member of the Subcommittee on Readiness and Management Support, 

Senate Committee on Armed Services, we have initiated an audit of the 

Army’s efforts to achieve financial management visibility over its 

assets. One aspect of this audit will be to ascertain the Army’s progress 

in resolving the previously identified problems with LMP. 

• Navy Enterprise Resource Planning (ERP). We reported in September 

2005 that the Navy had invested approximately $1 billion in four pilot 

ERP efforts, without marked improvement in its day-to-day 

operations.24 The four pilots were limited in scope and were not 

intended to be a corporate solution for resolving any of the Navy’s longstanding financial and business management problems. The lack of a

coordinated effort among the pilots led to a duplication of efforts in 

implementing many business functions and resulted in ERP solutions 

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

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

May. 27, 2004). 

23 GAO, Army Depot Maintenance: Ineffective Oversight of Depot Maintenance 

Operations and System Implementation Efforts, GAO-05-441 (Washington, D.C.: June 30, 

2005). 

24 GAO, DOD Business Systems Modernization: Navy ERP Adherence to Best Business

Practices Critical to Avoid Past Failures, GAO-05-858 (Washington, D.C.: Sept. 29, 2005). 

Page 12 GAO-06-1006T 
that carry out similar functions in different ways from one another. In 

essence, the pilots resulted in four more DOD stovepiped systems that 

did not enhance DOD’s overall efficiency and resulted in $1 billion 

being largely wasted. While the current Navy ERP effort has the 

potential to address some of the Navy’s financial management 

weaknesses, its planned functionality will not provide an all-inclusive, 

end-to-end corporate solution for the Navy. For example, the scope of 

the ERP project does not provide for real-time asset visibility of 

shipboard inventory. Asset visibility has been and continues to be a 

long-standing problem within the department. Furthermore, the project 

has a long way to go, with a current estimated completion date of 2011, 

at an estimated cost of $800 million.

• Defense Travel System (DTS). As we reported in January 2006,25 DTS 

continues to face implementation challenges, particularly with respect 

to testing key functionality to ensure that the system will perform as 

intended. Our analysis of selected requirements for one key area 

disclosed that system testing was not effective in ensuring that the 

promised capability was delivered as intended. For example, we found 

that DOD did not have reasonable assurance that flight information 

was properly displayed.

26 This problem was not detected prior to 

deployment of DTS because DOD did not properly test the system 

interfaces through which the data are accessed for display. As a result, 

those travelers using the system may not have received accurate 

information on available flights, which could have resulted in higher 

travel costs. Our report also identified key challenges facing DTS in 

becoming DOD’s standard travel system, including the development of 

needed interfaces and underutilization of DTS at sites where it has 

been deployed. While DTS has developed 36 interfaces with various 

DOD business systems, it will have to develop interfaces with at least 

18 additional business systems—not a trivial task. Additionally, the 

continued use of the existing legacy travel systems at locations where 

DTS is already deployed results in underutilization of DTS and affects 

the savings that DTS was planned to achieve. 

• Naval Tactical Command Support System (NTCSS). The Navy 

initiated the NTCSS program in 1995 to enhance the combat readiness 

 25 GAO, DOD Business Transformation: Defense Travel System Continues to Face 

Implementation Challenges, GAO-06-18 (Washington, D.C.: Jan. 18, 2006).

26 Flight information includes items such as departure and arrival times, airports, and the 

cost of the airline ticket. 

Page 13 GAO-06-1006T 
of ships, submarines, and aircraft. To accomplish this, NTCSS was to 

provide unit commanding officers and crews with information about 

maintenance activities, parts inventories, finances, technical manuals 

and drawings, and personnel. According to the Navy, it spent 

approximately $1.1 billion for NTCSS from its inception through fiscal 

year 2005 and expects to spend another $348 million from fiscal years 

2006 through 2009, for a total of approximately $1.45 billion. As 

discussed in our December 2005 report,27 the Navy has not 

economically justified its ongoing and planned investment in NTCSS on 

the basis of reliable estimates of future costs and benefits. The most 

recent economic justification’s cost estimates were not reliably 

derived, and return on investment was not properly calculated. In 

addition, independent reviews of the economic justification to

determine its reliability did not occur, and the Navy has not measured 

whether already deployed and operating components of the system are 

producing expected value. 

• TC-AIMS II. In December 2005, we reported that the Army had not 

economically justified its investment in TC-AIMS II on the basis of 

reliable estimates of costs and benefits. TC-AIMS II was intended to be 

the single integrated system to automate transportation management 

function areas for the military services.28 As noted in our report, the 

most recent economic justification included cost and benefit estimates 

predicated on all four military services using the system. However, the 

Air Force and the Marine Corps have stated that they do not intend to 

use TC-AMIS II. Even with costs and benefits for all four services 

included, the analysis showed a marginal return on investment; that is, 

for each dollar spent on the system, slightly less than one dollar of 

benefit would be returned. The Army estimates the total life cycle cost 

of TC-AIMS II to be $1.7 billion over 25 years, including $569 million for 

acquisition and $1.2 billion for operation and maintenance. The Army 

reports that it has spent approximately $751 million on TC-AIMS II 

since its inception in 1995. 

To effectively and efficiently modernize its nonintegrated and duplicative 

business operations and systems, it is essential for DOD to develop and 

use a well-defined business enterprise architecture. In July 2001, the 

 27 GAO, DOD Systems Modernization: Planned Investment in the Navy Tactical

Command Support System Needs to Be Reassessed, GAO-06-215 (Washington, D.C.: Dec. 5,

2005). 

28 GAO-06-171. 

Page 14 GAO-06-1006T 
department initiated a business management modernization program to, 

among other things, develop the architecture. We have previously reported 

on DOD’s long-standing architecture management weaknesses.29 Despite 

spending almost 4 years and about $318 million, the architecture did not 

provide sufficient content and utility to effectively guide and constrain 

ongoing and planned business systems investments. DOD recognized the 

weaknesses that needed to be addressed and assigned a new business 

transformation leadership team in 2005. More specifically, as previously 

noted, in October 2005, DOD established BTA to advance DOD-wide 

business transformation efforts in general, but particularly with regard to 

business systems modernization. 

DOD’s complex and pervasive weaknesses cannot be fixed with short-term 

solutions, but require ongoing and sustained top management attention 

and resources. DOD’s top management has demonstrated a commitment 

to transforming the department and has launched key initiatives to 

improve its financial management processes and related business systems, 

as well as made important progress in complying with legislation 

pertaining to its business systems modernization and financial 

management improvement efforts. For example, we reported in May 200630

that DOD released an update to its business enterprise architecture on 

March 15, 2006, developed an updated enterprise transition plan, and 

issued its annual report to Congress describing steps taken and planned 

with regard to business transformation, among other things. These steps 

address several of the missing elements we previously identified relative to

the legislative provisions concerning the architecture, transition plan, 

budgetary reporting of business system investments, and investment 

review. Further, we testified31 that in December 2005 DOD had issued its 

FIAR Plan, a major component of its business transformation strategy, to 

guide financial management improvement and audit efforts within the 

department. In addition, DOD developed SFIS that will be its 

enterprisewide data standard for categorizing financial information to 

support financial management and reporting functions. While this progress 

better positions the department to address the business systems 

DOD’s Key Initiatives 

to Improve Financial 

Management 

Processes and 

Business Systems 

 29 GAO-05-702. 

30 GAO, Business Systems Modernization: DOD Continues to Improve Institutional 

Approach, but Further Steps Needed, GAO-06-658. (Washington, D.C.: May 15, 2006). 

31 GAO-06-406T. 

Page 15 GAO-06-1006T 
modernization and financial management high-risk areas, significant 

challenges remain, particularly in implementing its tiered accountability 

investment approach. 

DOD Issued Its Financial 

Improvement and Audit 

Readiness Plan 

A major component of DOD’s business transformation strategy is its FIAR 

Plan, issued in December 2005. The FIAR Plan was issued pursuant to 

section 376 of the National Defense Authorization Act for Fiscal Year 

2006,

32 which for fiscal year 2006 limited DOD’s ability to obligate or 

expend funds for financial improvement activities until the department 

submitted a comprehensive and integrated financial management 

improvement plan to congressional defense committees that (1) described 

specific actions to be taken to correct deficiencies that impair the 

department’s ability to prepare timely, reliable, and complete financial

management information; and (2) systematically tied such actions to 

process and control improvements and business systems modernization 

efforts described in the business enterprise architecture and transition 

plan. Further, section 376 required a written determination that each 

financial management improvement activity undertaken be (1) consistent 

with the financial management improvement plan and (2) likely to 

improve internal controls or otherwise result in sustained improvement in 

DOD’s ability to produce timely, reliable, and complete financial 

management information. The act also required that each written 

determination be submitted to the congressional defense committees. 

The FIAR Plan is intended to provide DOD components with a road map 

for achieving the following objectives: (1) resolving problems affecting the 

accuracy, reliability, and timeliness of financial information, and (2) 

obtaining clean financial statement audit opinions. Similar to the Financial 

Improvement Initiative, an earlier DOD improvement effort, the FIAR Plan 

uses an incremental approach to structure its process for examining 

operations, diagnosing problems, planning corrective actions, and 

preparing for audit. However, unlike the previous initiative, the FIAR Plan 

does not establish a specific target date for achieving a clean audit opinion

on the departmentwide financial statements. Target dates under the prior 

plan were not credible. Rather, the FIAR Plan recognizes that it will take 

several years before DOD is able to implement the systems, processes, and 

other changes necessary to fully address its financial management 

weaknesses. This plan is an important and positive step that will help key 

 32 Pub. L. No. 109-163, § 376, 119 Stat. 3136, 3213 (Jan. 6, 2006). 

Page 16 GAO-06-1006T 
department personnel to better understand and address its financial 

management deficiencies. 

As outlined in its FIAR Plan, DOD has established business rules and an 

oversight structure to guide improvement activities and audit preparation 

efforts. In December 2005, the U.S. Army Corps of Engineers, Civil Works, 

became the first major DOD component to assert, under DOD’s new 

process and business rules, that its fiscal year 2006 financial statement 

information was reliable. An independent public accounting firm has been 

hired to perform this component’s financial statement audit, under the 

oversight and direction of the DOD Inspector General. However, the 

effectiveness of DOD’s FIAR Plan, as well as the department’s leadership 

and business rules, in addressing DOD’s financial management 

deficiencies will be ultimately measured by the department’s ability to 

provide timely, reliable, accurate, and useful information for day-to-day

management and decision making. 

DOD Developed an Initial 

Standard Financial 

Information Structure 

Another key initiative is SFIS, which is DOD’s enterprisewide data 

standard for categorizing financial information to support financial 

management and reporting functions. DOD has recently completed phase I

of the SFIS initiative, which focused on standardizing general ledger and

external financial reporting requirements. SFIS includes a standard 

accounting classification structure that can allow DOD to standardize 

financial data elements necessary to support budgeting, accounting, cost 

management, and external reporting; it also incorporates many of the 

Department of the Treasury’s U. S. Standard General Ledger attributes. 

Additional SFIS efforts remain under way, and the department plans to 

further define key data elements, such as those relating to the planning, 

programming, and budgeting business process area. 

DOD intends to implement SFIS using three approaches. One approach 

requires legacy accounting systems to submit detail-level accounting 

transactions that are to be converted to SFIS-equivalent data elements. 

The second approach applies to business feeder systems and will require 

incorporation of SFIS data elements within systems that create the 

business transactions. Lastly, accounting systems under development, 

including new enterprise resource planning systems, are required to have

the ability to receive SFIS data as part of source transactions and generate

appropriate general ledger entries in accordance with the U.S. Standard 

General Ledger. 

Page 17 GAO-06-1006T 
To help improve the department’s control and accountability over its 

business systems investments, provisions in the fiscal year 2005 national 

defense authorization act directed DOD to put in place a specifically 

defined structure that is responsible and accountable for controlling 

business systems investments to ensure compliance and consistency with 

the business enterprise architecture. More specifically, the act directs the 

Secretary of Defense to delegate responsibility for review, approval, and

oversight of the planning, design, acquisition, deployment, operation, 

maintenance, and modernization of defense business systems to 

designated approval authorities or “owners” of certain business missions.33

DOD has satisfied this requirement under the act. On March 19, 2005, the 

Deputy Secretary of Defense issued a memorandum that delegated the 

authority in accordance with the criteria specified in the act, as described

above. Our research and evaluation of agencies’ investment management 

practices have shown that clear assignment of senior executive investment 

management responsibilities and accountabilities is crucial to having an 

effective institutional approach to IT investment management.34

DOD Efforts to Control 

Business Systems 

Investments 

The fiscal year 2005 national defense authorization act also required DOD 

to establish investment review structures and processes, including a 

hierarchy of IRBs, each with representation from across the department, 

and a standard set of investment review and decision-making criteria for 

these boards to use to ensure compliance and consistency with DOD’s 

business enterprise architecture. In this regard, the act required the 

establishment of the DBSMC—which serves as the highest ranking 

governance body for business system modernization activities within the 

department. As of April 2006, DOD identified 3,717 business systems and 

assigned responsibility for these systems to IRBs. Table 1 shows the 

systems by the responsible IRB and component. 

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

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

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

Networks and Information Integration/Chief Information Officer of the Department of

Defense; and the Deputy Secretary of Defense or an Under Secretary of Defense, as 

designated by the Secretary of Defense, are responsible for the review, approval, and 

oversight of business systems and must establish investment review processes for systems 

under their cognizance. 

34 GAO, Information Technology Investment Management: A Framework for Assessing 

and Improving Process Maturity, GAO-04-394G (Washington, D.C.: March 2004). 

Page 18 GAO-06-1006T 
Table 1: DOD Systems by Investment Review Board and Component 

Investment Review Board Air Force Army Navy

Defense Finance

and Accounting 

Service

Other defense 

agencies Total

Financial Management 67 161 148 72 35 483

Human Resources Management 164 320 174 20 114 792

Weapon System Life Cycle Management and 

Materiel Supply and Service Management 780 730 406 1 168 2,085

Real Property and Installations Life Cycle 

Management 71 122 44 0 17 254

Other 65 0 26 0 12 103

Total 1,147 1,333 798 93 346 3,717

Source: GAO analysis of DOD data. 

A key element of the department’s approach to reviewing and approving 

business systems investments is the use of what it refers to as tiered 

accountability. DOD’s tiered accountability approach involves an 

investment control process that begins at the component level and works 

its way through a hierarchy of review and approval authorities, depending

on the size and significance of the investment. Military service officials 

emphasized that the success of the process depends on them performing a 

thorough analysis of each business system before it is submitted for 

higher-level review and approval. Through this process, the department 

reported in March 2006 that 226 business systems, representing about $3.6 

billion in modernization investment funding, had been approved by the 

DBSMC—the department’s highest-ranking approval body for business 

systems. According to the department’s March 2006 report, this process 

also identified more than 290 systems for phaseout or elimination and 

approximately 40 business systems for which the requested funding was 

reduced and the funding availability periods were shortened to fewer than 

the number of years requested. For example, one business system 

investment that has been eliminated is the Forward Compatible Payroll 

(FCP) system. In reviewing the program status, the IRB determined that 

FCP would duplicate the functionality contained in the Defense Integrated 

Military Human Resources System, and it was unnecessary to continue 

investing in both systems. According to the department’s fiscal year 2007

IT budget request, approximately $33 million was sought for fiscal year 

2007 and about $31 million was estimated for fiscal year 2008 for FCP. 

Eliminating this duplicative system will enable DOD to use this funding for 

other priorities. The funding of multiple systems that perform the same 

function is one reason the department has thousands of business systems. 

Identifying and eliminating duplicative systems helps optimize mission 

Page 19 GAO-06-1006T 
performance and accountability and supports the department’s 

transformation goals. 

Furthermore, based on information provided by BTA program officials, 

there was a reduction of funding and the number of years that funding will 

be available for 14 Army business systems, 8 Air Force business systems, 

and 8 Navy business systems. For example, the Army’s Future Combat 

Systems Advanced Collaborative Environment program requested funding

of $100 million for fiscal years 2006 to 2011, but the amount approved was 

reduced to approximately $51 million for fiscal years 2006 to 2008. 

Similarly, Navy’s Military Sealift Command Human Resources 

Management System requested funding of about $19 million for fiscal 

years 2006 to 2011, but the amount approved was approximately $2 million 

for the first 6 months of fiscal year 2006. According to Navy officials, this 

system initiative will be reviewed to ascertain whether it has some of the 

same functionality as the Defense Civilian Personnel Data System. 

Funding system initiatives for shorter time periods can help reduce the 

financial risk by providing additional opportunities for monitoring a 

project’s progress against established milestones and help ensure that the 

investment is properly aligned with the architecture and the department’s 

overall goals and objectives. 

Besides limiting funding as part of the investment review and approval 

process, this process is also resulting in conditions being placed on system 

investments. These conditions identify specific actions to be taken and

when the actions must be completed. For example, in the case of the 

Army’s LMP initiative, one of the noted conditions was that the Army had 

to address the issues discussed in our previous reports.35 In our May 2004 

report, we recommended that the department establish a mechanism that 

provides for tracking all business systems modernization conditional 

approvals to provide reasonable assurance that all specific actions are 

completed on time.36 The department’s action is consistent with the intent

of our recommendations. 

Notwithstanding the department’s efforts to control its business system 

investments, formidable challenges remain. In particular, the reviews of 

those business systems that have modernization funding of less than $1 

million, which represent the majority of the department’s reported 3,717 

 35 GAO-04-615 and GAO-05-441. 

36 GAO-04-615. 

Page 20 GAO-06-1006T 
business systems, are only now being started on an annual basis. The 

extent to which the review structures and processes will be applied to the 

department’s 3,717 business systems is still evolving. Given the large 

number of systems involved, it is important that an efficient system review 

and approval process be effectively implemented for all systems. As 

indicated in table 1, there are numerous systems across the department in 

the same functional area. Such large numbers of systems indicate a real

possibility for eliminating unnecessary duplication and avoiding 

unnecessary spending on the department’s multiple business systems. 

While DOD’s recent efforts represent positive steps toward improving 

financial management and changing DOD’s business systems environment, 

the department still lacks key elements that are needed to ensure a 

successful and sustainable business transformation effort. We reiterate 

two major elements necessary for successful business transformation: 

(1) a comprehensive, integrated, and enterprisewide business 

transformation plan and (2) a CMO with the right skills and at the right 

level of the department for providing the sustained leadership needed to 

achieve a successful and sustainable transformation effort. 

Key Elements Needed 

to Guide DOD 

Transformation 

Efforts

Comprehensive, 

Integrated, and 

Enterprisewide Business 

Transformation Plan Not 

Developed 

Although some progress has been made in business transformation 

planning, DOD still has not developed a comprehensive, integrated, and 

enterprisewide strategy or action plan for managing its overall business 

transformation effort. The lack of a comprehensive, integrated, 

enterprisewide action plan linked with performance goals, objectives, and 

rewards has been a continuing weakness in DOD’s business management 

transformation. 

Since 1999, GAO has recommended a comprehensive, integrated strategy

and action plan for reforming DOD’s major business operations and 

support activities.37 DOD’s efforts to plan and organize itself to achieve 

business transformation are continuing to evolve. Critical to the success of

these efforts will be top management attention and structures that focus 

on transformation from a broad perspective and a clear, comprehensive, 

integrated, and enterprisewide plan that at a summary level, addresses all 

of the department’s major business areas. This strategic plan should cover 

 37 GAO, Defense Reform Initiative: Organization, Status, and Challenges, 

GAO/NSIAD-99-87 (Washington, D.C.: Apr. 21, 1999). 

Page 21 GAO-06-1006T 
all of DOD’s key business functions; contain results-oriented goals, 

measures, and expectations that link institutional, unit, and individual 

performance goals and expectations to promote accountability; identify 

people with needed skills, knowledge, experience, responsibility, and 

authority to implement the plan; and establish an effective process and 

related tools for implementation. Such an integrated business 

transformation plan would be instrumental in establishing investment 

priorities and guiding the department’s key resource decisions. 

DOD’s leadership has recognized the need to transform the department’s 

business operations. DOD released a major update to its business 

enterprise architecture in September 2005 and developed an updated 

transition plan in March 2006 for modernizing its business processes and 

supporting IT assets. The business enterprise architecture provides a 

foundational blueprint for modernizing business operations, information, 

and systems, while the enterprise transition plan provides a road map and 

management tool that sequences business systems investments in the 

areas of personnel, logistics, real property, acquisition, purchasing, and 

financial requirements. 

However, while the enterprise transition plan is an important step toward 

developing a strategic plan for the department’s overall business 

transformation efforts, it is still focused primarily on business systems. 

Business transformation is much broader; it encompasses areas such as 

support infrastructure, human capital, financial management, planning and 

budgeting, and supply chain management. DOD officials acknowledge that 

the enterprise transition plan may not have all of the elements of an 

overarching business transformation plan as we envision it. However, they 

consider the plan to be evolving. 

Sustained Leadership Is 

Needed 

DOD continues to lack the sustained leadership at the right level to 

achieve successful and lasting transformation. We have testified on the 

need for a CMO on numerous occasions.38 Because of the complexity and

 38 GAO, Department of Defense: Long-standing Problems Continue to Impede Financial

and Business Management Transformation, GAO-04-907T (Washington, D.C.: July 7,

2004); Department of Defense: Financial and Business Management Transformation 

Hindered by Long-standing Problems, GAO-04-941T, (Washington, D.C.: July 8, 2004); 

Department of Defense: Further Actions Are Needed to Effectively Address Business 

Management Problems and Overcome Key Business Transformation Challenges, 

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

Business Transformation Requires Sound Strategic Planning and Sustained Leadership, 

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

Page 22 GAO-06-1006T 
long-term nature of DOD’s business transformation efforts, we reiterate 

the need for a CMO to provide sustained leadership and maintain 

momentum. Without formally designating responsibility and accountability 

for results, choosing among competing demands for scarce resources and 

resolving differences in priorities between various DOD organizations will 

be difficult and could impede DOD’s ability to transform in an efficient, 

effective, and reasonably timely manner. In addition, it may be particularly 

difficult for DOD to sustain transformation progress when key personnel 

changes occur. The National Defense Authorization Act for Fiscal Year 

200639 directs the department to study the feasibility of a CMO position in 

DOD. In this regard, the Institute for Defense Analysis has initiated a study 

and the results are due by December 2006. Further, in May 2006, the 

Defense Business Board recommended the creation of a Principal Under 

Secretary of Defense, with a 5 year term appointment, to serve as CMO. 

Additionally, in July 2006, a major global consulting firm recommended 

the concept of a chief operating officer be instituted in many federal 

agencies as the means to help achieve the transformation that many 

agencies have undertaken.40

To provide for senior-level leadership, the CMO would serve as the 

strategic, enterprisewide integrator of DOD’s overall efforts to transform 

its business operations. The CMO would be an executive level II 

appointment, with a tenure of 5 to7 years and serve as the Deputy 

Secretary or Principal Under Secretary of Defense for Management. This 

position would elevate integrate, and institutionalize the attention 

essential for addressing key stewardship responsibilities, such as strategic 

planning, enterprise architecture development and implementation, IT 

management, financial management reform, and human capital reform 

while facilitating the overall business management transformation effort 

within DOD. It is important to note that theCMO would not assume the 

responsibilities of the undersecretaries of defense, the service secretaries,

or other DOD officials for the day-to-day management of the department. 

Rather, the CMO would be responsible and accountable for planning, 

integrating, and executing the overall business transformation effort. The

 39 National Defense Authorization Act for Fiscal Year 2006, Pub. L. No. 109-163, § 907, 119

Stat. 3136, 3403 (Jan. 6, 2006). 

40 Tony Danker, Thomas Dohrmann, Nancy Killefer, and Lenny Mendonca, How can 

American government meet its productivity challenge? (Washington, D.C.: McKinsey & 

Company, 2006). 

Page 23 GAO-06-1006T 
CMO also would develop and implement a strategic plan for the overall 

business transformational efforts. 

The Secretary of Defense, Deputy Secretary of Defense, and other senior 

leaders have clearly shown a commitment to business transformation and 

addressing deficiencies in the department’s business operations. During 

the past year, DOD has taken additional steps to address certain 

provisions and requirements of the fiscal year 2005 national defense 

authorization act, including establishing the DBSMC as DOD’s primary 

transformation leadership and oversight mechanism, and creating the BTA

to support the DBSMC, a decision-making body. However, these 

organizations do not provide the sustained leadership needed to 

successfully achieve business transformation. The DBSMC’s 

representatives consist of political appointees whose terms expire when 

administrations change. Furthermore, it is important to remember that 

committees do not lead, people do. Thus, DOD still needs to designate a 

person to provide sustained leadership and have overall responsibility and 

accountability for this effort. 

DOD continues to face two formidable challenges. Externally, it must 

combat the global war on terrorism, and internally, it must address the 

long-standing problems of fraud, waste, and abuse. Pervasive, decades-old 

management problems related to its business operations affect all of 

DOD’s major business areas. While DOD has taken several positive steps 

to address these problems, our previous work has uncovered a persistent 

pattern among DOD’s reform initiatives that limits their overall impact on 

the department. These initiatives have not been fully implemented in a 

timely fashion because of the absence of comprehensive, integrated 

strategic planning; inadequate transparency and accountability; and the 

lack of sustained leadership. In this time of growing fiscal constraints, 

every dollar that DOD can save through improved economy and efficiency 

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

legitimate needs of our warfighters. Until DOD resolves the numerous 

problems and inefficiencies in its business operations, billions of dollars 

will continue to be wasted every year. Furthermore, without strong and 

sustained leadership, both within and across administrations, DOD will 

likely continue to have difficulties in maintaining the oversight, focus, and

momentum needed to implement and sustain the needed reforms to its 

business operations. In this regard, I would like to reiterate the need for a 

CMO to serve as the strategic and enterprisewide integrator to oversee the

overall transformation of the department’s business operations. 

Conclusion 

Page 24 GAO-06-1006T 
Mr. Chairman and Members of the Subcommittee, this concludes my 

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

have at this time. 

Page 25 GAO-06-1006T (195097) 
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Congressional 

Relations 

Public Affairs 

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