DOD Business Transformation: Sustained Leadership Needed to Address Long-standing Financial and Business Management Problems
Published: 2005-06-08T00:00:00

Fast Facts:

Highlights:
section_title: Why GAO Did This Study
paragraphs: In July 2004, GAO testified before Congress on the impact and causes of financial and related business weaknesses on the Department of Defense's (DOD) operations and the status of DOD reform efforts. The report released today highlights that DOD still does not have management controls to ensure that its business systems investments are directed towards integrated corporate system solutions. GAO's reports continue to show that fundamental problems with DOD's financial management and related business operations result in substantial waste and inefficiency, adversely impact mission performance, and result in a lack of adequate accountability across all major business areas. Over the years, DOD leaders attempted to address these weaknesses and transform the department. For years, GAO has reported that DOD is challenged in its efforts to effect fundamental financial and business management reform and GAO's ongoing work continues to raise serious questions about DOD's chances of success. Congress asked GAO to provide information on the (1) pervasive long-standing financial and business management weaknesses that affect DOD's efficiency, (2) cost of and control over the department's business systems investments, and (3) legislative actions needed to enhance the success of DOD's business transformation efforts.
section_title: What GAO Found
paragraphs: Overhauling the financial management and business operations of one of the largest and most complex organizations in the world represents a daunting challenge. Eight DOD program areas, representing key business functions, are on GAO's high-risk list, and the department shares responsibility for six other governmentwide high-risk areas, meaning that DOD is fully or partially responsible for 14 of the 25 high-risk areas in the federal government. DOD's substantial financial and business management weaknesses adversely affect not only its ability to produce auditable financial information, but also to provide accurate, complete, and timely information for management and Congress to use in making informed decisions. Further, the lack of adequate accountability across all of DOD's major business areas results in billions of dollars in annual wasted resources in a time of increasing fiscal constraint and has a negative impact on mission performance. The department has recently taken several steps to address provisions of the fiscal year 2005 defense authorization act which are aimed at improving DOD's business systems management practices. For example, DOD has established the Defense Business Systems Management Committee to oversee its business systems modernization efforts. However, DOD's overall transformation efforts have not adequately addressed the key causes of past reform failures. Lessons learned from these previous reform attempts include the need for sustained leadership at the highest level and a strategic and integrated plan. The seriousness of DOD's weaknesses underscores the importance of no longer condoning the "status quo." To improve the likelihood that DOD's transformation efforts will succeed, GAO proposes that business systems funding be appropriated to the approval authorities responsible for business systems investments. Additionally, GAO suggests that a senior management position be established to provide sustained leadership for DOD's overall business transformation. Absent this unified responsibility, authority, accountability, and control of funding, DOD's transformation efforts are likely to fail.

section_title: Letter
paragraphs: It is a pleasure to be back before this Subcommittee to discuss 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 in  addressing DOD’s business transformation challenges. DOD spends billions  of dollars each year to sustain key business operations that support our  forces, including systems and processes related to acquisition and contract  management, financial management, supply chain management, support  infrastructure management, human capital management, and other key  areas. Recent and ongoing military operations in Afghanistan and Iraq and  new homeland defense missions have led to higher demands on our forces  in a time of growing fiscal challenges for our nation. 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.
However, as discussed in the report being released at this hearing and  previous reports and testimonies, fundamental problems with DOD’s  financial management and related business operations continue to cause  substantial waste and inefficiency, have an adverse impact on mission  performance, and result in the lack of adequate transparency and  appropriate accountability across all major business areas. Of the 25 areas  on GAO’s governmentwide high-risk list, 8 are DOD specific program areas  related to key business functions, and the department shares responsibility  for 6 other high-risk areas that are governmentwide in scope.   These  problems preclude the department from producing reliable and timely  information to make sound decisions and to accurately report on its  trillions of dollars of assets and liabilities.
Today, my testimony will focus on two of the high-risk areas—financial  management and business systems modernization.  Both of these areas  have been designated as high-risk since 1995—a decade ago.  In this regard,  my testimony will provide our perspectives on the (1) pervasive long- standing financial and business management weaknesses that affect DOD’s  efficiency, (2) cost of and control over the department’s business systems  investments, and (3) legislative actions needed to enhance the success of  DOD’s business transformation efforts—specifically, the central control of  business systems investment funding and establishment of a chief  management official.  Implementation of these two suggestions would  provide the sustained top-level leadership and accountability needed and  thereby increase the likelihood of successful business transformation.
My statement is based upon the report released today, as well as our  previous reports and testimonies.  Our work was performed in accordance  with U.S. generally accepted government auditing standards.
subsections: section_title: Background
paragraphs: Because DOD is one of the largest and most complex organizations in the  world, overhauling its business operations represents a huge management  challenge.  In fiscal year 2004, DOD reported that its operations involved  $1.2 trillion in assets, $1.7 trillion in liabilities, over 3.3 million in military  and civilian personnel, and over $605 billion in net cost of operations. For  fiscal year 2005, the department received an annual appropriation of about  $417 billion and was appropriated about $76 billion for the global war on  terrorism.  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  processes, including logistics, procurement, health care, and financial  management.
Transformation of DOD’s business systems and operations is critical to the  department providing Congress and DOD management with accurate and  timely information for use in the decision-making process.  This effort is an  essential part of the Secretary of Defense’s broad initiative to “transform  the way the department works and what it works on.”  The Secretary of  Defense has estimated that improving business operations of the  department could save 5 percent of DOD’s annual budget, which based on  fiscal year 2005 appropriations, represents a savings of about $25 billion.
section_title: Pervasive Financial and Business Management Problems Affect DOD’s Efficiency and Effectiveness
paragraphs: For several years, we have reported that DOD faces a range of financial  management and related business process challenges that are complex,  long-standing, pervasive, and deeply rooted in virtually all business  operations throughout the department.  As the Comptroller General  testified in April 2005, DOD’s financial management deficiencies, taken  together, continue to represent a major impediment to achieving an  unqualified opinion on the U.S. government’s consolidated financial  statements. To date, none of the military services has passed the test of an  independent financial audit because of pervasive weaknesses in internal  controls and processes and fundamentally flawed business systems.
In identifying improved financial performance as one of its five  governmentwide initiatives, the President’s Management Agenda  recognized that without sound internal controls and accurate and timely  financial and performance information, it is not possible to accomplish the  President’s agenda and secure the best performance and highest measure  of accountability for the American people.
subsections: section_title: Pervasive Weaknesses Impact DOD Operations
paragraphs: Long-standing weaknesses in DOD’s financial management and related  business processes and systems have (1) resulted in a lack of reliable  information needed to make sound decisions and report on the status of  DOD activities, including accountability of assets, through financial and  other reports to Congress and DOD decision makers; (2) hindered its  operational efficiency; (3) adversely affected mission performance; and  (4) left the department vulnerable to fraud, waste, and abuse, as the  following examples illustrate.
The current inefficient, paper-intensive, error-prone travel  reimbursement process has resulted in inaccurate, delayed, and denied  travel payments for mobilized Army Guard soldiers. We found a broad  range of reimbursement problems that included disputed amounts for  meals that we estimated to be as high as about $6,000 for each of  76 soldiers in one case study that remained unpaid by the end of our  review. Until DOD improves the antiquated process that requires Army  Guard soldiers to accumulate, retain, and submit numerous paper  documents, reimbursement problems and inefficiencies will likely  continue. Of approximately 930,000 travel vouchers received between  fiscal years 2002 and 2004, the Defense Finance and Accounting Service  (DFAS) Contingency Travel Operations Office rejected and returned  about 139,000 vouchers to soldiers for additional paper documentation  or to correct other processing deficiencies. This repeated churning of  vouchers frustrated soldiers and added to the volume of claims to be  processed.
Injured and ill reserve component soldiers—who are entitled to extend  their active duty service to receive medical treatment—have been  inappropriately removed from active duty status in the automated  systems that control pay and access to medical care.  The current  stovepiped, nonintegrated systems are labor-intensive and require  extensive error-prone manual entry and reentry.  Inadequate controls  resulted in some soldiers experiencing significant gaps in their pay and  medical benefits, causing hardships for the soldiers and their families.   In addition, because these soldiers no longer had valid active duty  orders, they did not have access to the commissary and post  exchange—which allows soldiers and their families to purchase  groceries and other goods at a discount.  In one case we reviewed,  during a 12-month period, while attempting to obtain care for injuries  sustained from a helicopter crash in Afghanistan, one Special Forces  soldier fell out of active duty status four times.  During the times he was  not recorded in the system as being on active duty, he was not paid and  he and his family experienced delays in receiving medical treatment.  In  all, he missed payments for 10 pay periods—totaling $11,924.
Ninety-four percent of mobilized Army National Guard and Reserve  soldiers we investigated during two audits had pay problems.  These  problems distracted soldiers from their missions, imposed financial  hardships on their families, and may have a negative impact on  retention.  The processes and automated systems relied on to provide  active duty payments to mobilized Army Guard and Reserve soldiers are  so error-prone, cumbersome, and complex that neither DOD nor, more  importantly, the soldiers themselves could be reasonably assured of  timely and accurate payments.  Some of the pay problems soldiers  experienced often lingered unresolved for considerable lengths of time,  some for over a year.
DOD continues to lack visibility and control over the supplies and spare  parts it owns. Therefore, it cannot monitor the responsiveness and  effectiveness of the supply system to identify and eliminate choke  points. Currently, DOD does not have the ability to provide timely or  accurate information on the location, movement, status, or identity of its  supplies. Although total asset visibility has been a departmentwide goal  for over 30 years, DOD estimates that it will not achieve this visibility  until the year 2010. DOD may not meet this goal by 2010, however,  unless it overcomes three significant impediments: (1) developing a  comprehensive plan for achieving visibility, (2) building the necessary  integration among its many inventory management information systems,  and (3) correcting long-standing data accuracy and reliability problems  within existing inventory management systems. A key to successful  implementation of a comprehensive logistics strategy will be addressing  these initiatives as part of a comprehensive, integrated business  transformation.
The Defense Logistics Agency (DLA) and each of the military services  experienced significant shortages of critical spare parts, even though  more than half of DOD’s reported inventory—about $35 billion— exceeded current operating requirements. In many cases, these  shortages contributed directly to equipment downtime, maintenance  problems, and the services’ failure to meet their supply availability  goals. DOD, DLA, and the military services each lack strategic  approaches and detailed plans that could help mitigate these critical  spare parts shortages and guide their many initiatives aimed at  improving inventory management.
The Navy did not know how much it spent on telecommunications and  did not have detailed cost and inventory data needed to evaluate  spending patterns and to leverage its buying power. At the four case  study sites we audited, management oversight of telecommunication  purchases did not provide reasonable assurance that requirements were  met in the most cost-effective manner. For example, cell phone usage at  three sites was not monitored to determine whether plan minutes met  users’ needs, resulting in overpayment for cell phone services. In  addition, the Navy lacks specific policies and processes addressing the  administration and management of calling cards.  On one card alone, in  a 3-month period, the Navy paid over $17,000. Not until the vendor’s  fraud unit raised questions about more than $11,000 in charges in a 6-day  period was the card suspended.
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.  At December 31, 2004, DOD reports showed  that, even after the write-offs, more than $1.3 billion (absolute value)  remained in suspense accounts for longer than 60 days; however, DOD  has acknowledged that its suspense reports are incomplete and  inaccurate.  In addition, DOD is still not performing effective  reconciliations of its disbursement and collection activity.  Similar to  checkbook reconciliations, DOD needs to compare its records of  monthly activity to Treasury’s records and promptly research and  correct any differences.
section_title: Financial Improvement Initiative Lacks a Comprehensive and Integrated Plan and Effective Oversight and Monitoring Capabilities
paragraphs: In September 2004, we reported that DOD had begun implementing a  financial improvement initiative that included the goal of obtaining an  unqualified audit opinion on its fiscal year 2007 consolidated financial  statements but that the initiative lacked a clearly defined, integrated, well- documented, and realistic plan for improving DOD’s financial management  and thus achieving that goal.  We also reported that DOD lacked effective  oversight and accountability mechanisms to ensure that the mid-range  financial improvement plans being developed by the military services and  defense agencies in support of the initiative were adequately planned,  implemented, and sustainable.  Our report expressed concern that DOD’s  emphasis on obtaining a clean audit opinion for fiscal year 2007 could  divert limited resources away from ongoing efforts to develop and  implement the long-term systems and process changes needed to improve  financial information and to efficiently and effectively manage DOD’s  business operations.
In the Ronald W. Reagan National Defense Authorization Act for Fiscal Year  2005, Congress placed a limitation on the use of operations and  maintenance funds for continued preparation or implementation of DOD’s  mid-range financial improvement plan.  Use of such funds for the mid-range  plan is prohibited until the Secretary of Defense submits to the  congressional defense committees a report containing the following: (1) a  determination that DOD’s business enterprise architecture (BEA) and the  transition plan for implementing the BEA have been developed, (2) an  explanation of the manner in which fiscal year 2005 operations and  maintenance funds will be used by DOD components to prepare or  implement the mid-range financial improvement plan, and (3) an estimate  of future year costs for each of the military services and defense agencies  to prepare and implement the mid-range financial improvement plan.   As  of the end of May 2005, DOD has not yet provided the defense committees  with the required report.
section_title: Ineffective Management Oversight and Control over Business System Investments
paragraphs: Until DOD has complete, reliable information on the costs and number of  business systems operating within the department, its ability to effectively  control the money it spends on these systems will be limited.  DOD’s fiscal  year 2005 budget request for its business systems was $13.3 billion, which,  on its face, is about $6 billion, or 29 percent, less than its fiscal year 2004  budget request.  However, we found that this decrease can be attributed to  DOD’s reclassification of some business systems to national security  systems, not to a reduction in spending on its systems.  While some of the  reclassifications appeared reasonable, our analysis showed that others  were questionable or inconsistencies exist, which hinder DOD’s ability to  develop a definitive business systems inventory.  At the same time the  amount of requested business system funding declined, the reported  number of business systems increased by about 1,900—from 2,274 in April  2003 to 4,150 in February 2005.
Furthermore, given that DOD does not know how many business systems it  has, it is not surprising that the department continues to lack effective  management oversight and control over business systems investments.   Since February 2003, the domains have been given the responsibility to  oversee the department’s business systems investments, yet the billions of  dollars spent each year continue to be spread among the military services  and defense agencies, enabling the numerous DOD components to  continue to develop stovepiped, parochial solutions to the department’s  long-standing financial management and business operation challenges.  Additionally, based upon data reported to us by the military services and  DOD components, obligations totaling at least $243 million were made for  systems modernizations in fiscal year 2004 that were not referred to the  DOD Comptroller for the required review, as specified in the fiscal year  2003 defense authorization act.
subsections: section_title: Fiscal Year 2005 Budget Request for DOD’s Business Systems Environment Is $13.3 Billion
paragraphs: For fiscal year 2005, DOD requested approximately $28.7 billion in IT  funding to support a wide range of military operations as well as DOD  business systems operations. Of the $28.7 billion, our analysis showed that  about $13.3 billion was for business applications and related infrastructure.   Of the $13.3 billion, our analysis of the budget request disclosed that about  $8.4 billion was for infrastructure and related costs.  Business applications  include activities that support the business functions of the department,  such as personnel, health, travel, acquisition, finance and accounting, and  logistics.  The remaining $15.4 billion was classified as being for national  security systems.  Of that amount, our analysis ascertained that about $7.5  billion was for infrastructure and related costs.
Of the $13.3 billion, $10.7 billion was for the operation and maintenance of  the existing systems and $2.6 billion was for the modernization of existing  systems, the development of new systems, or both.  Table 1 shows the  distribution, by DOD component, of the reported $13.3 billion between  current services and modernization funding.
section_title: Reclassification Limits Oversight of Business Systems
paragraphs: Incorrect system classification hinders the department’s efforts to improve  its control and accountability over its business systems investments.  Our  comparison of the fiscal years 2004 and 2005 budget requests disclosed that  DOD reclassified 56 systems in the fiscal year 2005 budget request from  business systems to national security systems, which are not subject to the  same level of investment control. The net effect of the reclassifications was  a decrease of approximately $6 billion in the fiscal year 2005 budget request  for business systems and related infrastructure.  The reported amount  declined from about $19 billion in fiscal year 2004 to over $13 billion in  fiscal year 2005.
In some cases, we found that the reclassification appeared reasonable.  The  reclassification of the Defense Information System Network initiative as a  national security system appeared reasonable since it provides a secure  telecommunication network—voice, data, and video—to the President, the  Secretary of Defense, the Joint Chiefs of Staff, and military personnel in the  field.  However, our analysis of the 56 systems also identified instances for  which reclassification was questionable.  For example, Base Level  Communication Infrastructure—initiative number 254—for several DOD  entities was shown as a national security system in the fiscal year 2005  budget request.  Our review of the fiscal year 2005 budget found that within  the Air Force, there were numerous other initiatives entitled Base Level  Communication Infrastructure that were classified as business systems,  not national security systems.  The nomenclature describing these different  initiatives was the same.  Therefore, it was difficult to ascertain why certain  initiatives were classified as national security systems while others, with  the same name, were classified as business systems.
In another example, this is the first year in which the Navy enterprise  resource planning (ERP) effort was listed in the budget and incorrectly  classified as a national security system.  Its forerunners, four pilot ERP  projects, have been classified as business systems since their inception.   DOD officials were not able to provide a valid explanation as to why the  program was classified as a national security program.  For the fiscal year  2006 budget request, the Navy has requested that the DOD CIO reclassify  the program from a national security system to a business system.   Improper classification diminishes Congress’s ability to effectively monitor  and oversee the billions of dollars spent annually to maintain, operate, and  modernize the department’s business systems environment.
section_title: DOD Reports Significant Increase in the Number of Existing Business Systems
paragraphs: The department’s reported number of business systems continues to rise,  and DOD does not yet have reasonable assurance that the currently  reported number of business systems is complete.  As of February 2005,  DOD reported that its business systems inventory consisted of 4,150  systems, which is an increase of approximately 1,900 reported business  systems since April 2003.  Table 2 presents a comparison of the April 2003  and February 2005 reported business systems inventories by domain.
The largest increase is due to the logistics domain increasing its reported  inventory of business systems from 565 in April 2003 to the current 2,005.   We reported in May 2004 that the logistics domain had validated about  1,900 business systems but had not yet entered most of them into the  BMMP systems inventory.  Logistics domain officials informed us that they  completed that process and this increase was the result.
Table 3 shows the distribution of the 4,150 business systems among the  components and domains.
The table shows the stovepiped, duplicative nature of DOD’s business  systems.  For example, there are 713 human resources systems across all  components whose reported funding for fiscal year 2005 includes  approximately $223 million for modernization and over $656 million for  operation and maintenance.  According to DOD officials, the Defense  Integrated Military Human Resources System (DIMHRS) is intended to  totally or partially replace 113 of these systems.  We were informed that the  remaining 600 human resources systems are to be reviewed in the context  of DOD’s BEA, as it is developed.
In discussing the increase in the number of reported systems, some of the  domains stated that funding for many of the systems are not included in the  IT budget request.  They said that some of these systems were likely  developed at the local level and financed by the operation and maintenance  funds received at that location and therefore were not captured and  reported as part of the department’s annual IT budget request.  Financing  business systems in this manner rather than within the IT budget results in  Congress and DOD management not being aware of the total amount being  spent to operate, maintain, and modernize the department’s business  systems.
section_title: DOD Lacks Reasonable Assurance That It Is in Compliance with Statutory Investment Management Controls
paragraphs: We found that DOD is not in compliance with the fiscal year 2003 defense  authorization act, which requires that all financial system improvements  with obligations exceeding $1 million be reviewed by the DOD Comptroller.   Based upon the reported obligational data provided to us by the military  services and the defense agencies for fiscal year 2004, we identified 30  modernizations with obligations totaling about $243 million that were not  submitted for the required review. Because DOD lacks a systematic means  to identify the systems that were subject to the requirements of the fiscal  year 2003 defense authorization act, there is no certainty that the  information provided to us accurately identified all systems improvements  with obligations greater than $1 million during the  fiscal year.   BMMP  officials stated that the domains were responsible for working with the  components to make sure that business systems with obligations for  modernizations greater than $1 million were submitted for review as  required.  In essence, compliance was achieved via the “honor system,”  which relied on systems owners coming forward and requesting approval.   However, the approach did not work.  During fiscal year 2004, the number  of systems reviewed was small when compared to the potential number of  systems that appeared to meet the obligation threshold identified in the  fiscal year 2004 budget request.  We analyzed the DOD IT budget request  for fiscal year 2004 and identified over 200 systems in the budget that could  involve modernizations with obligations of funds that exceed the $1 million  threshold.  However, BMMP officials confirmed that only 46 systems were  reviewed, of which 38 were approved as of September 30, 2004.   The  remaining 8 systems were either withdrawn by the component/domain or  were returned to the component/domain because the system package  submitted for review lacked some of the required supporting  documentation, such as the review by the Office of Program Analysis and  Evaluation, if necessary.
In an attempt to substantiate that financial system improvements with over  $1 million in obligations had in fact been reviewed by the DOD  Comptroller, as provided for in the fiscal year 2003 act, we requested that  DOD entities provide us with a list of obligations (by system) greater than  $1 million for modernizations for fiscal year 2004.  We compared the  reported obligational data to the system approval data reported to us by  BMMP officials.  Based upon this comparison and as shown in table 4, DOD  provided data showed that 30 business systems with obligations totaling  about $243 million in fiscal year 2004 for modernizations were not reviewed  by the DOD Comptroller.
Examples of DOD business systems modernizations with obligations in  excess of $1 million included in table 4 that were not submitted to the DOD  Comptroller include the following.
DFAS obligated about $3 million in fiscal year 2004 for the DFAS  Corporate Database/DFAS Corporate Warehouse (DCD/DCW).  In fiscal  year 2003, DFAS obligated approximately $19 million for DCD/DCW  without submitting it to the DOD Comptroller for review.  Additionally,  we reported in May 2004 that DFAS had yet to complete an economic  analysis justifying that continued investment in DCD/DCW would result  in tangible improvements in the department’s operations. The  department has acknowledged that DCD/DCW will not result in tangible  savings to DOD.  Continued investment is being based upon intangible  savings of man-hour reductions by DFAS.
The Army obligated over $34 million for its Logistics Modernization  Program (LMP) in fiscal year 2004.  In fiscal year 2003, the Army  obligated over $52 million without the prerequisite review being  performed by the DOD Comptroller.  We have previously reported that  LMP experienced significant problems once it became operational at the  first deployment site.
Cumulatively, since passage of the fiscal year 2003 defense authorization  act in December 2002 through the end of fiscal year 2004, based upon  information reported to us, the military services and defense components  obligated about $651 million for business systems modernizations without  the required review by the DOD Comptroller.  While this amount is  significant, it is not complete or accurate because it does not include any  fiscal year 2005 obligations that occurred prior to the enactment of the  fiscal year 2005 defense authorization act on October 28, 2004.
section_title: Congress Acts to Improve DOD’s Control and Accountability over Business Systems Investments
paragraphs: The statutory requirements enacted as part of the Ronald W. Reagan  National Defense Authorization Act for Fiscal Year 2005 are aimed at  improving the department’s business systems management practices.  The  act directs DOD to put in place a definite management structure that is  responsible for the control and accountability over business systems  investments by establishing a hierarchy of investment review boards from  across the department and directs that the boards use a standard set of  investment review and decision-making criteria to ensure compliance and  consistency with the BEA.
DOD has taken several steps to address provisions of the fiscal year 2005  defense authorization act.  On March 19, 2005, the Deputy Secretary of  Defense delegated the authority for the review, approval, and oversight of  the planning, design, acquisition, development, operation, maintenance,  and modernization of defense business systems to the designated approval authority for each business area.  Additionally on March 24, 2005, the  Deputy Secretary of Defense directed the transfer of program management,  oversight, and support responsibilities regarding DOD business  transformation efforts from the Office of the Under Secretary of Defense,  (Comptroller), to the Office of the Under Secretary of Defense for  Acquisition, Technology and Logistics. According to the directive, this  transfer of functions and responsibilities will allow the Office of the Under  Secretary of Defense for Acquisition, Technology and Logistics to establish  the level of activity necessary to support and coordinate activities of the  newly established Defense Business Systems Management Committee  (DBSMC).  As required by the act, DBSMC, with representation including  the Deputy Secretary of Defense, the designated approval authorities,  secretaries of the military services, and heads of the defense agencies, is  the highest ranking governance body responsible for overseeing DOD  business systems modernization efforts.
section_title: Suggestions for Legislative Consideration
paragraphs: I would like to reiterate two suggestions for legislative consideration that I  discussed in my July 2004 testimony, which I believe could further  improve the likelihood of successful business transformation at DOD. Most  of the key elements necessary for successful transformation could be  achieved under the current legislative framework; however, addressing  sustained and focused leadership for DOD business transformation and  funding control will require additional legislation. These suggestions  include the appropriation of business system funding to the approval  authorities responsible and accountable for business systems investments  under provisions enacted by the Ronald W. Reagan National Defense  Authorization Act for Fiscal Year 2005, and the creation of a CMO.
subsections: section_title: Central Control over Business Systems Investment Funds Is Crucial
paragraphs: DOD’s current business systems investment process, in which system  funding is controlled by DOD components, has contributed to the evolution  of an overly complex and error-prone information technology environment  containing duplicative, nonintegrated, and stovepiped systems. We have  made numerous recommendations to DOD to improve the management  oversight and control of its business systems investments. However, as  previously discussed, a provision of the Ronald W. Reagan National  Defense Authorization Act for Fiscal Year 2005, established specific  management oversight and accountability with the “owners” of the various  core business mission areas. This legislation defines the scope of the  various business areas (e.g., acquisition, finance, logistics, and etc.), and  established functional approval authority and responsibility for  management of the portfolio of business systems with the relevant under  secretary of defense for the departmental core business mission areas and  the Assistant Secretary of Defense for Networks and Information  Integration (information technology infrastructure). For example, the  Under Secretary of Defense for Acquisition, Technology and Logistics is  now responsible and accountable for any defense business system  intended to support acquisition activities, logistics activities, or  installations and environment activities for DOD.
This legislation also requires that the responsible approval authorities  establish a hierarchy of investment review boards, the highest level being  DBSMC, with DOD-wide representation, including the military services and  defense agencies. The boards are responsible for reviewing and approving  investments to develop, operate, maintain, and modernize business  systems for their business-area portfolio, including ensuring that  investments are consistent with DOD’s BEA.
Although this recently enacted legislation clearly defines the roles and  responsibilities of business systems investment approval authorities,  control over the budgeting for and execution of funding for business  systems investment activities remains at the DOD component level. As a  result, DOD continues to have little or no assurance that its business  systems investment money is being spent in an economical, efficient, and  effective manner. Given that DOD spends billions on business systems and  related infrastructure each year, we believe it is critical that those  responsible for business systems improvements control the allocation and  execution of funds for DOD business systems. However, implementation  may require review of the various statutory authorities for the military  services and other DOD components. Control over business systems  investment funds would improve the capacity of DOD’s designated  approval authorities to fulfill their responsibilities and gain transparency  over DOD investments, and minimize the parochial approach to systems  development that exists today.
In addition, to improve coordination and integration activities, we suggest  that all approval authorities coordinate their business systems  modernization efforts with a CMO who would chair the DBSMC. Cognizant  business area approval authorities would also be required to report to  Congress through a CMO and the Secretary of Defense on applicable  business systems that are not compliant with review requirements and to  include a summary justification for noncompliance.
section_title: Chief Management Official Is Essential for Sustained Leadership of Business Management Reform
paragraphs: As DOD embarks on large-scale business transformation efforts, we believe  that the complexity and long-term nature of these efforts requires the  development of an executive position capable of providing strong and  sustained change management leadership across the department—and  over a number of years and various administrations. One way to ensure  such leadership would be to create by legislation a full-time executive-level  II position for a CMO, who would serve as the Deputy Secretary of Defense  for Management. This position would elevate, integrate, and institutionalize  the high-level attention essential for ensuring that a strategic business  transformation plan—as well as the business policies, procedures, systems,  and processes that are necessary for successfully implementing and  sustaining overall business transformation efforts within DOD—are  implemented and sustained. An executive-level II position for a CMO would  provide this individual with the necessary institutional clout to overcome  service parochialism and entrenched organizational silos, which in our  opinion need to be streamlined below the service secretaries and other  levels.
The CMO would function as a change agent, while other DOD officials  would still be responsible for managing their daily business operations. The  position would divide and institutionalize the current functions of the  Deputy Secretary of Defense into a Deputy Secretary who, as the alter ego  of the Secretary, would focus on policy-related issues such as military  transformation, and a Deputy Secretary of Defense for Management, the  CMO, who would be responsible and accountable for the overall business  transformation effort and would serve full-time as the strategic integrator  of DOD’s business transformation efforts by, for example, developing and  implementing a strategic and integrated plan for business transformation  efforts. The CMO would not conduct the day-to-day management functions  of the department; therefore, creating this position would not add an  additional hierarchical layer to the department. Day-to-day management  functions of the department would continue to be the responsibility of the  undersecretaries of defense, the service secretaries, and others. Just as the  CMO would need to focus full-time on business transformation, we believe  that the day-to-day management functions are so demanding that it is  difficult for these officials to maintain the oversight, focus, and momentum  needed to implement and sustain needed reforms of DOD’s overall business  operations. This is particularly evident given the demands that the Iraq and  Afghanistan postwar reconstruction activities and the continuing war on  terrorism have placed on current leaders. Likewise, the breadth and  complexity of the problems and their overall level within the department  preclude the under secretaries, such as the DOD Comptroller, from  asserting the necessary authority over selected players and business areas  while continuing to fulfill their other responsibilities.
If created, we believe that the new CMO position could be filled by an  individual appointed by the President and confirmed by the Senate, for a  set term of 7 years.  As prior GAO work examining the experiences of  major change management initiatives in large private and public sector  organizations has shown, it can often take at least 5 to 7 years until such  initiatives are fully implemented and the related cultures are transformed  in a sustainable way. Articulating the roles and responsibilities of the  position in statute would also help to create unambiguous expectations and  underscore Congress’s desire to follow a professional, nonpartisan,  sustainable, and institutional approach to the position. In that regard, an  individual appointed to the CMO position should have a proven track  record as a business process change agent in large, complex, and diverse  organizations—experience necessary to spearhead business process  transformation across DOD.
Furthermore, to improve coordination and integration activities, we  suggest that all business systems modernization approval authorities  designated in the Ronald W. Reagan National Defense Authorization Act for  Fiscal Year 2005 coordinate their efforts with the CMO, who would chair  the DBSMC that DOD recently established to comply with the act. We also  suggest that cognizant business area approval authorities would also be  required to report to Congress through the CMO and the Secretary of  Defense on applicable business systems that are not compliant with review  requirements and include a summary justification for noncompliance. In  addition, the CMO would enter into an annual performance agreement with  the Secretary that sets forth measurable individual goals linked to overall  organizational goals in connection with the department’s business  transformation efforts. Measurable progress toward achieving agreed-upon  goals should be a basis for determining the level of compensation earned,  including any related bonus. In addition, the CMO’s achievements and  compensation should be reported to Congress each year.  As previously  noted, on April 14, 2005, a bill was introduced in the Senate that requires  the establishment of a CMO who would be appointed by the President and  confirmed by the Senate, for a set term of 7 years.
section_title: Conclusion
paragraphs: DOD lacks the efficient and effective financial management and related  business operations, including processes and systems, to support the war  fighter, DOD management, and Congress. With a large and growing fiscal  imbalance facing our nation, achieving tens of billions of dollars of annual  savings through successful DOD transformation is increasingly important.  Recent legislation pertaining to defense business systems, enterprise  architecture, accountability, and modernization, if properly implemented,  should improve oversight and control over DOD’s significant system  investment activities. However, DOD’s transformation efforts to date have  not adequately addressed key underlying causes of past reform failures.  Reforming DOD’s business operations is a monumental challenge and many  well-intentioned efforts have failed over the last several decades. Lessons  learned from these previous reform attempts include the need for sustained  and focused leadership at the highest level.  This leadership could be  provided through the establishment of a CMO. Absent this leadership,  authority, and control of funding, the current transformation efforts are  likely to fail.
I commend the Subcommittee for holding this hearing and I encourage you  to use this vehicle, on an annual basis, as a catalyst for long overdue  business transformation at DOD.  Mr. Chairman, this concludes my  statement.
section_title: Contacts and Acknowledgments
paragraphs: For further information about this testimony, please contact Gregory D.  Kutz at (202) 512-9095 or kutzg@gao.gov. The following individuals  contributed to the various reports and testimonies that were the basis for  the testimony: Beatrice Alff, Renee Brown, Donna Byers, Molly Boyle, Mary  Ellen Chervenic, Francine DelVecchio, Francis Dymond, Geoff Frank, Gina  Flacco, Diane Handley, Cynthia Jackson, Evelyn Logue, John Martin,  Elizabeth Mead, Dave Moser, Mai Nguyen, Sharon Pickup, David Plocher,  John Ryan, and Darby Smith.
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