Department of Defense: Further Actions Needed to Establish and Implement a Framework for Successful Financial and Business Management Transformation
Published: 2004-03-23T00:00:00

Fast Facts:

Highlights:
section_title: Why GAO Did This Study
paragraphs: In March 2002, GAO testified on the Department of Defense's (DOD) financial management problems and key elements necessary for successful reform. Although the underlying conditions remain fundamentally unchanged, within the past 2 years DOD has begun a number of initiatives intended to address previously reported problems and transform its business operations. The Subcommittee on Readiness and Management Support, Senate Committee on Armed Services, asked GAO to provide a current status report on DOD's progress to date and suggestions for improvement. Specifically, GAO was asked to provide (1) an overview of the impact of financial and related business weaknesses on DOD operations, (2) the underlying causes of DOD business transformation challenges, and (3) the status of DOD reform efforts. In addition, GAO reiterates the key elements to successful reform: (1) an integrated business transformation strategy, (2) sustained leadership and resource control, (3) clear lines of responsibility and accountability, (4) results-oriented performance, (5) appropriate incentives and consequences, (6) an enterprise architecture to guide reform efforts, and (7) effective monitoring and oversight. GAO also offers two suggestions for legislative consideration which are intended to improve the likelihood of meaningful, broad-based financial management and related business reform at DOD.
section_title: What GAO Found
paragraphs: DOD's senior civilian and military leaders are committed to transforming the department and improving its business operations and have taken positive steps to begin this effort. However, overhauling the financial management and related business operations of one of the largest and most complex organizations in the world represents a huge management challenge. Six DOD program areas are on GAO's "high risk" list, and the department shares responsibility for three other governmentwide high-risk areas. DOD's substantial financial and business management weaknesses adversely affect not only its ability to produce auditable financial information, but also to provide timely, reliable information for management and Congress to use in making informed decisions. Further, the lack of adequate transparency and appropriate 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. Four underlying causes impede reform: (1) lack of sustained leadership, (2) cultural resistance to change, (3) lack of meaningful metrics and ongoing monitoring, and (4) inadequate incentives and accountability mechanisms. To address these issues, GAO reiterates the keys to successful business transformation and makes two additional suggestions for legislative action. First, GAO suggests that a senior management position be established to spearhead DOD-wide business transformation efforts. Second, GAO proposes that the leaders of DOD's functional areas, referred to as domains, receive and control the funding for system investments, as opposed to the military services. Domain leaders would be responsible for managing business system and process reform efforts within their business areas and would be accountable to the new senior management official for ensuring their efforts comply with DOD's business enterprise architecture.

section_title: Letter
paragraphs: It is a pleasure to be back again to discuss financial management and  related 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 providing a catalyst for business transformation at DOD. The  involvement of this Subcommittee is critical to ultimately assuring public  confidence in DOD as a steward that is accountable for its finances. DOD’s  substantial long-standing financial and business management problems  adversely affect the economy, effectiveness, and efficiency of its  operations, and have resulted in a lack of adequate transparency and  appropriate accountability across all major business areas. As a result,  DOD does not have timely, reliable information for management to use in  making informed decisions. Further, as our reports continue to show,  these problems result in significant fraud, waste, and abuse and hinder  DOD’s attempts to develop world-class operations and activities to  support its forces. Of the 25 areas on GAO’s governmentwide “high risk”  list, 6 are DOD program areas, and the department shares responsibility  for 3 other high-risk areas that are governmentwide in scope. The  problems we continue to identify relate to human capital challenges,  ineffective internal control and processes, and duplicative and stovepiped  business systems. The seriousness of DOD’s financial management  weaknesses underscores the importance of no longer condoning “status  quo” business operations at DOD.
Although the underlying operational conditions remain fundamentally  unchanged since I last testified before this Subcommittee in March 2002,  DOD has taken action to begin addressing a number of these challenges as  part of its business transformation effort. Business transformation has  been a priority of Secretary Rumsfeld. For example, DOD has been  granted additional human capital flexibilities and is in the process of  developing a new personnel management system for its civilian  employees. In addition, through its Business Management Modernization  Program (BMMP), DOD is continuing its efforts to develop and implement  a business enterprise architecture and establish effective management and  control over its business system modernization investments. To date,  however, tangible evidence of improvements in DOD business operations  remains limited to specific business process areas, such as DOD’s  purchase card program, where improvements have generally resulted from  increased management focus and better internal control rather than from  major modifications to automated systems. It is important to note that  some of the key elements I highlight in this testimony as necessary for  successful business transformation were critical to the success of several  narrowly defined initiatives that I will discuss today.
Because DOD is one of the largest and most complex organizations in the  world, overhauling its financial management and related business  operations represents a huge management challenge. In fiscal year 2003,  DOD reported that its operations involved over $1 trillion in assets, nearly  $1.6 trillion in liabilities, approximately 3.3 million military and civilian  personnel, and disbursements of over $416 billion. Moreover, execution of  DOD 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  operations. To execute these military operations, the department performs  an assortment of interrelated and interdependent business process areas,  including logistics management, procurement, healthcare management,  and financial management. Secretary Rumsfeld has estimated that  successful improvements to DOD’s business operations could save the  department 5 percent of its budget a year. Using DOD’s reported fiscal  year 2004 budget amounts, this percentage would equate to approximately  $22 billion a year in savings.
Two years ago, I testified on the challenges DOD faces in transforming its  financial management and related business operations and systems and I  discussed several key elements necessary for reform to succeed. If the  past has taught us anything, it is that addressing the department’s serious  financial and related business process weaknesses will not be easy. For  several years, we have reported on DOD’s efforts to improve the  effectiveness and efficiency of its business operations and actions needed  to achieve and sustain reform. Many of the same underlying causes, such  as lack of sustained leadership, cultural resistance to change,  parochialism, and stovepiped operations, that impeded the success of  previous administrations in addressing DOD’s problems continue today. If  DOD is unable to address these underlying causes that have resulted in the  failure of previous broad-based reform efforts, improvements will remain  marginal, confined to narrowly defined business process areas and  incremental improvements in human capital policies, business processes,  internal control systems, and information technologies.
Today, I will provide my perspectives on (1) the impact that long-standing  financial management and related business process weaknesses continue  to have on DOD’s business operations, (2) underlying causes that have  impeded the success of prior efforts, (3) keys to successful reform, and   (4) the status of current DOD business transformation efforts. In addition,  I will offer two suggestions for legislative consideration, which I believe  will provide the sustained top-level leadership and accountability  necessary for the overall business transformation effort to succeed. My  statement is based on previous GAO reports as well as on our review of  the work of other DOD auditors and recent DOD reports and studies.
subsections: section_title: Impact of Financial Management and Related Business Process Weaknesses
paragraphs: As I previously stated, and we have reported on for several years, 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 I  recently testified and as discussed in our latest financial audit report,  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. To date, none of  the military services has passed the test of an independent financial audit  because of pervasive weaknesses in internal control 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 obtaining a clean (unqualified) financial audit opinion is a  basic prescription for any well-managed organization. At the same time, it  recognized that without sound internal control 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. The Joint Financial  Management Improvement Program (JFMIP) principals have defined  certain measures, in addition to receiving an unqualified financial  statement audit opinion, for achieving financial management success.  These additional measures include (1) being able to routinely provide  timely, accurate, and useful financial and performance information,   (2) having no material internal control weaknesses or material  noncompliance with laws and regulations, and (3) meeting the  requirements of the Federal Financial Management Improvement Act of  1996 (FFMIA). Unfortunately, DOD does not meet any of these conditions.  For example, for fiscal year 2003, the DOD Inspector General issued a  disclaimer of opinion on DOD’s financial statements, citing 11 material  weaknesses in internal control and noncompliance with FFMIA  requirements.
Recent audits and investigations by GAO and DOD auditors continue to  confirm the existence of pervasive weaknesses in DOD’s financial  management and related business processes and systems. These problems  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. For example,    450 of the 481 mobilized Army National Guard soldiers from six GAO case  study Special Forces and Military Police units had at least one pay  problem associated with their mobilization. DOD’s inability to provide  timely and accurate payments to these soldiers, many of whom risked  their lives in recent Iraq or Afghanistan missions, distracted them from  their missions, imposed financial hardships on the soldiers and their  families, and has had a negative impact on retention. (GAO-04-89, Nov. 13,  2003)
DOD incurred substantial logistical support problems as a result of weak  distribution and accountability processes and controls over supplies and  equipment shipments in support of Operation Iraqi Freedom activities,  similar to those encountered during the prior gulf war. These weaknesses  resulted in (1) supply shortages, (2) backlogs of materials delivered in  theater but not delivered to the requesting activity, (3) a discrepancy of  $1.2 billion between the amount of materiel shipped and that  acknowledged by the activity as received, (4) cannibalization of vehicles,  and (5) duplicate supply requisitions. (GAO-04-305R, Dec. 18, 2003)
Inadequate asset visibility and accountability resulted in DOD selling new  Joint Service Lightweight Integrated Suit Technology (JSLIST)—the  current chemical and biological protective garment used by our military  forces—on the internet for $3 each (coat and trousers) while at the same  time buying them for over $200 each. DOD has acknowledged that these  garments should have been restricted to DOD use only and therefore  should not have been available to the public. (GAO-02-873T, June 25, 2002)
Inadequate asset accountability also resulted in DOD’s inability to locate  and remove over 250,000 defective Battle Dress Overgarments (BDOs)— the predecessor of JSLIST—from its inventory. Subsequently, we found  that DOD had sold many of these defective suits to the public, including  379 that we purchased in an undercover operation. In addition, DOD may  have issued over 4,700 of the defective BDO suits to local law enforcement  agencies. Although local law enforcement agencies are most likely to be  the first responders to a terrorist attack, DOD failed to inform these  agencies that using these BDO suits could result in death or serious injury.  (GAO-04-15NI, Nov. 19, 2003)
Tens of millions of dollars are not being collected each year by military  treatment facilities from third-party insurers because key information  required to effectively bill and collect from third-party insurers is often not  properly collected, recorded, or used by the military treatment facilities.  (GAO-04-322R, Feb. 20, 2004)
Our analysis of data on more than 50,000 maintenance work orders  opened during the deployments of six battle groups indicated that about  29,000 orders (58 percent) could not be completed because the needed  repair parts were not available on board ship. This condition was a result  of inaccurate ship configuration records and incomplete, outdated, or  erroneous historical parts demand data. Such problems not only have a  detrimental impact on mission readiness, they may also increase  operational costs due to delays in repairing equipment and holding  unneeded spare parts inventory. (GAO-03-887, Aug. 29, 2003)
DOD sold excess biological laboratory equipment, including a biological  safety cabinet, a bacteriological incubator, a centrifuge, and other items  that could be used to produce biological warfare agents. Using a fictitious  company and fictitious individual identities, we were able to purchase a  large number of new and usable equipment items over the Internet from  DOD. Although the production of biological warfare agents requires a high  degree of expertise, the ease with which these items were obtained  through public sales increases the risk that terrorists could obtain and use  them to produce biological agents that could be used against the United  States. (GAO-04-81TNI, Oct. 7, 2003)
Based on statistical sampling, we estimated that 72 percent of the over  68,000 premium class airline tickets DOD purchased for fiscal years 2001  and 2002 was not properly authorized and that 73 percent was not  properly justified. During fiscal years 2001 and 2002, DOD spent almost  $124 million on premium class tickets that included at least one leg in  premium class—usually business class. Because each premium class  ticket cost the government up to thousands of dollars more than a coach  class ticket, unauthorized premium class travel resulted in millions of  dollars of unnecessary costs being incurred annually. (GAO-04-229T,   Nov. 6, 2003)
Some DOD contractors have been abusing the federal tax system with  little or no consequence, and DOD is not collecting as much in unpaid  taxes as it could. Under the Debt Collection Improvement Act of 1996,  DOD is responsible—working with the Treasury Department—for  offsetting payments made to contractors to collect funds owed, such as  unpaid federal taxes. However, we found that DOD had collected only  $687,000 of unpaid taxes over the last 6 years. We estimated that at least  $100 million could be collected annually from DOD contractors through  effective implementation of levy and debt collection programs. (GAO-04- 95, Feb. 12, 2004)
DOD continues to lack a complete inventory of contaminated real  property sites, which affects not only DOD’s ability to assess the potential  environmental impact and to plan, estimate costs, and fund cleanup  activities, as appropriate, but also its ability to minimize the risk of civilian  exposure to unexploded ordnance. The risk of such exposure is expected  to grow with the increase in development and recreational activities on  land once used by the military for munitions-related activities (e.g., live  fire testing and training). (GAO-04-147, Dec. 19, 2003)
DOD’s Space and Naval Warfare Systems Command working capital fund  activities used accounting entries to manipulate the amount of customer  orders for the sole purpose of reducing the actual dollar amounts reported  to Congress for work that had been ordered and funded (obligated) by  customers but not yet completed by fiscal year end. As a result,  congressional and DOD decision makers did not have the reliable  information they needed to make decisions regarding the level of funding  to be provided to working capital fund customers. (GAO-03-668, July 1,  2003)
Our review of fiscal year 2002 data revealed that about $1 of every $4 in  contract payment transactions in DOD’s Mechanization of Contract  Administration Services (MOCAS) system was for adjustments to  previously recorded payments—$49 billion of adjustments out of $198  billion in disbursement, collection, and adjustment transactions.  According to DOD, the cost of researching and making adjustments to  accounting records was about $34 million in fiscal year 2002, primarily to  pay hundreds of DOD and contractor staff. (GAO-03-727, Aug. 8, 2003)
DOD and congressional decision makers lack reliable data upon which to  base sourcing decisions due to weaknesses in DOD’s data-gathering,  reporting, and financial systems. As in the past, we have identified  significant errors and omissions in the data submitted to Congress  regarding the amount of each military service’s depot maintenance work  out-sourced or performed in-house. As a result, both DOD and Congress  lack assurances that the dollar amounts of public-private sector workloads  reported by military services are reliable. (GAO-03-1023, Sept. 15, 2003)
DOD’s information technology (IT) budget submission to Congress for  fiscal year 2004 contained material inconsistencies, inaccuracies, or  omissions that limited its reliability. For example, we identified  discrepancies totaling about $1.6 billion between two primary parts of the  submission—the IT budget summary report and the detailed Capital  Investments Reports on each IT initiative. These problems were largely  attributable to insufficient management attention and limitations in  departmental policies and procedures, such as guidance in DOD’s  Financial Management Regulations, and to shortcomings in systems that  support budget-related activities. (GAO-04-115, Dec. 19, 2003)
Since the mid 1980s, we have reported that DOD uses overly optimistic  planning assumptions to estimate its annual budget request. These same  assumptions are reflected in its Future Years Defense Program, which  reports projected spending for the current budget year and at least 4  succeeding years. In addition, in February 2004 the Congressional Budget  Office projected that DOD’s demand for resources would grow to about  $473 billion a year by fiscal year 2009. DOD’s own estimate for that same  year was only $439 billion. As a result of DOD’s continuing use of  optimistic assumptions, DOD has too many programs for the available  dollars, which often leads to program instability, costly program stretch- outs, and program termination. Over the past few years, the mismatch  between programs and budgets has continued, particularly in the area of  weapons systems acquisition. For example, in January 2003, we reported  that the estimated costs of developing eight major weapons systems had  increased from about $47 billion in fiscal year 1998 to about $72 billion by  fiscal year 2003. (GAO-03-98, January 2003)
DOD did not know the size of its security clearance backlog at the end of  September 2003 and had not estimated a backlog since January 2000.  Using September 2003 data, we estimated that DOD had a backlog of  roughly 360,000 investigative and adjudicative cases, but the actual  backlog size is uncertain. DOD’s failure to eliminate and accurately assess  the size of its backlog may have adverse affects. For example, delays in  updating overdue clearances for personnel doing classified work may  increase national security risks and slowness in issuing new clearances  can increase the costs of doing classified government work. (GAO-04-344,  Feb. 9, 2004)
These examples clearly demonstrate not only the severity of DOD’s  current problems, but also the importance of reforming financial  management and related business operations to improve mission support  and the economy and efficiency of DOD’s operations, and to provide for  transparency and accountability to Congress and American taxpayers.
section_title: Underlying Causes of Financial and Related Business Process Transformation Challenges
paragraphs: The underlying causes of DOD’s financial management and related  business process and system weaknesses are generally the same ones I  outlined in my prior testimony before this Subcommittee 2 years ago. For  each of the problems cited in the previous section, we found that one or  more of these causes were contributing factors. Over the years, the  department has undertaken many initiatives intended to transform its  business operations departmentwide and improve the reliability of  information for decision making and reporting but has not had much  success because it has not addressed the following four underlying causes:    a lack of sustained top-level leadership and management accountability for    deeply embedded cultural resistance to change, including military service  parochialism and stovepiped operations;   a lack of results-oriented goals and performance measures and  inadequate incentives and accountability mechanisms relating to business  transformation efforts.
If not properly addressed, these root causes will likely result in the failure  of current DOD initiatives.
subsections: section_title: Lack of Sustained Leadership and Adequate Accountability
paragraphs: DOD has not routinely assigned accountability for performance to specific  organizations or individuals who have sufficient authority to accomplish  desired goals. For example, under the Chief Financial Officers Act of  1990, it is the responsibility of the agency Chief Financial Officer (CFO) to  establish the mission and vision for the agency’s future financial  management and to direct, manage, and provide oversight of financial  management operations. However, at DOD, the Comptroller—who is by  statute the department’s CFO—has direct responsibility for only an  estimated 20 percent of the data relied on to carry out the department’s  financial management operations. The other 80 percent comes from DOD’s  other business operations and is under the control and authority of other  DOD officials.
In addition, DOD’s past experience has suggested that top management  has not had a proactive, consistent, and continuing role in integrating daily  operations for achieving business transformation related performance  goals. It is imperative that major improvement initiatives have the direct,  active support and involvement of the Secretary and Deputy Secretary of  Defense to ensure that daily activities throughout the department remain  focused on achieving shared, agencywide outcomes and success. While  the current DOD leadership, such as the Secretary, Deputy Secretary, and  Comptroller have certainly demonstrated their commitment to reforming  the department, the magnitude and nature of day-to-day demands placed  on these leaders following the events of September 11, 2001, clearly affect  the level of oversight and involvement in business transformation efforts  that these leaders can sustain. Given the importance of DOD’s business  transformation effort, it is imperative that it receive the sustained  leadership needed to improve the economy, efficiency, and effectiveness  of DOD’s business operations. Based on our surveys of best practices of  world-class organizations, strong executive CFO and Chief Information  Officer leadership is essential to (1) making financial management an  entitywide priority, (2) providing meaningful information to decision  makers, (3) building a team of people that delivers results, and   (4) effectively leveraging technology to achieve stated goals and  objectives.
section_title: Cultural Resistance and Parochialism
paragraphs: Cultural resistance to change, military service parochialism, and  stovepiped operations have all contributed significantly to the failure of  previous attempts to implement broad-based management reforms at  DOD. The department has acknowledged that it confronts decades-old  problems deeply grounded in the bureaucratic history and operating  practices of a complex, multifaceted organization. Recent audits reveal  that DOD has made only small inroads in addressing these challenges. For  example, the Bob Stump National Defense Authorization Act for Fiscal  Year 2003 requires the DOD Comptroller to determine that each financial  system improvement meets the specific conditions called for in the act  before DOD obligates funds in amounts exceeding $1 million. However,  we found that most system improvement efforts were not reviewed by the  DOD Comptroller, as required, and that DOD continued to lack a  mechanism for proactively identifying system improvement initiatives. We  asked for, but DOD did not provide, comprehensive data for obligations in  excess of $1 million for business system modernization. Based on the  limited information provided, we found that as of December 2003,  business system modernization efforts with reported obligations totaling  over $479 million were not referred to the DOD Comptroller for review for  fiscal years 2003 and 2004.
In addition, in September 2003, we reported that DOD continues to use a  stovepiped approach to develop and fund its business system investments.  Specifically, we found that DOD components receive and control funding  for business systems investments without being subject to the scrutiny of  the DOD Comptroller. DOD’s ability to address its current “business-as- usual” approach to business system investments is further hampered by its  lack of (1) a complete inventory of business systems (a condition we first  highlighted in 1998), (2) a standard definition of what constitutes a  business system, (3) a well-defined enterprise architecture, and (4) an  effective approach for controlling financial system improvements before  making obligations exceeding $1 million. Until DOD develops and  implements an effective strategy for overcoming resistance, parochialism,  and stovepiped operations, reform will fail and “business-as-usual” will  continue at the department.
section_title: Lack of Goals and Performance Measures
paragraphs: At a programmatic level, the lack of clear, linked goals and performance  measures handicapped DOD’s past reform efforts. As a result, DOD  managers lacked straightforward roadmaps showing how their work  contributed to attaining the department’s strategic goals, and they risked  operating autonomously rather than collectively. As of March 2004, DOD  has formulated departmentwide performance goals and measures and  continues to refine and align them with the outcomes described in its  strategic plan—the September 2001 Quadrennial Defense Review (QDR).  The QDR outlined a new risk management framework, consisting of four  dimensions of risk—force management, operational, future challenges,  and institutional—to use in considering trade-offs among defense  objectives and resource constraints. According to DOD’s Fiscal Year 2003  Annual Report to the President and the Congress, these risk areas are to  form the basis for DOD’s annual performance goals. They will be used to  track performance results and will be linked to resources. As of March  2004, the department is still in the process of implementing this approach  on a departmentwide basis.
DOD currently has plans to institutionalize performance management by  aligning management activities with the President’s Management Agenda.  As part of this effort, DOD linked its fiscal year 2004 budget resources with  metrics for broad program areas, e.g., air combat, airlift, and basic  research in the Office of Management and Budget’s (OMB) Program  Assessment Rating Tool. We have not reviewed DOD’s efforts to link  resources to metrics; however, some of our recent work notes the lack of  clearly defined performance goals and measures in the management of  such areas as defense inventory and military pay.
section_title: Lack of Incentives for Change
paragraphs: The final underlying cause of the department’s long-standing inability to  carry out needed fundamental reform has been the lack of incentives for  making more than incremental change to existing “business-as-usual”  operations, systems, and organizational structures. Traditionally, DOD has  focused on justifying its need for more funding rather than on the  outcomes its programs have produced. DOD has historically measured its  performance by the amount of money spent, people employed, or number  of tasks completed. Incentives for its decision makers to implement  changed behavior have been minimal or nonexistent.
The lack of incentive to change is evident in the business systems  modernization area. Despite DOD’s acknowledgement that many of its  systems are error prone, duplicative, and stovepiped, DOD continues to  allow its component organizations to make their own investment  decisions, following different approaches and criteria. These stovepiped  decision-making processes have contributed to the department’s current  complex, error-prone environment of approximately 2,300 systems. In  March 2003, we reported that ineffective program management and  oversight, as well as a lack of accountability, resulted in DOD continuing  to invest hundreds of millions of dollars in system modernization efforts  without any assurance that the projects will produce operational  improvements commensurate with the amount invested. For example,  the estimated cost of one of the business system investment projects that  we reviewed increased by as much as $274 million, while its schedule  slipped by almost 4 years. After spending $126 million, DOD terminated  that project in December 2002, citing poor performance and increasing  costs. GAO and the DOD Inspector General (DOD IG) have identified  numerous business system modernization efforts that cost more than  planned, take years longer than planned, and fall short of delivering  planned or needed capabilities. Despite this track record, DOD continues  to increase spending on business systems while at the same time it lacks  the effective management and oversight needed to achieve real results.  Without appropriate incentives to improve their project management,  ongoing oversight, and adequate accountability mechanisms, DOD  components will continue to develop duplicative and nonintegrated  systems that are inconsistent with the Secretary’s vision for reform.
To effect real change, actions are needed to (1) break down parochialism  and reward behaviors that meet DOD-wide goals, (2) develop incentives  that motivate decision makers to initiate and implement efforts that are  consistent with better program outcomes, including saying “no” or pulling  the plug on a system or program that is failing, and (3) facilitate a  congressional focus on results-oriented management, particularly with  respect to resource-allocation decisions.
section_title: Keys to Successful Reform and Current Status of Reform Efforts
paragraphs: Over the years, we have given DOD credit for beginning numerous  initiatives intended to improve its business operations. Unfortunately,  most of these initiatives failed to achieve their intended objective in part,  we believe, because they failed to incorporate key elements that in our  experience shows are critical to successful reform. Today, I would like to  discuss two very important broad-based initiatives DOD currently has  underway that, if properly developed and implemented, will result in  significant improvements in DOD’s business operations. In addition to  these broad-based initiatives, DOD has undertaken several interim  initiatives in recent years that have resulted in tangible, although limited,  improvements. We believe that these tangible improvements were possible  because DOD incorporated many of the key elements critical for reform.  Furthermore, I would like to offer two suggestions for legislative  consideration that I believe could significantly increase the likelihood of a  successful business transformation effort at DOD.
subsections: section_title: Keys to Successful Reform
paragraphs: As I have previously testified, and the success of the more narrowly  defined DOD initiatives I will discuss later illustrate, the following key  elements collectively will enable the department to effectively address the  underlying causes of its inability to resolve its long-standing financial and  business management problems. These elements are    addressing the department’s financial management and related business  operational challenges as part of a comprehensive, integrated, DOD-wide  strategic plan for business reform;   providing for sustained and committed leadership by top management,  including but not limited to the Secretary of Defense,   establishing resource control over business systems investments;    establishing clear lines of responsibility, authority, and accountability;  incorporating results-oriented performance measures and monitoring  progress tied to key financial and business transformation objectives;   providing appropriate incentives or consequences for action or inaction;    establishing an enterprise architecture to guide and direct business  systems modernization investments; and   ensuring effective oversight and monitoring.
For the most part, these elements, which should not be viewed as  independent actions but rather as a set of interrelated and interdependent  actions, are consistent with those discussed in the department’s April 2001  financial management transformation report. The degree to which DOD  incorporates them into its current reform efforts—both long and short  term—will be a deciding factor in whether these efforts are successful.
section_title: Human Capital Initiative
paragraphs: Human capital challenges at DOD are crosscutting and impact the  effectiveness of all of its business operations. Effective human capital  strategies are necessary for any business transformation to succeed at  DOD. For several years, we have reported  that many of DOD’s business  process and control weaknesses were attributable in part to human capital  issues. Recent audits of DOD’s military payroll and the individually billed  travel card program further highlight the adverse impact that outdated and  inadequate human capital practices, such as insufficient staffing, training,  and monitoring of performance, continue to have on DOD business  operations.
I strongly support the need for modernizing federal human capital policies  both within DOD and for the federal government at large. We have found  that a critical success factor for overall organizational transformation is  the use of a modern, effective, credible, and integrated performance  management system to define responsibility and assure accountability for  achieving desired goals and objectives. Such a performance management  system can help manage and direct the transformation process by linking  performance expectations to an employee’s role in the transformation  process. GAO has found that there are significant opportunities to use the  performance management system to explicitly link senior executive  expectations for performance to results-oriented goals. There is a need to  hold senior executives accountable for demonstrating competencies in  leading and facilitating change and fostering collaboration both within and  across organizational boundaries to achieve results. Setting and meeting  expectations such as these will be critical to achieving needed  transformation changes. Simply put, DOD must convince people  throughout the department that they must change business-as-usual  practices or they are likely to face serious consequences, personally and  organizationally. DOD has already applied this principle at the Defense  Finance and Accounting Service (DFAS). For example, DFAS managers— and sometimes staff—are rated and rewarded based on their ability to  reach specific annual performance goals. But linking employee pay to the  achievement of measurable performance goals must be done within the  context of a credible human capital system that includes adequate  safeguards.
The National Defense Authorization Act for Fiscal Year 2004  authorized  DOD to establish a National Security Personnel System for its civilian  employees that is modern, flexible, and consistent with the merit  principles outlined by the act. This legislation requires DOD to develop a  human capital system that is consistent with many of the practices that we  have laid out for an effective human capital system, including a modern  and results-oriented performance management system. However, in our  opinion, DOD does not yet have the necessary institutional infrastructure  in place within its organization to support an effective human capital  transformation effort. This institutional infrastructure must include, at a  minimum,    a human capital planning process that integrates the department’s human  capital policies, strategies, and programs for both civilian (including  contractors) and military personnel, with its program goals, mission, and  desired outcomes; the capabilities to effectively develop and implement a new human capital  system, and   a modern, effective, credible, and hopefully validated performance  management system that includes a set of adequate safeguards, including  reasonable transparency and appropriate accountability mechanisms, to  ensure the fair, effective, and credible implementation of the system.
The results of our review of DOD’s strategic human capital planning  efforts along with the use of human capital flexibilities and related human  capital efforts across government underscore the importance of such an  institutional infrastructure in developing and effectively implementing new  personnel authorities. In the absence of this critical element, the new  human capital authorities will provide little advantage and could actually  end up doing damage if not properly implemented.
As DOD develops regulations to implement its new civilian personnel  system, the department needs to do the following.
Ensure the active involvement of the Office of Personnel Management  (OPM) in the development process, given the significant implications that  changes in DOD regulations may have on governmentwide human capital  policies.
Ensure the involvement of civilian employees and unions in the  development of a new personnel system. The law calls for DOD to involve  employees, especially in the design of its new performance management  system. Involving employees in planning helps to develop agency goals  and objectives that incorporate insights about operations from a front-line  perspective. It can also serve to increase employees’ understanding and  acceptance of organizational goals and improve motivation and morale.
Use a phased approach to implementing the system in recognition that  different parts of the organization will have different levels of readiness  and different capabilities to implement new authorities. Moreover, a  phased approach allows for learning so that appropriate adjustments and  midcourse corrections can be made before the regulations are fully  implemented departmentwide. In this regard, DOD has indicated that it  plans to implement its new human capital system for 300,000 civilian  employees by October 1, 2004. It is highly unlikely that DOD will have  employed an appropriate process and implemented an appropriate  infrastructure to achieve this objective.
It is worth mentioning here that the Department of Homeland Security  (DHS) is also currently developing a new human capital system. DHS is  using a collaborative process that facilitates participation from all levels of  DHS, and directly involves OPM. We found that the DHS process to date  has generally reflected the important elements of a successful  transformation, including effective communication and employee  involvement. In addition, DHS plans to implement the job evaluation, pay,  and performance management system in phases to allow time for final  design, training, and careful implementation. I believe that DOD could  benefit from employing a more inclusive process and phased  implementation approach similar to the process used by DHS.
section_title: Business Management Modernization Program
paragraphs: Another broad-based initiative that is vital to the department’s efforts to  transform DOD business operations is the BMMP, which the department  established in July 2001. The purpose of the BMMP is to oversee  development and implementation of a departmentwide business enterprise  architecture (BEA), transition plan, and related efforts to ensure that DOD  business system investments are consistent with the architecture. A well- defined and properly implemented business enterprise architecture can  provide assurance that the department invests in integrated  enterprisewide business solutions and, conversely, can help move  resources away from nonintegrated business system development efforts.  As we reported in July 2003, within 1 year DOD developed an initial  version of its departmentwide architecture for modernizing its current  financial and business operations and systems. Thus far, DOD has  expended tremendous effort and resources and has made important  progress towards complying with legislative requirements. However,  substantial work remains before the architecture will begin to have a  tangible impact on improving DOD’s overall business operations. I cannot  overemphasize the degree of difficulty DOD faces in developing and  implementing a well-defined architecture to provide the foundation that  will guide its overall business transformation effort.
On the positive side, during its initial efforts to develop the architecture,  the department established some of the architecture management  capabilities advocated by best practices and federal guidance, such as  establishing a program office, designating a chief architect, and using an  architecture development methodology and automated tool. Further,  DOD’s initial version of its BEA provides a foundation on which to build  and ultimately produce a well-defined business enterprise architecture.  For example, in September 2003, we reported that the “As Is”  descriptions within the BEA include an inventory of about 2,300 systems  in operation or under development and their characteristics. The “To Be”  descriptions address, to at least some degree, how DOD intends to operate  in the future, what information will be needed to support these future  operations, and what technology standards should govern the design of  future systems.
While some progress has been made, DOD has not yet taken important  steps that are critical to its ability to successfully use the enterprise  architecture to drive reform throughout the department’s overall business  operations. For example, DOD has not yet defined and implemented the  following.
Detailed plans to extend and evolve its initial architecture to include the  missing scope and detail required by the Bob Stump National Defense  Authorization Act for Fiscal Year 2003 and other relevant architectural  requirements. Specifically, (1) the initial version of the BEA excluded  some relevant external requirements, such as requirements for recording  revenue, and lacked or provided little descriptive content pertaining to its  “As Is” and “To Be” environments and (2) DOD had not yet developed the  transition plan needed to provide a temporal road map for moving from  the “As Is” to the “To Be” environment.
An effective approach to select and control business system investments  for obligations exceeding $1 million. As I previously stated, and it bears  repeating here, DOD components currently receive direct funding for their  business systems and continue to make their own parochial decisions  regarding those investments without having received the scrutiny of the  DOD Comptroller as required by the Bob Stump National Defense  Authorization Act for Fiscal Year of 2003. Later, I will offer a suggestion  for improving the management and oversight of the billions of dollars DOD  invests annually in system modernization efforts.
Until DOD completes its efforts to refine and implement its enterprise  architecture and transition plan, and develop and implement an effective  approach for selecting and controlling business system investments, DOD  will continue to lack (1) a comprehensive and integrated strategy to guide  its business process and system changes, and (2) results-oriented  measures to monitor and measure progress, including whether system  development and modernization investment projects adequately  incorporate leading practices used by the private sector and federal  requirements and achieve performance and efficiency commensurate with  the cost. These elements are critical to the success of DOD’s BMMP.
Developing and implementing a business enterprise architecture for an  organization as large and complex as DOD is a formidable challenge but it  is critical to effecting the change required to achieve the Secretary’s vision  of relevant, reliable, and timely financial and other management  information to support the department’s vast operations. As mandated, we  plan to continue to report on DOD’s progress in developing the next  version of its architecture, developing its transition plan, validating its “As  Is” systems inventory, and controlling its system investments.
section_title: Interim Initiatives
paragraphs: Since DOD’s overall business process transformation is a long-term effort,  in the interim it is important for the department to focus on improvements  that can be made using, or requiring only minor changes to, existing  automated systems and processes. As demonstrated by the examples I will  highlight in this testimony, leadership, real incentives, accountability, and  oversight and monitoring—key elements to successful reform—have  brought about improvements in some DOD operations, such as more  timely commercial payments, reduced payment recording errors, and  significant reductions in individually billed travel card delinquency rates.
To help achieve the department’s goal of improved financial information,  the DOD Comptroller has developed a Financial Management Balanced  Scorecard that is intended to align the financial community’s strategy,  goals, objectives, and related performance measures with the  departmentwide risk management framework established as part of DOD’s  QDR, and with the President’s Management Agenda. To effectively  implement the balanced scorecard, the Comptroller is planning to cascade  the performance measures down to the military services and defense  agency financial communities, along with certain specific reporting  requirements. DOD has also developed a Web site where implementation  information and monthly indicator updates will be made available for the  financial communities’ review. At the departmentwide level, certain  financial metrics will be selected, consolidated, and reported to the top  levels of DOD management for evaluation and comparison. These  “dashboard” metrics are intended to provide key decision makers,  including Congress, with critical performance information at a glance, in a  consistent and easily understandable format.
DFAS has been reporting the metrics cited below for several years, which,  under the leadership of DFAS’ Director and DOD’s Comptroller, have  reported improvements, including    From April 2001 to January 2004, DOD reduced its commercial pay  backlogs (payment delinquencies) by 55 percent.
From March 2001 to December 2003, DOD reduced its payment recording  errors by 33 percent.
The delinquency rate for individually billed travel cards dropped from 18.4  percent in January 2001 to 10.7 percent in January 2004.
Using DFAS’ metrics, management can quickly see when and where  problems are arising and can focus additional attention on those areas.  While these metrics show significant improvements from 2001 to today,  statistics for the last few months show that progress has slowed or even  taken a few steps backward for payment recording errors and commercial  pay backlogs. Our report last year on DOD’s metrics program included a  caution that, without modern integrated systems and the streamlined  processes they engender, reported progress may not be sustainable if  workload is increased.
Since we reported problems with DOD’s purchase card program, DOD and  the military services have taken actions to address all of our 109  recommendations. In addition, we found that DOD and the military  services took action to improve the purchase card program consistent  with the requirements of the Bob Stump National Defense Authorization  Act for Fiscal Year 2003 and the DOD Appropriation Act for Fiscal Year  2003. Specifically, we found that DOD and the military services had done  the following.
Substantially reduced the number of purchase cards issued. According to  GSA records, DOD had reduced the total number of purchase cards from  about 239,000 in March 2001 to about 134,609 in January 2004. These  reductions have the potential to significantly improve the management of  this program.
Issued policy guidance to field activities to (1) perform periodic reviews of  all purchase card accounts to reestablish a continuing bona fide need for  each card account, (2) cancel accounts that were no longer needed, and  (3) devise additional controls over infrequently used accounts to protect  the government from potential cardholder or outside fraudulent use.
Issued disciplinary guidelines, separately, for civilian and military  employees who engage in improper, fraudulent, abusive, or negligent use  of a government charge card.
In addition, to monitor the purchase card program, the DOD IG and the  Navy have prototyped and are now expanding a data-mining capability to  screen for and identify high-risk transactions (such as potentially  fraudulent, improper, and abusive use of purchase cards) for subsequent  investigation. On June 27, 2003, the DOD IG issued a reportsummarizing  the results of an in-depth review of purchase card transactions made by  1,357 purchase cardholders. The report identified 182 cardholders who  potentially used their purchase cards inappropriately or fraudulently.
We believe that consistent oversight played a major role in bringing about  these improvements in DOD’s purchase and travel card programs. During  2001, 2002, and 2003, seven separate congressional hearings were held on  the Army and Navy purchase and individually billed travel card programs.  Numerous legislative initiatives aimed at improving DOD’s management  and oversight of these programs also had a positive impact.
Another important initiative underway at the department pertains to  financial reporting. Under the leadership of Comptroller Zakheim, DOD is  working to instill discipline into its financial reporting processes to  improve the reliability of the department’s financial data. Resolution of  serious financial management and related business management  weaknesses is essential to achieving any opinion on the DOD consolidated  financial statements. Pursuant to the requirements in section 1008 of the  National Defense Authorization Act for Fiscal Year 2002, DOD has  reported for the past 3 years on the reliability of the department’s financial  statements, concluding that the department is not able to provide adequate  evidence supporting material amounts in its financial statements.  Specifically, DOD stated that it was unable to comply with applicable  financial reporting requirements for (1) property, plant, and equipment  (PP&E), (2) inventory and operating materials and supplies, (3)  environmental liabilities, (4) intragovernmental eliminations and related  accounting entries, (5) disbursement activity, and (6) cost accounting by  responsibility segment. Although DOD represented that the military  retirement health care liability data had improved for fiscal year 2003, the  cost of direct health care provided by DOD-managed military treatment  facilities was a significant amount of DOD’s total recorded health care  liability and was based on estimates for which adequate support was not  available. DOD has indicated that by acknowledging its inability to  produce reliable financial statements, as required by the act, the  department saves approximately $23 million a year through reduction in  the level of resources needed to prepare and audit financial statements.  However, DOD has set the goal of obtaining a favorable opinion on its  fiscal year 2007 departmentwide financial statements. To this end, DOD  components and agencies have been tasked with addressing material line  item deficiencies, in conjunction with the BMMP. This is an ambitious goal  and we have been requested by Congress to review the feasibility and cost  effectiveness of DOD’s plans for obtaining such an opinion within the  stated time frame.
To instill discipline in its financial reporting process, the DOD Comptroller  requires DOD’s major components to prepare quarterly financial  statements along with extensive footnotes that explain any improper  balances or significant variances from previous year quarterly statements.  All of the statements and footnotes are analyzed by Comptroller office  staff and reviewed by the Comptroller. In addition, the midyear and end-of- year financial statements must be briefed to the DOD Comptroller by the  military service Assistant Secretary for Financial Management or the head  of the defense agency. We have observed several of these briefings and  have noted that the practice of preparing and explaining interim financial  statements has led to the discovery and correction of numerous recording  and reporting errors.
If DOD continues to provide for active leadership, along with appropriate  incentives and accountability mechanisms, improvements will continue to  occur in its programs and initiatives.
section_title: Suggestions for Legislative Consideration
paragraphs: I would like to offer two suggestions for legislative consideration that I  believe could contribute significantly to the department’s ability to not  only address the impediments to DOD success but also to incorporate  needed key elements to successful reform. These suggestions would  include the creation of a chief management official and the centralization  of responsibility and authority for business system investment decisions  with the domain leaders responsible for the department’s various  business process areas, such as logistics and human resource  management.
subsections: section_title: Chief Management Official
paragraphs: Previous failed attempts to improve DOD’s business operations illustrate  the need for sustained involvement of DOD leadership in helping to assure  that the DOD’s financial and overall business process transformation  efforts remain a priority. While the Secretary and other key DOD leaders  have certainly demonstrated their commitment to the current business  transformation efforts, the long-term nature of these efforts requires the  development of an executive position capable of providing the strong and  sustained executive leadership—over a number of years and various  administrations. The day-to-day demands placed on the Secretary, the  Deputy Secretary, and others make it difficult for these leaders to maintain  the oversight, focus, and momentum needed to resolve the weaknesses in  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 preclude the Under  Secretaries, such as the DOD Comptroller, from asserting the necessary  authority over selected players and business areas.
While sound strategic planning is the foundation upon which to build,  sustained leadership is needed to maintain the continuity needed for  success. One way to ensure sustained leadership over DOD’s business  transformation efforts would be to create a full-time executive level II  position for a chief management official who would serve as the Principal  Under Secretary of Defense for Management. This position would  provide the sustained attention essential for addressing key stewardship  responsibilities such as strategic planning, performance and financial  management, and business systems modernization in an integrated  manner, while also facilitating the overall business transformation  operations within DOD. This position could be filled by an individual,  appointed by the President and confirmed by the Senate, for a set term of  7 years with the potential for reappointment. Such an individual 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 the department and serve as an  integrator for the needed business transformation efforts. In addition, this  individual 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 overall business  transformation efforts. Measurable progress towards achieving agreed  upon goals would be a basis for determining the level of compensation  earned, including any related bonus. In addition, this individual’s  achievements and compensation would be reported to Congress each  year.
section_title: Central Control Over System Investments
paragraphs: We have made numerous recommendations to DOD intended to improve  the management oversight and control of its business systems  modernization investments. However, as previously mentioned, progress  in achieving this control has been slow and, as a result, DOD has little or  no assurance that current business systems modernization investment  money is being spent in an economically efficient and effective manner.  DOD’s current systems investment process has contributed to the  evolution of an overly complex and error-prone information technology  environment containing duplicative, nonintegrated, and stovepiped  systems. Given that DOD plans to spend $19 billion on business systems  and related infrastructure for fiscal year 2004—including an estimated   $5 billion in modernization money—it is critical that actions be taken to  gain more effective control over such business systems investments.
One suggestion we have for legislative action to address this issue that is  consistent with our open recommendations to DOD, is to establish specific  management oversight, accountability, and control of funding with the  “owners” of the various functional areas or domains. This legislation  would define the scope of the various business areas (e.g., acquisition,  logistics, finance and accounting) and establish functional responsibility  for management of the portfolio of business systems in that area with the  relevant Under Secretary of Defense for the six departmental domains and  the Chief Information Officer for the Enterprise Information Environment  Mission (information technology infrastructure). For example, planning,  development, acquisition, and oversight of DOD’s portfolio of logistics  business systems would be vested in the Under Secretary of Defense for  Acquisition, Technology, and Logistics.
We believe it is critical that funds for DOD business systems be  appropriated to the domain owners in order to provide for accountability,  transparency, and the ability to prevent the continued parochial approach  to systems development that exists today. The domains would establish a  hierarchy of investment review boards with DOD-wide representation,  including the military services and Defense agencies. These boards would  be responsible for reviewing and approving investments to develop,  operate, maintain, and modernize business systems for the domain  portfolio, including ensuring that investments were consistent with DOD’s  BEA. All domain owners would be responsible for coordinating their  business system modernization efforts with the chief management official  who would chair the Defense Business Systems Modernization Executive  Committee. Domain leaders would also be required to report to Congress  through the chief management official 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: Conclusion
paragraphs: As seen again in Iraq, the excellence of our military forces is unparalleled.  However, that excellence is often achieved in the face of enormous  challenges in DOD’s financial management and other business areas,  which have serious and far-reaching implications related to the  department’s operations and critical national defense mission. Our recent  work has shown that DOD’s long-standing financial management and  business problems have resulted in fundamental operational problems,  such as failure to properly pay mobilized Army Guard soldiers and the  inability to provide adequate accountability and control over supplies and  equipment shipments in support of Operation Iraqi Freedom. Further, the  lack of adequate transparency and appropriate accountability across all  business areas has resulted in certain fraud, waste, and abuse and hinders  DOD’s attempts to develop world-class operations and activities to  support its forces. As our nation continues to be challenged with growing  budget deficits and increasing pressure to reduce spending levels, every  dollar that DOD can save through improved economy and efficiency of its  operations is important.
DOD’s senior leaders have demonstrated a commitment to transforming  the department and improving its business operations and have taken  positive steps to begin this effort. We believe that our two suggested  legislative initiatives will greatly improve the likelihood of meaningful,  broad-based reform at DOD. The continued involvement and monitoring  by congressional committees will be critical to ensure that DOD’s initial  transformation actions are sustained and extended and that the  department achieves its goal of securing the best performance and highest  measure of accountability for the American people. 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. I would be pleased to answer  any questions you or other members of the Subcommittee may have at this  time.
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, Randolph Hite at (202) 512-3439  or hiter@gao.gov, or Evelyn Logue at 202-512-3881. Other key contributors  to this testimony include Sandra Bell, Meg Best, Molly Boyle, Mary Ellen  Chervenic, Cherry Clipper, Francine Delvecchio, Abe Dymond, Gayle  Fischer, Geoff Frank, John Kelly, Elizabeth Mead, John Ryan, Cary  Russell, Lisa Shames, Darby Smith, Edward Stephenson, Derrick B.  Stewart, Carolyn Voltz, Marilyn Wasleski, and Jenniffer Wilson.
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