United States General Accounting Office

GAO Report to Congressional Requesters

September 1995 DEFENSE

INFRASTRUCTURE

DOD’s Planned

Finance and

Accounting Structure

Is Larger and More

Costly Than Necessary

GAO/NSIAD-95-127

GAO United States

General Accounting Office

Washington, D.C. 20548

National Security and

International Affairs Division

B-259036 

Letter Date Goes Here

The Honorable Herbert H. Bateman

Chairman

The Honorable Norman Sisisky

Ranking Minority Member

Subcommittee on Military Readiness

Committee on National Security

House of Representatives

On May 3, 1994, the Department of Defense (DOD) announced a plan to

consolidate over 300 defense accounting offices into 5 large existing

finance centers1

 and 20 new sites called operating locations during the

next 5 to 7 years. The plan, which is expected to reduce DOD finance and

accounting personnel from 46,000 to 23,000, is aimed at streamlining DOD’s

financial operations and setting the stage for future process enhancements

and budgetary savings. In total, DOD expects the consolidation will save

between $8 billion and $9 billion (present value) over the next 20 years.

On August 3, 1994, your Subcommittee asked us to evaluate this plan. Your

Subcommittee wanted to know if the plan reflected leading-edge business

practices that would result in substantial cost reductions and high-quality

customer service and included a sound implementation strategy that was

achievable within stated time frames. Your Subcommittee also wanted to

know when DOD would begin to save money and if the potential for

consolidating finance and accounting operations had been fully realized.

This report assesses (1) the process DOD used to identify the number and

locations of the finance and accounting centers and operating locations,

(2) the potential impact of the consolidation on customer service, and

(3) DOD’s plan to include leading-edge business practices in the

consolidation.

Results in Brief We see DOD’s plan to consolidate and reduce personnel as a necessary step

toward a more effective and efficient finance and accounting service.

Consolidating and reengineering finance and accounting functions while

sustaining ongoing operations, however, is a difficult and complex task. In

such an undertaking it is important to strike a balance between cost

considerations and other factors important to maintaining customer

service and improving business operations. Based on our analysis of the

1

DOD’s five large centers are located in Columbus, Ohio; Cleveland, Ohio; Denver, Colorado;

Indianapolis, Indiana; and Kansas City, Missouri.

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process DOD used to select the proper number of new operating locations

and decide where they should be located, we do not believe DOD achieved

that balance. Specifically, we found the following:

• DOD decided to open 20 new operating locations without first determining

what finance and accounting functions they would perform or if 20 was

the right number to support its operations. DOD’s primary emphasis during

the decision-making process was on maximizing short-term cost savings,

not on determining what was best from a finance and accounting business

perspective.

• DOD, in selecting the 20 specific operating locations, used a process that

placed significant weight on using excess DOD facilities, primarily those on

military bases closed or realigned during the base realignment and closure

process. As a result, 15 of the 20 locations will be housed in excess DOD

facilities, even though DOD considered several of them less desirable from

a customer service, cost, or quality workforce standpoint. About

$173 million of military construction funding will be needed during fiscal

years 1997, 1998, and 1999 to bring these sites up to par.

• DOD, for the most part, has not reengineered the finance and accounting

functions that will be performed at the 20 operating locations. Thus, the

consolidation may reduce the number of locations performing finance and

accounting functions, but it will not likely improve DOD’s business

operations. Once these functions are reengineered, DOD may be faced with

the need to consolidate them once again.

Although DOD is opening 13 operating locations this fiscal year and 3 more

in early 1996, it will be some time before they are fully staffed and

operational. We believe this provides DOD time to reconsider its

consolidation decisions. Accordingly, as DOD proceeds with this

consolidation process, it needs to develop an updated estimate of the

number of locations and personnel needed to meet current and future

operating requirements and use this information to reassess its site

selection decisions for new operating locations.

Background The scope of DOD’s finance and accounting network is extremely large and

complex. The network pays about 6 million people (3 million uniformed

men and women, 1 million civilians, and 2 million retirees and annuitants)

and more than 15 million invoices annually charged to nearly 12 million

contracts. The network disburses over $250 billion annually and is the

source of financial information and thousands of reports used by

executives and managers throughout DOD.

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Prior to 1991, the military services managed this network. There were 5

large finance and accounting centers (one for each service plus a

contractor pay center) and over 300 small defense accounting offices at

various military bases and installations. This network was not only

inefficient (each service had unique and often duplicative processes and

systems) but was also unable to produce reliable financial information and

reports. To help solve these problems, in January 1991, DOD created the

Defense Finance and Accounting Service (DFAS). DFAS’ mission was to

strengthen DOD’s financial management operations by standardizing,

consolidating, and streamlining finance and accounting policies,

procedures, and systems. It was given management control of the 5 large

finance centers and some of the functions carried out at over 300 defense

accounting offices. Of the estimated 46,000 people in the finance and

accounting network at the time, DFAS eventually assumed organizational

responsibility for about 27,000. The remaining 19,000 people stayed with

their respective military service to perform managerial accounting and

various installation-related and customer service functions.

DFAS is a Defense Business Operations Fund entity. It operates as a

revolving fund and provides finance and accounting services to the

military departments and defense agencies. DFAS recoups its costs through

various fees and charges billed to those departments and agencies. DFAS’

fiscal year 1995 operating budget, which is about $2.0 billion, comes

primarily from operations and maintenance funds appropriated to the

military departments and defense agencies. Therefore, by reducing its

operating costs, DFAS will reduce the fees charged to the military services

and demands on operations and maintenance funds.

The consolidation of financial operations is a major piece of DOD’s plan for

achieving much needed financial management reform. Although the

planned consolidation is expected to provide a streamlined and less costly

infrastructure, other pieces of DOD’s plan will also need to be implemented

before significant improvement in financial operations will be realized.

Other pieces include reengineering its business and organizational

practices, standardizing financial data and definitions, and improving

financial systems so they allow DOD to comply with the requirements of the

Chief Financial Officers Act. Collectively, the pieces of the plan could

result in major improvements to DOD’s financial operations. DOD hopes to

implement its plan by the end of 1999.

DFAS’ first attempt to consolidate and streamline its finance and accounting

operations was done through a program known as the Opportunity for

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Economic Growth. Under this program, which began in March 1992, 112

communities in 33 states submitted economic incentive packages and

competed for the opportunity to house a large (4,000 to 7,000 person)

finance center. DFAS evaluated their proposals2

 and recommended to the

Secretary of Defense five “winners.” Before these winners were

announced, however, the new Secretary of Defense canceled the initiative

in March 1993, believing it was not sound public policy. Rather, he

believed it was an auction for public jobs that placed the cost of national

defense on local communities rather than the nation as a whole. He was

also concerned that moving large finance and accounting centers to new

cities would seriously degrade customer service.

Shortly thereafter, the Secretary announced a new consolidation initiative.

Under this initiative, the Secretary directed DFAS to select a small number

of sites (from 5 to 15). DFAS subsequently evaluated 132 potential locations,

including most of the cities that had competed under the Opportunity for

Economic Growth process and 16 bases that had been closed or realigned.

After this analysis was completed in May 1994, the Deputy Secretary of

Defense announced that finance and accounting operations would be

housed in the existing 5 large centers plus 20 new operating locations.3

Better Balance Is

Needed Between

Budgetary and

Customer Service

Goals

One of the more important aspects of the consolidation initiative was for

DOD to determine the appropriate size and location of its finance and

accounting network (e.g., how many offices and people are needed to

meet not only today’s requirements but also future requirements once new

systems, processes, and technologies are introduced). Size and location

are important because they help form the foundation upon which the new

network will be built. Wrong decisions could cause the network to be

mis-sized, leading to costly future reorganizations, consolidations, or

realignments. In making its consolidation decision, however, DOD’s primary

emphasis was on achieving short-term budgetary gains rather than on

establishing the best network for meeting current and future operational

and customer needs. As a result, DOD may be establishing a larger than

necessary finance and accounting network and increasing the risk of

creating short-term customer service problems.

2

DFAS’ primary evaluation criterion was the extent communities were willing to subsidize the cost of

facilities and operations. However, community and facility characteristics were also considered.

3

On July 1, 1994, a 21st site was added to the network. Located at Ford Island, Hawaii, this site will

support DOD’s finance and accounting operations in the Pacific theater.

Page 4 GAO/NSIAD-95-127 Defense Infrastructure
B-259036 

Planned DFAS

Infrastructure May Be

Larger Than Necessary

Throughout both DFAS consolidation initiatives, defense managers

indicated that finance and accounting operations should be consolidated

into as few sites as possible. Under the Opportunity for Economic Growth

process, for example, all DFAS operations were to be brought into five large

centers. This carried over to the second consolidation initiative when the

Secretary of Defense (on June 7, 1993) directed DFAS to analyze options for

5 to 15 sites. According to testimony by DOD officials,4

 reducing the

number of sites to “no more than a handful” was essential if DOD was to

achieve the savings, operational improvements, and efficiencies

envisioned from the consolidation.

Following this guidance, DFAS established the Consolidation Task Force to

study alternatives and carry out the site-selection process. The Senior

Review Council, made up of DFAS executives,5

 was also established to

oversee the Task Force’s work. During the first month of its study, the task

force gathered information about how to properly size DOD’s finance and

accounting operations. It reviewed research conducted by academia and

other DOD, federal, and private sector organizations and obtained the views

of 25 senior DFAS officials. It concluded that there was no “right size” for

consolidation sites but suggested that the existing 5 centers should have

from 1,000 to 5,000 employees and new operating locations should have

from 500 to 1,500 employees. During this time, the Review Council

discussed potential organizational structures that would move DOD’s

finance and accounting operations toward a joint operations environment

rather than a military service-oriented environment. The Review Council

wanted to avoid managing a large number of small organizations and

dividing finance and accounting functions among many sites.

Based on this work, DFAS, in conjunction with the DOD Comptroller’s staff,

completed a site-selection process plan in August 1993. This plan specified

5 to 15 sites as the acceptable number of sites and 750 as the minimum

number of people at each site. The plan included an explicit assumption

that “larger rather than smaller and fewer rather than a larger number of

sites was preferable.” During the next several months, the Task Force

assessed various alternatives, analyzed cost information, and deliberated

over different organizational structures. Based on input from the Senior

Review Council in January 1994, the Task Force narrowed its assessment

4

Statement by the Principal Deputy Assistant Secretary of Defense, Production and Logistics, and

Principal Deputy, DOD Comptroller, before the Subcommittee on Military Installations and Facilities,

House Committee on Armed Services, regarding DFAS consolidation (June 10, 1993).

5

Membership included about one-half of DFAS’ 27 Senior Executive Service members. Most DFAS

headquarters’ deputy directors and several finance center directors were represented on the Council.

Page 5 GAO/NSIAD-95-127 Defense Infrastructure
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to 2 primary alternatives, each involving a target population of 23,000

employees.

The first alternative would have placed 23,000 employees at the 5 existing

centers. The 5 centers employ about 11,000 people, so some facilities

would have required substantial modification to accommodate the growth.

The second alternative would have expanded the 5 centers to about 13,000

people and assigned 10,000 people to 6 additional sites—4 sites with 1,500

employees and 2 sites with 2,000 employees. In terms of cost, the Task

Force considered several factors (e.g., personnel costs, one-time transition

costs for severance pay and relocation of employees, building renovation

costs, rent, and utilities) and estimated that the 2 alternatives would save

between $6.4 billion and $8.8 billion (present value) over the next 20 years.6

 According to Senior Review Council representatives, six sites was the

preferred alternative because it would save more money and allow an

optimum consolidation of finance and accounting functions.

After further review, however, DOD officials7

 decided on a different course

of action. In May 1994, the Deputy Secretary of Defense announced that

finance and accounting functions would be consolidated into the 5

existing centers and 20 additional operating locations. His decision was

based primarily on two rationale:

1.The cost of activating and operating 20 smaller sites over 20 years is

comparable to the cost of 6 additional operating locations.

2.Twenty sites, staffed with fewer people, can be activated quicker than

either of the 2 alternatives studied by DFAS. This would allow DOD to close

the 300 defense accounting offices sooner and begin reducing the number

of employees in the finance and accounting network—the area where DOD

expects to achieve the most budgetary savings.

We have several concerns with this decision. First, it was based on

maximizing short-term cost savings, not on making the best business

decisions. Although these two concepts are not mutually exclusive, we

6

Present value analysis is a commonly used technique to quantify and compare costs for multiple

alternatives. The analysis considers the time value of money. The Consolidation Task Force

established costs in terms of 1993 dollars and escalated them to then-year dollars using approved DOD

inflation factors. After establishing these costs, the Task Force conducted present value analyses using

a discount factor of 6.4 percent.

7

A high-level group of DOD managers met several times during March and April 1994 to review DFAS

data and consider alternatives. This group included the DOD Comptroller and Deputy Comptroller, the

DFAS Director, and other management and support personnel.

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found no analysis that suggested that 20 operating locations was the

appropriate infrastructure to support either current or future operating

requirements or customer needs. DOD clearly decided on the number of

locations first and then attempted to determine which finance and

accounting functions they would perform.

Besides not being a good business practice, this action had a direct impact

on previous DFAS planning initiatives and concept of operations. Since the

beginning of the Opportunity for Economic Growth process, for example,

DFAS management had been planning to consolidate finance and

accounting functions either within the 5 large centers or at a limited

number of other locations. According to DFAS officials, larger sites gives

them greater flexibility to adjust and reorganize to meet future

technological, workload, and customer service changes. Under this

operating concept, the DFAS Indianapolis center, which handles accounting

for the Army, was planning for two large operating locations. One location

would have consolidated base-level finance and accounting functions for

the training and combat commands; a second site would have

consolidated finance and accounting functions for logistics and depot

activities. Further, the DFAS Columbus center was planning to consolidate

all vendor pay functions within the center; it did not see a need for any

additional operating locations. When DOD announced its consolidation

decision, however, it gave DFAS Indianapolis six operating locations and

DFAS Columbus two. As of April 1995, these two centers still had not

settled on the functions and workloads that would operate at these

locations.

Our second concern is that DOD did not estimate the costs of a 20-site

option and, consequently, does not know how those costs might compare

with other alternatives. During the time DOD executives were considering

DFAS alternatives, they did ask the Consolidation Task Force to analyze the

cost savings associated with retaining the 5 large centers plus either 10 or

15 additional operating locations. The Task Force’s analysis showed that

the two options would save between $8.1 billion and $8.8 billion (present

value).8

 Table 1 compares the cost estimates and potential savings of the

various consolidation alternatives. As the table shows, 6 and 15 locations

offer about the same amount of savings.

8

As required by the Office of Management and Budget Circular A-94, “Guidelines and Discount Rates

for Benefit-Cost Analysis of Federal Programs,” the Task Force conducted a sensitivity analysis by

varying the cost factors (plus/minus 10 percent) and applying the 1994 DOD discount rate of

5.75 percent.

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Table 1: Cost Estimates and Savings

of DFAS Consolidation Alternatives

(20-Year Present Value)

Dollars in billions

Consolidation

alternatives

Cost of

alternatives

Cost of existing

structure

Estimated

savings

Five centers $21.2 $27.6 $6.4

Five centers & 6

operating locationsa

18.5 - 19.5 27.6 8.1 - 8.8

Five centers & 10

operating locationsa

19.0 - 19.5 27.6 8.1 - 8.6

Five centers & 15

operating locationsa

18.8 - 19.1 27.6 8.5 - 8.8

aThe cost of these alternatives varied according to the sites evaluated. For example, for the

six-site alternative, the sites that provided the lowest cost alternative of $18.8 billion were different

than those that provided the best labor force alternative of $19.5 billion.

According to a Consolidation Task Force representative, the 15-location

option offers as much or more cost savings than other options because

DOD’s analysis assumed that the transfer or addition of personnel at new

operating locations was limited to 375 positions per year, per location.

More locations, therefore, would allow the work to be transferred from the

300 Defense Accounting Offices more rapidly, resulting in a quicker

drawdown of personnel and an earlier realization of savings. Although the

infrastructure costs associated with 15 sites is more expensive than other

options, DOD believed the additional cost would be more than offset by the

early consolidation. Based on this premise, DOD assumed that 20 sites

would result in a quicker drawdown of personnel and even more savings.

No additional analysis was done to confirm this assumption.

To determine if this premise was accurate, we ran an analysis for a 20-site

option, using the same parameters, assumptions, and discount rate as the

Consolidation Task Force. This analysis showed that 20 operating

locations, with a minimum of 750 people each, increases the target

population of the operating locations from 11,500 to 15,000. Consequently,

the workforce of the 5 existing centers and the 20 operating locations

would total 26,500 people, or 3,500 more than DOD’s target of 23,000

people. This increases the 20-year cost of the consolidation by at least

$2.8 billion (present value).9

In discussing the results of this analysis with the DFAS Director and other

DOD representatives, we were told that 750 people per site was not a

9

The additional cost is only for personnel. It does not include costs for such items as training,

equipment, and telecommunications that will be incurred with a larger workforce and infrastructure.

Page 8 GAO/NSIAD-95-127 Defense Infrastructure
B-259036 

minimum but rather a target and they had no intention of retaining a

population of more than 23,000 people. They explained that there is really

no way to tell how many people will be at an operating location, but they

would not arbitrarily increase the size just to reach a planning goal of 750.

Although we agree that DOD should not arbitrarily increase the size of its

operating locations, these statements raise questions about whether 20

locations are needed. All DFAS analysis prior to the site selection, for

example, was based on the need for at least 750 people per operating

location. Potential sites, buildings, and renovation costs were analyzed

and decisions were made with that in mind. Because DOD does not yet

know how many people will be assigned to each location, it has no way of

knowing whether its facility planning assumptions are accurate.

Consequently, it may be over- or underestimating its facility needs at the

various locations.

In addition, DOD does not have any specific analysis to support its position

that the 20 sites could be activated sooner to support a faster drawdown of

personnel. Although it seems logical that smaller sites can be activated

sooner than larger sites, much depends on the condition of the available

facilities; the time needed to make necessary renovations; the time

required to establish a management structure to recruit, hire, and train

new employees; the time required to transfer current employees and

workloads from offices that will close; and the quality of the workforce

available at the new location. As discussed later in this report, DOD

considered some of these factors in selecting the 20 sites, but they had

little impact on which sites were selected.

Site-Selection Process

Placed a Lower Priority on

Customer Service

In any consolidation initiative, it is important to consider the impact on the

business operation—will the enterprise be able to provide uninterrupted

service to customers? DOD recognized this when it made customer service

one of four site-selection criteria. According to DFAS officials, the idea was

to place a high value on sites with readily available, trained DFAS

employees. Even though these employees might have to learn a new

functional process or develop new skills, DOD assumed that a core group of

DFAS employees who are familiar with DFAS’ mission and possess a mix of

supervisory and technical skills would help maintain customer service

during the transition period.

This criterion, however, did not play a large part in DOD’s site-selection

decisions. An example relates to the Defense Commissary Agency’s vendor

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pay functions. Currently, DFAS has two locations that perform this function:

one in Hopewell, Virginia, where the Commissary Agency’s headquarters is

located, and the other in San Antonio, Texas. In fiscal year 1994, these two

offices processed 2.8 million invoices totaling $4.8 billion. According to

information provided to us by DFAS officials, there are two locations where

a consolidation would appear to be reasonable: (1) Hopewell, Virginia,

because it already performs vendor pay functions, is colocated with the

Commissary Agency’s headquarters, and is the home of the vendor pay

computer system and (2) the DFAS center in Columbus, Ohio, because it

already has people trained in vendor pay functions and does accounting

and disbursing for the Commissary Agency. DFAS Columbus, prior to the

site-selection process, was planning to bring Commissary Agency vendor

pay functions into its center.

Under the 20-site option, the plan is to consolidate this function in

Pensacola, Florida. Because fewer than 20 percent of the people are

expected to transfer to Pensacola, new staff will have to be hired and

trained. If not properly managed, such consolidations can result in

significant problems. In 1991, for example, the Commissary Agency went

through a consolidation that was not well-managed. It resulted in late

vendor payments, prompt pay penalties,10 and companies going out of

business because they could not get paid.

The same potential for customer service problems exists with

nonappropriated fund accounting. DFAS has already consolidated most of

the Army’s nonappropriated fund accounting at the Red River Army Depot

in Texas, but the Air Force and Navy are still doing their accounting in

decentralized field offices around the world. As part of the consolidation

initiative, DFAS plans to consolidate all of nonappropriated fund accounting

at one location. The location for nonappropriated fund accounting

(Chanute Air Force Base in Rantoul, Illinois) was not determined until

after the site-selection process was completed. According to DFAS officials,

it will be difficult to transfer the Army’s consolidated operation to Chanute

while DFAS is trying to bring Air Force and Navy operations on line. Few

people are expected to transfer from Red River Depot to the Chanute

location. Because DFAS has no employees in the Chanute area, almost an

entirely new workforce will have to be hired and trained.

10The Prompt Payment Act (31 U.S.C. 3901-3906) requires the federal government to pay interest on

late payments to vendors.

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DOD’s Site-Selection

Process Favored

Excess DOD Facilities

Over Other Factors

Once DOD decided to consolidate finance and accounting functions at the 5

existing centers and 20 operating locations, it then had to decide where to

locate these activities. Since the Opportunity for Economic Growth

program was canceled, it was clear that the location of the five large

centers would not change. There were many options, however, for

selecting the sites for operating locations. During the evaluation and

scoring process, for example, DOD used 4 criteria to evaluate sites in 132

communities: (1) cost to the government, (2) maintenance of customer

service, (3) availability of a good labor supply, and (4) use of excess

defense assets. It assigned each of the selection criteria a value of between

0 and 100 points. We have two basic concerns with the site-selection and

scoring process.

First, before DOD conducted the scoring and evaluation process, it did not

determine the relative importance of and assign corresponding weights to

each criteria—each was initially given equal weight. Once the initial

scoring process was completed, DOD arrayed the data using nine different

weighting schemes, sometimes, for example, giving more weight to cost

and at other times giving cost a relatively low priority. This scheme

resulted in 10 different priority listings. Finally, DOD arrayed all 10 lists and

counted the number of times each site showed up in the top 20. This

became the 11th list. All 11 lists were then given to the Deputy Secretary of

Defense as potential selection options. He selected list number 11.

We question the soundness of this process. Determining the relative

importance of the four criteria during the selection process rather than

before the process begins may not lead to sound decision-making. DOD

recently stated this position during base closure and realignment hearings.

Specifically, DOD said that predetermining the rules, including weighting

factors, was absolutely necessary in order to be as objective and fair as

possible.11

Second, the process, in effect, guaranteed that base closure and

realignment sites or other excess DOD facilities would be selected, even if

they were more costly to modify and operate and were ranked lower from

a customer service and labor supply standpoint. Scores for three of the

criteria, for example, provided a relative ranking of the communities using

a wide spectrum of points: customer service scores ranged from 15 points

to 100 points; quality labor force scores ranged from 58.5 points to 100

points; and cost-to-the-government scores ranged from 0 to 100 points.

11Statement by the Assistant Secretary of Defense (Economic Security), before the Base Closure and

Realignment Commission (Mar. 1, 1995).

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However, for the use of excess defense assets, there were only two

possible scores. Excess defense sites received the full 100 points while

nondefense sites received 0 points. Using this scoring method, 15 of 16

communities with excess DOD assets were selected as operating locations.

The 16th community ranked 21st.

We conducted a sensitivity analysis to determine how locations would

have fared if no credit or points had been given for the availability of

excess DOD assets. Our analysis assigned equal weights to cost, customer

service, and availability of a good labor force. It also assumed that DOD had

adequately considered the economic merits of using excess DOD facilities

during its evaluation of costs. This analysis showed that the rankings of

the sites changed significantly when no points were given for excess DOD

assets. Only three of the base closure and realignment sites would have

been ranked among the top 20 sites.

A factor that affected the relative ranking of the base closure sites was the

cost to renovate and make them useful for finance and accounting

operations. During the cost analysis of potential sites, $115 million was the

estimated cost to renovate the 15 excess DOD facilities. DFAS now estimates

it will need $173 million in military construction money during fiscal years

1997, 1998, and 1999 to complete renovations at these sites. Appendix II

describes the results of DOD’s architectural and engineering assessment. It

shows that 8 of the 15 facilities were considered good, 5 were

characterized fair, 1 was rated poor, and 1 was sold by DOD before it could

be activated. A variety of problems need to be corrected at the facilities

rated fair or poor.

The Oakland Naval Supply Center, for example, will need $18 million to

improve seismic characteristics, remove asbestos, and expand parking at

the facility. This is $136 per square foot, which is less than new

construction cost but more than the estimated cost to lease administrative

space in the Oakland area. The facility at Fort Ord, a hospital building built

in 1972, needs about $20 million for extensive interior renovations to

provide suitable office space. It also needs a major modification to its

heating and cooling system. At Chanute Air Force Base in Rantoul, Illinois,

the original building selected by DFAS would have cost about $26 million to

renovate, but it was subsequently sold by DOD to a private developer. DFAS

expects that an alternative site on base, which it has not yet finished

evaluating, will cost about $18 million to renovate.

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Funding for these renovations will require the use of military construction

appropriations. If approved, these funds will not be available until at least

fiscal year 1996, and renovations will probably not begin until 1997 or later

after design specifications are finalized and contracts are awarded. In the

interim, the use and capacity of some facilities will be limited. For

example, according to DFAS officials, the Fort Ord facility, an 8-story

hospital building, cannot house more than about 200 DFAS employees until

extensive renovations are complete.

Yet, DOD is moving ahead with its consolidation plans. On November 14,

1994, DOD announced that 43 defense accounting offices would close and

13 of the new operating locations would begin limited operations by the

end of fiscal year 1995. On March 7, 1995, DOD announced plans to close

another 32 defense accounting offices during the first half of fiscal year

1996. This is happening even though DFAS has not yet received

congressional funding to renovate the sites and does not know what

functions it will place at some of the facilities, and, therefore, what types

of personnel it needs to recruit and hire.

DFAS Consolidation

Precedes Most

Reengineering Efforts

Business process reengineering is a quality improvement concept DOD

introduced about 4 years ago as part of its Corporate Information

Management initiative. Reengineering allows organizations to develop a

baseline and critically evaluate their current business processes, eliminate

unnecessary tasks, and, in some cases, reinvent the way they do business.

It has been used successfully by many businesses over the past several

years as they have attempted to downsize and become more competitive.

More recently, the Secretary of Defense asked each defense organization

to apply reengineering techniques to its high payoff processes and develop

truly innovative approaches for reducing business-process cycle times.

The ultimate goal is a 50-percent reduction by the year 2000.

DFAS has recognized the importance of reengineering in streamlining its

operations and reducing the size of its finance and accounting workforce.

Its consolidation planning documents, for example, refer to 30- to

50-percent productivity gains that might be possible through

reengineering. For some processes that operate at its large finance

centers, DFAS has implemented reengineering initiatives. For example, both

its transportation payment process and its retiree and annuitant payment

process have been consolidated and streamlined to gain efficiencies and

improve customer service. In addition, DFAS is considering several

additional center processes for reengineering. These include the contract

Page 13 GAO/NSIAD-95-127 Defense Infrastructure
B-259036 

payment process at the Columbus center and the garnishment process at

the Cleveland center.

On the other hand, DFAS has not yet applied reengineering techniques to

the finance and accounting processes it plans to place at the 20 operating

locations. DFAS officials stated that reengineering its processes at the same

time it was consolidating its operations would be difficult to manage and

cause unnecessary risk to its operations. Instead, it plans to use existing

systems and processes to perform many of the same basic functions at the

new operating locations as it did at the smaller defense accounting offices:

vendor pay, travel processing, general funds accounting, and Defense

Business Operations Fund accounting. Once these functions are

reengineered, it is likely that fewer personnel with different skills may be

needed to carry out the new business processes.

For example, DOD reported that it spent $3.5 billion on temporary duty

travel in fiscal year 1993. It also estimated that its processing costs may be

at least 30 percent of the direct travel cost—well above the 10-percent

average reported for private companies and the 6-percent rate that

industry considers an efficient operation. In a recent report,12 we

estimated that DOD could save hundreds of millions of dollars in travel

processing costs by following private industry best practices. Although

DOD has chartered a task force to reengineer travel management and

consider private industry best practices, it has not considered any of these

practices in its consolidation plans. One best practice, for example,

involves consolidating travel voucher processing at a single location.

Under the DFAS consolidation, voucher processing will be done at almost

all of the 20 new operating locations. Consequently, if DOD’s travel task

force concludes that one voucher processing site (or a small number of

processing sites) is sufficient, DFAS will once again have to consolidate a

portion of its financial operations.

Another example involves DOD’s civilian pay functions. Currently, DFAS

employees are responsible for paying DOD civilians handle about 684 pay

accounts each. Under the consolidation initiative, DFAS intends to reduce

the number of pay systems from 25 to 2 and reduce the number of

locations responsible for processing civilian pay to 4. Once the system

standardization and consolidation are finished, DFAS officials told us that

each employee should be able to handle 1,600 pay accounts. Although this

would be a substantial productivity gain, private sector companies that

12Travel Process Reengineering: DOD Faces Challenges in Using Industry Practices to Reduce Costs

(GAO/AIMD/NSIAD-95-90, Mar. 2, 1995).

Page 14 GAO/NSIAD-95-127 Defense Infrastructure
B-259036 

have aggressively reengineered their employee pay functions average

about 3,000 pay accounts per person. If DFAS could achieve this level of

productivity, it would need 470 fewer people than what it expects under its

planned consolidated pay operation. This would save DFAS another

$16 million in annual operating costs and might reduce the number of

locations needed for civilian payroll operations.

Recommendations As DOD proceeds with the consolidation and reengineering of finance and

accounting functions and locations, we recommend that the Secretary of

Defense direct the DOD Comptroller to

• develop an updated estimate of the number of locations and personnel

required to perform finance and accounting functions. In developing this

estimate, it is important that the Comptroller consider not only today’s

concept-of-operations but also how finance and accounting operations will

be performed once DFAS has complied with DOD’s business process

reengineering goals and directives.

• use the updated information to reassess the site selection decisions for

new operating locations. This reassessment should balance DOD’s desire

for short-term cost savings with the need to select sites that, from a

business perspective, offer the greatest opportunity for maintaining or

enhancing finance and accounting operations and service to DFAS’

customers.

Matters for

Congressional

Consideration

Before approving military construction funds for renovating excess

facilities for finance and accounting operations, the Congress may want to

ensure that DOD has adequately assessed and justified the size and

locations of its finance and accounting network.

Agency Comments

and Our Evaluation

Following DOD’s initial review of a draft of this report, we met with

representatives of the Comptroller’s Office and DFAS to discuss their

preliminary comments. Although they generally agreed with the facts and

contents of the report, they did not believe we had given DFAS adequate

credit for some of the reengineering initiatives it had implemented at the

large finance centers. They also did not believe we had adequately

recognized that DFAS expects the consolidation will save between $8 billion

and $9 billion over the next 20 years. We added information to the report

in both these areas.

Page 15 GAO/NSIAD-95-127 Defense Infrastructure
B-259036 

The major point raised by the DOD representatives, however, concerned

our draft recommendation to stop the consolidation until the number of

operating locations and sites was reevaluated. Although they agreed with

the recommendation in principle, they said that stopping the consolidation

at this point in time could be detrimental to current finance and

accounting operations. They pointed out that several defense accounting

offices had already been closed and 13 new operating locations opened or

partially opened to pick up the workload. Stopping the buildup of these

sites, in their view, could jeopardize DFAS’ ability to support its military

customers.

After considering DOD’s position, we modified our recommendation to

request that DOD reevaluate its consolidation and site-selection decisions

concurrently with its ongoing consolidation efforts. Based on this change,

DOD now concurs with the recommendations and has committed to

reevaluate the number of locations and personnel required to perform

finance and accounting functions by November 30 of 1995 and each year

thereafter. Likewise, beginning on December 15, 1995, it has agreed to

annually reassess its site-selection decisions and report its findings to the

Secretary of Defense. (See app. III.)

We performed our review from August 1994 through July 1995 in

accordance with generally accepted government auditing standards. (See

app. I for details on our objectives, scope, and methodology.)

We are sending copies of this report to the Chairmen, Senate Committee

on Governmental Affairs, Senate Committee on Armed Services, House

Committee on Government Reform and Oversight, and Senate and House

Committees on Appropriations; the Director, Office of Management and

Budget; the Secretary of Defense; and other interested parties. We will

make copies available to others on request.

If you have any questions on this report, please call me on (202) 512-8412.

Major contributors to this report are listed in appendix IV.

David R. Warren

Director, Defense Management

 and NASA Issues

Page 16 GAO/NSIAD-95-127 Defense Infrastructure
Page 17 GAO/NSIAD-95-127 Defense Infrastructure
Contents

Letter 1

Appendix I 

Objectives, Scope,

and Methodology

20

Appendix II 

Process DOD Used to

Assess Excess

Facilities

23

Appendix III 

Comments From the

Department of

Defense

28

Appendix IV 

Major Contributors to

This Report

30

National Security and International Affairs Division, Washington,

D.C.

30

Related GAO Products 31

Tables Table 1: Cost Estimates and Savings of DFAS Consolidation

Alternatives

8

Table II.1: Planned DFAS Operating Location Facilities 24

Abbreviations

DFAS Defense Finance and Accounting Service

DOD Department of Defense

Page 18 GAO/NSIAD-95-127 Defense Infrastructure
Page 19 GAO/NSIAD-95-127 Defense Infrastructure
Appendix I 

Objectives, Scope, and Methodology

The Subcommittee on Military Readiness, House Committee on National

Security, asked us to address the following questions about the

Department of Defense’s (DOD) plan to consolidate its finance and

accounting operations:

• Does the plan reflect leading-edge business practices that are likely to lead

to substantial cost-reductions and high quality customer service?

• How will the planned structure achieve productivity gains that will enable

DFAS to reduce its workforce from 46,000 to 23,000 people?

• Is the plan’s implementation strategy sound and achievable within stated

time frames?

• When will the military services begin to realize reductions in the prices

they are charged for the Defense Finance and Accounting Service (DFAS)?

During this phase of our audit work, we focused on the consolidation

implementation strategy and the use of leading-edge business practices to

reduce costs and improve customer service. To determine the soundness

of the implementation strategy, we reviewed DOD’s site-selection process,

which determined the infrastructure for finance and accounting

operations and formed the basis for developing a consolidation

implementation strategy.

To assess how DFAS determined the number of sites needed, we reviewed

guidance and criteria prescribed by the Secretary of Defense, statements

made by DOD officials to congressional oversight committees,

documentation describing the Opportunity for Economic Growth,

documentation of meetings held by DFAS’ Senior Review Council, and

efforts made by the Consolidation Task Force to determine how private

sector organizations addressed the issue of organizational size. We also

reviewed implementation plans to identify the functions and workloads

that are planned for the various operating locations. During our review, we

interviewed DOD officials, particularly Task Force members, about the

costs and personnel requirements of organizational structures with 6, 10,

15, and 20 operating locations.

To determine how candidate sites were evaluated and selected, we

reviewed DFAS’ site-selection process plan to determine if it incorporated

the Secretary of Defense’s guidance, defined the selection criteria,

specified the analytical processes and products, assigned weights to the

selection criteria, and identified the responsibilities of the DFAS Director,

the Senior Review Council, and the Consolidation Task Force. We

reviewed the facts and assumptions used to analyze the candidate sites,

Page 20 GAO/NSIAD-95-127 Defense Infrastructure
Appendix I 

Objectives, Scope, and Methodology

the scoring process for each criterion, and the rankings and costs for

organizational structures that included 6, 10, 15, and 20 operating

locations. We also conducted a sensitivity analysis to determine the impact

of one of the selection criteria—reuse of excess DOD assets—on the

rankings of the 750-person candidate sites. Our analysis excluded this

criterion and gave equal weight to the criteria of cost, customer service,

and quality labor force. We then compared this ranking with DOD’s

rankings using all of the criteria. During our review, we met frequently

with DOD officials, particularly Task Force members, about various aspects

of the selection process.

To determine how excess DOD facilities were assessed, we reviewed DFAS’

site-selection process plan to identify criteria used to qualify candidate

facilities for consideration. We analyzed the results of an engineering and

architectural company’s assessments of DOD’s excess facilities and cost

estimates to renovate each facility. We compared DFAS’ military

construction estimates for renovating these facilities to the engineering

and architectural company’s estimates. We used this information to

identify problems with the facilities and compare the estimated renovation

costs of each facility. Using DFAS’ planned square footage for renovation

and planned staffing level of 750 people per site, we calculated the

renovation costs on the basis of both cost per square foot and cost per

person.

To determine how customer service would be affected by site-selection

and activation decisions, we reviewed DFAS plans to determine how they

addressed the Secretary of Defense’s concerns about maintaining

customer service and complied with the site-selection criterion that

emphasized maintaining customer service. Accordingly, we analyzed DFAS’

plans to maintain customer service when field offices are closed and their

workloads and functions are transferred to operating locations. To the

extent it was available, we analyzed data identifying where finance and

accounting functions are currently operating and where they will be

consolidated. We also analyzed documentation identifying the number of

DFAS employees expected to transfer to operating locations, the number of

current employees already located in metropolitan areas where operating

locations will be established, and the number of employees expected to be

hired. We also discussed with DFAS officials training requirements for

employees who could be assigned to operating locations during fiscal year

1995. We obtained information about training classes for employees who

are expected to be transferred or hired.

Page 21 GAO/NSIAD-95-127 Defense Infrastructure
Appendix I 

Objectives, Scope, and Methodology

We performed our work at the Headquarters, Office of the Secretary of

Defense (Comptroller); Headquarters, Defense Finance and Accounting

Service; and DFAS finance centers located in Cleveland, Ohio; Columbus,

Ohio; Denver, Colorado; Indianapolis, Indiana; and Kansas City, Missouri.

We also contacted officials assigned to the District Office, Army Corps of

Engineers, Louisville, Kentucky. We performed our review from August

1994 through March 1995 in accordance with generally accepted

government auditing standards. We discussed our report with cognizant

DOD officials and incorporated their views where appropriate.

Page 22 GAO/NSIAD-95-127 Defense Infrastructure
Appendix II 

Process DOD Used to Assess Excess

Facilities

To consider the reuse of excess DOD facilities, the Consolidation Task

Force first coordinated with the military services to identify available

facilities. It then screened the facilities to identify those that would be

available and would provide at least 125,000 square feet, the minimum

amount of space needed to house 750 employees. Next, each facility was

evaluated to determine its reuse potential. In total, 48 facilities were

evaluated.

An architectural and engineering company, under contract with the Army

Corps of Engineers, conducted the facility evaluations. The company was

required to evaluate each facility for its suitability for finance and

accounting operations and develop cost estimates for necessary

renovations. Facility suitability was rated on numerous factors, including

the amount of usable contiguous space available, the level of risk

associated with redesign and construction, access to utilities, the

availability of infrastructure support requirements, proximity to an airport,

existence of environmental problems, and physical security of the facility.

The contractor rated the suitability of each facility as good, fair, or poor

and provided a relative ranking of all facilities.

Table II.1 summarizes the results of the architectural and engineering

assessments and provides DFAS’ updated renovation cost estimates for

each facility.

Page 23 GAO/NSIAD-95-127 Defense Infrastructure
Appendix II 

Process DOD Used to Assess Excess

Facilities

Table II.1: Planned DFAS Operating

Location Facilities

Operating location Engineering assessment summary data

Dollars in millions

Location

Bldg.

no.

Area

(sq. ft.)

Rehab

cost Suitability Rank

Charleston Naval

Supply Yard

(Charleston, SC)

198 228,035 $ 2.7 Fair 7

Gentile Air Force

Station (Dayton,

OH)

45/46 447,632 14.6 Good 11

Ft. Sill 

(Lawton, OK)

4700 197,252 8.0 Good 21

Lexington-Blue

Grass Army Depot

(Lexington, KY)

4 138,360 2.7 Fair 9

Loring Air Force

Base (Limestone,

ME)

3502 142,400 4.4 Good 12

Memphis Naval Air

Station (Memphis,

TN)

787 128,000 2.8 Good 4

Newark Air Force

Base (Newark,

OH)

4 747,077 15.2 Poor 28

Oakland Naval

Supply Center

(Oakland, CA)

311 131,878 8.4 Fair 26

Offutt Air Force

Base (Omaha,

NE)

500 130,000 3.6 Good 5

Orlando Naval

Training Center

(Orlando, FL)

301 156,960 0.4 Good 1

Chanute Air Force

Base (Rantoul, IL)

3 n/a n/a n/a n/a

Rock Island Arsenal

(Rock Island, IL)

62 155,409 7.4 Good 10

Griffis Air Force

Base (Rome, NY)

1 195,332 8.6 Good 22

Page 24 GAO/NSIAD-95-127 Defense Infrastructure
Appendix II 

Process DOD Used to Assess Excess

Facilities

DFAS estimated renovation costs

Date

available Remarks

Area

(sq. ft.)

Rehab

costa

Cost per

sq. ft.b

Cost per

personc

N/A Moderate demolition needed to create large

floor areas suitable for offices. Contains

some asbestos and has lead paint.

125,280 $5.9 $47 $ 7,900

Sept. 1996 Built in 1954/1956. Recently renovated.

Probably has asbestos.

202,000 11.4 56 15,200

June 1994 Built in 1966 as a hospital. Extensive interior

demolition. Some asbestos.

197,252 12.8 65 17,100

Jan.

1994

Built in 1943. Warehouse easily convertible

to open office space. Has asbestos.

Inadequate parking.

138,360 7.3 53 9,700

Sept.

1994

Hospital built in 1988. Costly demolition of

hospital systems.

142,400 9.2 65 12,300

Jan.

1997

Newer facility. Easily modified to open

office. Modern.

128,000 6.6 52 8,800

Sept.

1996

DFAS areas not contiguous. Poor internal

configuration for offices. Built in 1954,

extremely high roof, no windows, has

asbestos. DFAS will have to treat potable

water onsite.

166,566 8.2 49 10,900

Sept.

1995

Built in 1942. New entrance tower needed.

Moderate interior demolition needed for

office space. Parking lot needs major

expansion. Seismic upgrade required.

Asbestos present.

131,878 18.0 136 24,000

Dec.

1994

Built in 1955. Space on 3rd floor for DFAS.

5,000 sq. ft. also designated for storage.

125,000 7.4 59 9,900

Jan.

1994

New 3-story electronics training school,

never occupied. If assumed parking

expansion not possible, suitability then

becomes fair.

156,960 4.2 27 5,600

n/a Original assessment was completed on

building 3. Subsequently, the building was

sold to a private developer. Building 68 was

chosen as an alternate site. DFAS’ estimate

is for building 68.

146,423 18.0 123 24,000

Oct.

1994

Now partially occupied. Built in 1878.

Historic landmark. Has asbestos.

155,409 13.8 89 18,400

Dec.

1994

Built in 1942 as a warehouse. Partly

converted to office space. Has some

identified asbestos.

183,332 12.6 69 16,800

(continued)

Page 25 GAO/NSIAD-95-127 Defense Infrastructure
Appendix II 

Process DOD Used to Assess Excess

Facilities

Operating location Engineering assessment summary data

Dollars in millions

Location

Bldg.

no.

Area

(sq. ft.)

Rehab

cost Suitability Rank

Norton Air Force

Base (San

Bernardino, CA)

951,

952,

953

189,168 10.3 Fair 25

Ft. Ord (Seaside,

CA)

4385 360,060 19.4 Fair 24

Total 3.5(mil) 114.9

Page 26 GAO/NSIAD-95-127 Defense Infrastructure
Appendix II 

Process DOD Used to Assess Excess

Facilities

DFAS estimated renovation costs

Date

available Remarks

Area

(sq. ft.)

Rehab

costa

Cost per

sq. ft.b

Cost per

personc

Sept.

1996

Two-story office built in 1963. Probably

contains asbestos. Needs seismic upgrade.

Separated from main base, not part of

closure.

189,168 17.5 93 23,300

July

1994

Built in 1972 as a hospital. Needs extensive

interior demolition to create suitable office

space. HVAC distribution will be difficult.

145,536 20.0 137 26,700

2.3 (mil) 173.0

Source: Defense Finance and Accounting Service (DFAS) military construction funding request

and Corps of Engineers architectural and engineering assessments.

a Renovation cost estimate was taken from DFAS’ request for military construction funding for

fiscal years 1997-99. DFAS’ estimate includes cost for building renovation and installation of

wiring for telecommunication and ADP equipment.

b Cost per square foot was calculated using the following formula: cost to rehab/square footage.

c Cost per person was calculated using the following formula: cost to rehab/750 (planned staffing

level at the operating locations)

Page 27 GAO/NSIAD-95-127 Defense Infrastructure
Appendix III 

Comments From the Department of Defense

Page 28 GAO/NSIAD-95-127 Defense Infrastructure
Appendix III 

Comments From the Department of Defense

Page 29 GAO/NSIAD-95-127 Defense Infrastructure
Appendix IV 

Major Contributors to This Report

National Security and

International Affairs

Division, Washington,

D.C.

James E. Hatcher, Assistant Director

James E. Fuquay, Evaluator-in-Charge

Cheryl K. Andrew, Senior Evaluator

Michael J. Enriquez, Senior Evaluator

David S. Epstein, Senior Evaluator

Page 30 GAO/NSIAD-95-127 Defense Infrastructure
Related GAO Products

Defense Infrastructure: Enhancing Performance Through Better Business

Practices (GAO/T-NSIAD/AIMD-95-126, Mar. 23, 1995).

DOD Procurement: Overpayments and Underpayments at Selected

Contractors Show Major Problem (GAO/NSIAD-94-245, Aug. 5, 1994).

Defense Business Operations Fund: Improved Pricing Practices and

Financial Reports Are Needed to Set Accurate Prices (GAO/AIMD-94-132,

June 22, 1994).

Financial Management: DOD’s Efforts to Improve Operations of the

Defense Business Operations Fund (GAO/T-AIMD/NSIAD-94-146, Mar. 24, 1994).

DOD Procurement: Millions in Overpayments Returned by DOD Contractors

(GAO/NSIAD-94-106, Mar. 14, 1994).

Financial Management: Status of the Defense Business Operations Fund

(GAO/AIMD-94-80, Mar. 9, 1994).

Financial Management: Strong Leadership Needed to Improve Army’s

Financial Accountability (GAO/AIMD-94-12, Dec. 22, 1993).

Letter to the Deputy Secretary of Defense (GAO/AIMD-94-7R, Oct. 12, 1993).

Financial Management: Opportunities to Strengthen Management of the

Defense Business Operations Fund (GAO/T-AFMD-93-6, June 16, 1993).

Financial Management: Navy Records Contain Billions of Dollars in

Unmatched Disbursements (GAO/AFMD-93-21, June 9, 1993).

Military Bases: Analysis of DOD’s Recommendations and Selection Process

for Closures and Realignments (GAO/NSIAD-93-173, Apr. 15, 1993).

(709088) Page 31 GAO/NSIAD-95-127 Defense Infrastructure
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