Department of Defense: Sustained Leadership Is Critical to Effective Financial and Business Management Transformation
Published: 2006-08-03T00:00:00

Fast Facts:

Highlights:
section_title: Why GAO Did This Study
paragraphs: 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.
section_title: What GAO Found
paragraphs: 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. 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.

section_title: Letter
paragraphs: 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. 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  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.
subsections: section_title: Background
paragraphs: 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  net cost of operations. For fiscal year 2005, the department was  appropriated approximately $525 billion.
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.
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  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.
section_title: Pervasive Financial and Business Management Problems Affect DOD’s Efficiency and Effectiveness
paragraphs: Since the first GAO report on the financial statement audit of a major DOD  component over 16 years ago, 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, 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. 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.
DOD’s financial management problems are pervasive, complex, long- standing, 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  the reported debts.
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.  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.
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  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 on- hand inventory balances, leading to unnecessary procurement of  items.
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.
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  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.
In June 2006, we reported that the military services had not  consistently implemented DOD’s revised policy in calculating  carryover. 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  makers who review and use the data for budgeting were erroneous and  not comparable across the three military services.
section_title: Improved Oversight of DOD Business Systems Needed
paragraphs: 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 1996 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  processes necessary to reduce the risks associated with these projects to  acceptable levels. Disciplined processes have been shown to reduce the  risks associated with software development and acquisition efforts 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.
Logistics Modernization Program (LMP). In May 2004, we first  reported our concerns with the requirements management and testing  processes used by the Army in the implementation of LMP and the  problems being encountered after it became operational in July 2003.  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. 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. The four pilots were limited in scope and were not  intended to be a corporate solution for resolving any of the Navy’s long- standing 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  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, 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. 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  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, 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. 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  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. 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.
section_title: DOD’s Key Initiatives to Improve Financial Management Processes and Business Systems
paragraphs: 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 2006  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 testified 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  modernization and financial management high-risk areas, significant  challenges remain, particularly in implementing its tiered accountability  investment approach.
subsections: section_title: DOD Issued Its Financial Improvement and Audit Readiness Plan
paragraphs: 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, 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  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.
section_title: DOD Developed an Initial Standard Financial Information Structure
paragraphs: 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.
section_title: DOD Efforts to Control Business Systems Investments
paragraphs: 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.  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.
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.
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  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. 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. 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  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.
section_title: Key Elements Needed to Guide DOD Transformation Efforts
paragraphs: 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.
subsections: section_title: Comprehensive, Integrated, and Enterprisewide Business Transformation Plan Not Developed
paragraphs: 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. 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  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.
section_title: Sustained Leadership Is Needed
paragraphs: 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. Because of the complexity and  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  2006 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.
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  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.
section_title: Conclusion
paragraphs: 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.
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.
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