Defense Business Transformation: A Full-time Chief Management Officer with a Term Appointment Is Needed at DOD to Maintain Continuity of Effort and Achieve Sustainable Success
Published: 2007-10-16T00:00:00

Fast Facts:

Highlights:
section_title: Why GAO Did This Study
paragraphs: The Department of Defense (DOD) continues to face significant challenges in resolving its many long-standing business challenges. DOD is solely responsible for eight high-risk areas and shares responsibility for another seven governmentwide areas on GAO's high-risk list. GAO designated DOD's approach to business transformation as high risk in 2005 because (1) DOD's improvement efforts were fragmented, (2) DOD lacked an enterprisewide and integrated business transformation plan, and (3) DOD had not appointed a senior official at the right level with an adequate amount of time and appropriate authority to be responsible for overall business transformation efforts. A recent DOD directive designated the current Deputy Secretary of Defense as DOD's chief management officer (CMO). Successful overall business transformation, however, will require full-time leadership that is focused solely on the integration and execution of these efforts, over the long term, to resolve pervasive weaknesses that have left DOD vulnerable to waste, fraud, and abuse at a time of increasing fiscal constraint. This testimony is based on previous and ongoing GAO work and discusses (1) the impact of DOD's long-standing business challenges on DOD and the warfighter, and (2) the progress DOD has made and actions needed to achieve sustainable success in its business transformation efforts. This testimony also provides an update on DOD-specific high-risk areas.
section_title: What GAO Found
paragraphs: The persistence and magnitude of DOD's business transformation challenges highlight the fact that the status quo is unacceptable and that, without focused and sustained leadership to guide the overall business transformation effort, the department will continue to waste billions of dollars annually. Within DOD, business transformation is broad, encompassing people, planning, processes, organizational structures, and technology. DOD's pervasive and long-standing business weaknesses adversely affect the department's economy, efficiency, and effectiveness, and have resulted in a lack of adequate accountability across all of its major business areas. Ultimately, these weaknesses affect the department's ability to support the warfighter, including the availability of equipment and weapon systems, the cost and performance of contractors supporting the warfighter, and the assessment of resource requirements. DOD's senior leadership has shown a commitment to transforming the department's business operations. Two critical actions, among others, however, are still needed to change the status quo. DOD has yet to establish (1) a strategic planning process that results in a comprehensive, integrated, and enterprisewide plan or set of plans to help guide transformation, and (2) a senior official who can provide full-time attention and sustained leadership to transformation. Broad-based consensus exists among GAO and others that DOD needs a full-time and term-based senior management official to provide focused and sustained leadership over its overall business transformation efforts, both within and across administrations. Also, various legislative proposals call for senior-level attention to these efforts. While DOD recently assigned CMO duties to the current Deputy Secretary of Defense, this does not ensure full-time attention or continuity of leadership. GAO continues to believe a CMO position should be codified in statute as a separate position, at the right level, and with the appropriate term in office. In the absence of a CMO with these characteristics, and an enterprisewide plan to guide business transformation efforts, it is highly unlikely that DOD will ever get the most out of every taxpayer dollar it invests to better support the warfighter in times of growing fiscal constraint.

section_title: Letter
paragraphs: I am pleased to be before this Subcommittee to discuss the status of the  Department of Defense’s (DOD) efforts to transform its business  operations and why further action is needed to maintain continuity of  effort, change the status quo, and achieve sustainable success. Since the  first financial statement audit of a major DOD component was attempted  almost 20 years ago, we have reported that weaknesses in business  operations not only adversely affect the reliability of reported financial  data, but also the economy, efficiency, and effectiveness of DOD’s  operations. In fact, DOD continues to dominate our list of high-risk  programs designated as vulnerable to waste, fraud, and abuse of funds,  bearing responsibility, in whole or in part, for 15 of 27 high-risk areas.  Eight of these areas are specific to DOD and include DOD’s overall  approach to business transformation, as well as business systems  modernization, financial management, the personnel security clearance  process, supply chain management, support infrastructure management,  weapon systems acquisition, and contract management. Collectively, these  high-risk areas relate to DOD’s major business operations which directly  support the warfighters, including how they are paid, the benefits provided  to their families, and the availability and condition of equipment they use  both on and off the battlefield.
Given the current security environment and growing longer-range fiscal  imbalance facing our nation, DOD, like other federal agencies, will  increasingly compete for resources in a fiscally constrained environment  in the future. Commitments are clearly growing both abroad, with our  involvement in ongoing operations in Iraq and Afghanistan, as well as at  home, with efforts to provide homeland security. However, our nation is  threatened not only by external security threats, but also from within by  large and growing fiscal imbalances over time due primarily to our aging  population and rising health care costs. Absent policy changes to cope  with rising health care costs and known demographic trends, a growing  imbalance between expected federal spending and revenues will mean  escalating and ultimately unsustainable federal deficits and debt levels. As  I have stated previously, our nation is on an imprudent and unsustainable  fiscal path. Given this scenario, DOD cannot afford to continue on the  course of reduced efficiencies, ineffective performance, and inadequate  accountability in connection with its business operations. With its annual  base budget approaching $500 billion, along with total reported obligations  of about $462 billion to support ongoing operations and activities related  to the global war on terrorism since the September 11th attacks through  July 2007, the department has clearly been given stewardship over  unprecedented amounts of taxpayer money. DOD must do more to get the  most from every dollar it is given.
Transformation in any organization is a long-term process, especially in an  organization as large and as complex as DOD. I continue to believe that  DOD’s senior leadership has shown a commitment to address long- standing weaknesses and transform its business operations. Congress,  under the leadership of this Subcommittee and others, has conducted  oversight, passed legislation, and codified many of our prior  recommendations, particularly with respect to DOD’s modernization of its  business systems. Since then, DOD has devoted substantial resources and  made important progress toward establishing key transformation entities  and processes to guide business activities. DOD’s current approach is  clearly superior to its prior approach; however, progress has been  inconsistent and a number of challenges remain. Most importantly, DOD  has not taken what could be considered one of the single most critical  steps, which is to provide the full-time attention and sustained leadership  needed to guide business transformation efforts. To that end, DOD needs a  chief management officer (CMO), codified in statute as a separate  position, at the right level, and with the adequate amount of time and  appropriate authority to be responsible and accountable for its business  transformation efforts. As I will discuss later, DOD recently assigned chief  management officer duties specifically to the current Deputy Secretary of  Defense, and therefore it appears these responsibilities will expire when  that individual leaves the department. In my view, subsuming the duties  within the other responsibilities of the current Deputy Secretary  essentially represents the status quo and will not provide the continuity of  effort and full-time focus that is necessary to effectively further achieve  and sustain success in connection with DOD’s overall business  transformation effort.
Our work shows that DOD will continue to face difficulty in achieving  better outcomes in its business operations and ultimately optimizing  support to the warfighter until it adopts a better leadership approach to  guide its business transformation efforts. My testimony today will touch  on the various high-risk areas for which DOD is responsible, paying  special attention to the department’s overall approach to business  transformation. I will provide perspectives on (1) the impact DOD’s  pervasive and long-standing business challenges have on the department  and the warfighter, and (2) the progress DOD has made and the actions  needed to achieve sustainable success in its business transformation  efforts. I will also provide an update on remaining DOD-specific high-risk  areas that highlight the need for continued attention.
My statement is based on our previous reports and testimonies, as well as  some of our current, ongoing efforts. Our work was performed in  accordance with generally accepted government auditing standards.
subsections: section_title: Background
paragraphs: DOD is one of the largest and most complex organizations in the world.  Overhauling its business operations will take many years to accomplish  and represents a huge and possibly unprecedented management challenge.  Execution of DOD’s operations spans a wide range of defense  organizations, including the military services and their respective major  commands and functional activities, numerous large defense agencies and  field activities, and various combatant and joint operational commands  that are responsible for military operations for specific geographic regions  or theaters of operation. To support DOD’s operations, the department  performs an assortment of interrelated and interdependent business  functions—using thousands of business systems—related to major  business areas such as weapon systems management, supply chain  management, procurement, health care management, and financial  management. The ability of these systems to operate as intended affects  the lives of our warfighters both on and off the battlefield.
To address long-standing management problems, we began our high-risk  series in 1990 to identify and help resolve serious weaknesses in areas that  involve substantial resources and provide critical services to the public.  Historically, high-risk areas have been designated because of traditional  vulnerabilities related to their greater susceptibility to fraud, waste, abuse,  and mismanagement. As our high-risk program has evolved, we have  increasingly used the high-risk designation to draw attention to areas  associated with broad-based transformation needed to achieve greater  economy, efficiency, effectiveness, accountability, and sustainability of  selected key government programs and operations. DOD has continued to  dominate the high-risk list, bearing responsibility, in whole or in part, for  15 of our 27 high-risk areas. Of the 15 high-risk areas, the 8 DOD-specific  high-risk areas cut across all of DOD’s major business areas. Table 1 lists  the 8 DOD-specific high-risk areas and the year in which each area was  designated as high risk. In addition, DOD shares responsibility for 7  governmentwide high-risk areas.
GAO designated DOD’s approach to business transformation as high risk  in 2005 because (1) DOD’s improvement efforts were fragmented, (2) DOD  lacked an enterprisewide and integrated business transformation plan, and  (3) DOD had not appointed a senior official at the right level with an  adequate amount of time and appropriate authority to be responsible for  overall business transformation efforts. Collectively, these high-risk areas  relate to DOD’s major business operations, which directly support the  warfighter, including how servicemembers get paid, the benefits provided  to their families, and the availability of and condition of the equipment  they use both on and off the battlefield.
section_title: DOD’s Pervasive and Long-standing Financial Management and Business Weaknesses Affect the Department’s Efficiency and Effectiveness and Ultimately Impact DOD’s Ability to Support the Warfighter
paragraphs: The persistence and magnitude of DOD’s business transformation  challenges underscore the fact that the status quo is unacceptable, and  without focused and sustained leadership to guide business  transformation, the department will continue to waste billions of dollars  every year. Within DOD, business transformation is broad, encompassing  people, planning, processes, organizational structures, and technology in  all of DOD’s major business areas. DOD spends billions of dollars to  sustain key business operations intended to support the warfighter. DOD’s  pervasive and long-standing weaknesses in its financial management and  business operations adversely affect the economy, efficiency, and  effectiveness of DOD’s operations, and have resulted in a lack of adequate  accountability across all the department’s major business areas. Every  dollar that DOD could save through improved economy and efficiency of  its operations is important to the fiscal well-being of our nation, and  ultimately can be used to support the needs of the warfighter. DOD’s high- risk areas have real world implications for our men and women in  uniform, including how the future needs of ongoing operations are  estimated, the availability and condition of the equipment they use both on  and off the battlefield, and the performance of contractors paid to provide  logistical support to servicemembers in theater, as the following examples  illustrate:    Financial management. Continuing material weaknesses in DOD’s  business processes, systems, and controls have adversely affected the  reliability of the department’s reported financial information and the  department’s ability to manage its operations. To its credit, the department  initiated the “Check It” Campaign in July 2006 to raise awareness  throughout the department on the importance of effective internal  management controls. However, until the impact of this campaign and  other efforts, including its financial improvement and audit readiness  (FIAR) effort, begin to significantly transform and improve DOD’s  business operations, the department will continue to suffer weaknesses in  the reliability and usefulness of its management information as illustrated  by the examples below.
The lack of reliable asset information, including cost, location, and  condition, necessary to effectively (1) safeguard assets from physical  deterioration, theft, or loss; (2) account for the acquisition and disposal  of these assets; (3) ensure that the assets are available for use when  needed; (4) prevent unnecessary storage and maintenance costs, or  purchase of assets already on hand; and (5) determine the full costs of  programs that use these assets.
DOD’s inability to estimate with assurance key components of its  environmental and disposal liabilities and support a significant amount  of its estimated military postretirement health benefits liabilities  included in federal employee and veteran benefits payable. Problems in  accounting for liabilities affect the determination of the full cost of  DOD’s current operations and the extent of its liabilities. Also,  improperly stated environmental and disposal liabilities and weak  internal control supporting the process for their estimation affect the  department’s ability to determine priorities for cleanup and disposal  activities and to appropriately consider future budgetary resources  needed to carry out these activities.
Continuing weaknesses in DOD’s ability to properly record  transactions and reconcile its disbursement activities have adversely  impacted the reliability of DOD’s reported cost data. Unreliable cost  information affects DOD’s ability to control and reduce costs, assess  performance, evaluate programs, and set appropriate fees to recover  costs where required. Improperly recorded disbursements could result  in misstatements in the financial statements and in certain data  provided by DOD for inclusion in The Budget of the United States  Government concerning obligations and outlays. Further, inadequacies  in DOD’s systems and processes for recording and reporting obligation  data related to ongoing operations in support of the global war on  terrorism have contributed to uncertainty regarding the reliability of  reported costs. Our reviews found a number of problems, including  long-standing deficiencies in DOD’s financial management and  business systems, incorrectly categorized or omitted obligations, and  the reporting of large amounts of obligations in miscellaneous “other”  categories. Without transparent and accurate cost reporting, neither  DOD nor Congress can reliably know how much the war is costing,  examine details on how funds are spent, or have historical data useful  in considering future needs. DOD has taken positive steps in response  to our recommendations intended to improve the reliability and  accuracy of its cost reports, and therefore cost reporting continues to  evolve.
These financial management problems continue to be exacerbated by  the department’s inability to implement business systems with the  desired capability. For example, the Army’s Logistics Modernization  Program has been beset with problems virtually since its initial  implementation in July 2003. For instance, as we reported in July 2007,  the program cannot accurately recognize revenue and bill customers,  and its inability to implement effective business processes has  adversely affected the reliability of its financial reports.
Weapon systems acquisition. DOD weapon system programs typically  take longer to field and cost more to buy than planned, placing additional  demands on available funding. For example, we reviewed 27 weapon  programs that were in the research, development, test and evaluation  phase and noted that since development began the costs had increased by  almost $35 billion, or 33.5 percent, over the first full estimate. The same  programs have also experienced an increase in the time needed to develop  capabilities. The consequence of cost and acquisition cycle time growth is  often manifested in a reduction of the buying power of the defense dollar.  As costs rise and key schedule milestones are delayed, programs are  sometimes forced to reduce quantities, resulting in a reduction in buying  power and a reduction in capability delivered to the warfighter. It is a  predictable and recurring phenomenon that can be remedied with more  attention to separating wants from needs and better knowledge at key  decision points. With a weapon investment portfolio of $1.5 trillion, DOD  cannot settle for the same kind of outcomes it has gotten in the past.
Supply chain management. Systemic deficiencies in DOD’s supply  support for U.S. ground forces have led to critical supply shortages during  war operations. At the outset of Operation Iraqi Freedom and periodically  throughout the campaign, DOD has experienced difficulties in providing  U.S. ground forces with critical items such as tires, body armor, and Meals- Ready-to-Eat. In addition, our review of the Air Force’s inventory  management practices found problems that hindered its ability to  efficiently and effectively maintain its spare parts inventory for military  equipment. For example, we found that from fiscal years 2002 through  2005, an average of 52 percent ($1.3 billion) of the Air Force’s secondary  on-order inventory was not needed to support on-order requirements.  Furthermore, we also reported that the Army plans to invest about $5  billion over the next several years to develop and implement business  systems to better track inventory items without a clear, integrated  strategy, Armywide enterprise architecture, or concept of operations to  guide this investment. Challenges remain in coordinating and  consolidating distribution and supply support in theater, which could lead  to similar types of supply problems experienced in Operation Iraqi  Freedom in future military operations.
Contract management. DOD has relied extensively on contractors to  undertake major reconstruction and logistical support to its troops in Iraq.  Service contracts have grown by nearly 80 percent in a decade, both at  home and abroad. In some cases, contractors have begun work without  the key terms and conditions of contracts, including projected costs, being  defined within required time frames. Problems with poor planning,  insufficient leadership and guidance, inadequate numbers of trained  contracting personnel, and limited oversight contribute to ineffective  contract management controls. For example, a program official for the  Logistics Civil Augmentation Program (LOGCAP)—DOD’s largest support  contract—noted that if adequate staffing had been in place, the Army  could have realized substantial savings through more effective reviews of  new requirements. Furthermore, we recently found that sole-source  contracts for security contractors on installations were found to be           25 percent higher than past contracts awarded competitively. In addition,  DOD does not have a sufficient number of oversight personnel, in  deployed locations and elsewhere, which precludes its ability to obtain  reasonable assurance that contractors are meeting contract requirements  efficiently and effectively at each location where work is being performed.  For example, officials responsible for contracting with the Multi-National  Force—Iraq (MNF-I) stated that they did not have enough contract  oversight personnel and quality assurance representatives to allow MNF-I  to reduce the Army’s use of the LOGCAP contract by awarding more  sustainment contracts for base operations support in Iraq. Further, a lack  of training for military commanders hinders their ability to adequately plan  for the use of contractor support and inhibits the ability of contract  oversight personnel to manage and oversee contracts and contractors who  support deployed forces.
As these examples point out, weaknesses in DOD’s business operations  span most of the department’s major business areas and negatively impact  the department’s efficiency and effectiveness and affect its ability to  support the warfighter. Overall, these long-standing weaknesses in DOD’s  business areas have (1) resulted in a lack of reliable information needed to  make sound decisions and report accurately on its operations;                   (2) hindered its operational efficiency; (3) adversely affected mission  performance; and (4) left the department vulnerable to fraud, waste,  abuse, and mismanagement.
section_title: DOD Has Made Progress in Addressing Its Business Transformation Efforts, but Critical Actions are Needed to Provide Comprehensive, Integrated, and Strategic Planning and Focused and Sustained Leadership
paragraphs: Due to the impact of the department’s business weaknesses on both the  department and the warfighter, DOD’s leaders have demonstrated a  commitment to making the department’s business transformation a  priority and have made progress in establishing a management framework  for these efforts. For example, the Deputy Secretary of Defense has  overseen the establishment of various management entities and the  creation of plans and tools to help guide business transformation at DOD.  However, our analysis has shown that these efforts are largely focused on  business systems modernization and that ongoing efforts across the  department’s business areas are not adequately integrated. Furthermore,  key characteristics of the management framework have yet to be  institutionalized or defined in directives. In addition, DOD lacks two  crucial features that are integral to successful organizational  transformation—(1) a strategic planning process that results in a  comprehensive, integrated, and enterprisewide plan or interconnected  plans, and (2) a senior leader who is responsible and accountable for  business transformation and who can provide full-time focus and  sustained leadership.
subsections: section_title: DOD Has Made Progress in Addressing Its Business Transformation Challenges
paragraphs: DOD’s senior leadership has shown commitment to transforming the  department’s business operations, and DOD has taken a number of  positive steps to begin this effort. In fact, because of the impact of the  department’s business operations on its warfighters, DOD recognizes the  need to continue working toward transformation of its business  operations and provide transparency in this process. The department has  devoted substantial resources and made important progress toward  establishing key management structures and processes to guide business  systems investment activities, particularly at the departmentwide level, in  response to congressional legislation that codified many of our prior  recommendations related to DOD business systems modernization and  financial management.
Specifically, DOD has made progress in establishing a management  framework for business transformation by creating various governance  and management entities and developing plans and tools to help guide  transformation. In the past few years, DOD has established the Defense  Business Systems Management Committee, investment review boards, and  the Business Transformation Agency to manage and guide business  systems modernization. The Defense Business Systems Management  Committee and investment review boards were statutorily required by the  Ronald W. Reagan National Defense Authorization Act for Fiscal Year 2005  to review and approve the obligation of funds for defense business  systems modernization, depending on the cost and scope of the system in  review. The Business Transformation Agency was created to support the  top-level management body, the Defense Business Systems Management  Committee, and to advance DOD-wide business transformation efforts.
Additionally, DOD has developed a number of tools and plans to enable  these management entities to help guide business systems modernization  efforts. The tools and plans include the business enterprise architecture  and the enterprise transition plan. The business enterprise architecture is  a tool or blueprint intended to guide and constrain investments in DOD  organizations and systems as they relate to business operations. It  provides a thin layer of corporate policies, capabilities, standards, and  rules and focuses on providing tangible outcomes for a limited set of  enterprise-level (DOD-wide) priorities. The enterprise transition plan is  currently considered the highest level plan for DOD business  transformation. According to DOD, the enterprise transition plan is  intended to summarize all levels of transition planning information  (milestones, metrics, resource needs, and system migrations) as an  integrated product for communicating and monitoring progress, resulting  in a consistent framework for setting priorities and evaluating plans,  programs, and investments.
Our analysis of these tools, plans, and meeting minutes of the various  transformational management entities shows that these efforts are largely  focused on business systems modernization, and that this framework has  yet to be expanded to encompass all of the elements of the overall  business transformation. Furthermore, DOD has not clearly defined or  institutionalized in directives the interrelationships, roles and  responsibilities, or accountability for the various entities that comprise its  management framework for overall business transformation. For example,  opinions differ within DOD as to which senior governance body will serve  as the primary body responsible for overall business transformation. Some  officials stated that the Defense Business Systems Management  Committee would serve as the senior-most governance entity, while others  stated that the Deputy’s Advisory Working Group, a group that provides  departmentwide strategic direction on various issues, should function as  the primary decision-making body for business transformation.  Additionally, opinions differ between the two entities regarding the  definition of DOD’s key business areas, with the Defense Business  Systems Management Committee and the Business Transformation  Agency using a broader definition of business processes than that of the  Deputy Advisory Working Group and its supporting organizations. Until  such differences are resolved and the department institutionalizes a  management framework that spans all aspects of business transformation,  DOD will not be able to integrate related initiatives into a sustainable,  enterprisewide approach and to resolve weaknesses in business  operations.
section_title: Critical Actions Are Needed to Provide Comprehensive, Integrated, and Strategic Planning and Focused and Sustained Leadership for DOD’s Overall Business Transformation Efforts
paragraphs: As we have testified and reported for years, a successful, integrated,  departmentwide approach to addressing DOD’s overall business  transformation requires two critical elements: a comprehensive,  integrated, and enterprisewide plan and an individual capable of providing  full-time focus and sustained leadership both within and across  administrations, dedicated solely to the integration and execution of the  overall business transformation effort.
subsections: section_title: DOD Lacks a Strategic Planning Process That Results in a Comprehensive, Integrated, and Enterprisewide Plan or Set of Plans
paragraphs: DOD continues to lack a comprehensive, integrated, and enterprisewide  plan or set of linked plans for business transformation that is supported by  a comprehensive planning process, and guides and unifies its business  transformation efforts. Our prior work has shown that this type of plan  should help set strategic direction for overall business transformation  efforts and all key business functions; prioritize initiatives and resources;  and monitor progress through the establishment of performance goals,  objectives, and rewards. Furthermore, an integrated business  transformation plan would be instrumental in establishing investment  priorities and guiding the department’s key resource decisions.
While various plans exist for different business areas, DOD’s various  business-related plans are not yet integrated to include consistent  reporting of goals, measures, and expectations across institutional, unit,  and individual program levels. Our analysis shows that plan alignment and  integration currently focuses on data consistency among plans, meaning  that plans are reviewed for errors and inconsistencies in reported  information, but there is a lack of consistency in goals and measurements  among plans. For example, our analysis of the March 2007 enterprise  transition plan showed that the goals and objectives in that plan were not  clearly linked to the goals and objectives in the most recent Quadrennial  Defense Review, which is DOD’s highest-level strategic plan. Additionally,  the enterprise transition plan is not based on a strategic planning process.  For example, it does not provide a complete assessment of DOD’s  progress in overall transformation efforts aside from business systems  modernization. The plan also does not contain results-oriented goals and  measures that assess overall business transformation. Other entities such  as the Institute for Defense Analyses, the Defense Science Board, and the  Defense Business Board have similarly reported the need for DOD to  develop an enterprisewide plan to link strategies across the department  for transforming all business areas and thus report similar findings as our  analysis. DOD officials recognize that the department does not have an  integrated plan in place, although they have stated that their intention is to  expand the scope of the enterprise transition plan to become a more  robust enterprisewide planning document and to evolve this plan into the  centerpiece strategic document. DOD updates the enterprise transition  plan twice a year, once in March as part of DOD’s annual report to  Congress and once in September, and DOD has stated the department’s  goal is to evolve the plan to that of a comprehensive, top-level planning  document for all business functions. DOD released the most recent  enterprise transition plan update on September 28, 2007, and we will  continue to monitor developments in this effort.
section_title: DOD Lacks a Full-time and Term-based Senior Management Official to Provide Focus and Sustained Leadership for the Overall Business Transformation Effort
paragraphs: DOD has not established a full-time and term-based leadership position  dedicated solely to the business transformation effort. We have long  advocated the importance of establishing CMO positions in government  agencies, including DOD, and have previously reported and testified on the  key characteristics of the position necessary for success. In our view,  transforming DOD’s business operations is necessary for DOD to resolve  its weaknesses in the designated high-risk areas, and to ensure the  department has sustained leadership to guide its business transformation  efforts. Specifically, because of the complexity and long-term nature of  business transformation, DOD needs a CMO with significant authority,  experience, and a term that would provide sustained leadership and the  time to integrate its overall business transformation efforts. Without  formally designating responsibility and accountability for results,  reconciling competing priorities among various organizations and  prioritizing investments will be difficult and could impede the  department’s progress in addressing deficiencies in key business areas.
Furthermore, a broad-based consensus exists among GAO and others that  the status quo is unacceptable and that DOD needs a full-time and term- based senior management official to provide focused and sustained  leadership for its overall business transformation efforts, although  differing views exist concerning the specifics of the position, such as term  limit and the level of the position within the department. Congress  directed DOD to commission studies of the feasibility and advisability of  establishing a deputy secretary of defense for management to oversee the  department’s business transformation process. As part of this effort, the  Defense Business Board and the Institute for Defense Analyses both  supported the need for a senior executive to be responsible for DOD’s  overall business transformation efforts. Additionally, this matter is now  before Congress as it prepares to deliberate on pending legislation that  calls for statutorily establishing a CMO at DOD. Both the current House  and Senate versions of the Fiscal Year 2008 Defense Authorization  legislation contain provisions for assigning responsibility for DOD’s  business transformation efforts to a senior-level position within the  department, although the versions differ in certain details. The Senate  version calls for the Deputy Secretary of Defense to take on the additional  duties of the CMO position while also establishing a Deputy CMO position  at the Executive Level III; the House version would require the Secretary  of Defense to assign CMO duties to a senior official at or above the under  secretary level.
DOD has recently taken action on the issue of establishing a CMO position  at DOD; however, we believe this action does not go far enough to change  the status quo and ensure sustainable success. We recognize the  commitment and elevated attention that the Deputy Secretary of Defense  and other senior leaders have clearly shown in addressing deficiencies in  the department’s business operations. For example, the Deputy Secretary  has overseen the creation of various business-related entities, such as the  Defense Business Systems Management Committee and the Business  Transformation Agency, and has been closely involved in monthly  meetings of both the Defense Business Systems Management Committee  and the Deputy’s Advisory Working Group, a group that provides  departmentwide strategic direction on various issues. Most recently, DOD  issued a directive on September 18, 2007, that assigned CMO  responsibilities to the current Deputy Secretary of Defense. In our view,  subsuming the duties within the responsibilities of the individual currently  serving as the Deputy Secretary represents the status quo and will not  provide full-time attention or continuity as administrations change. While  the Deputy Secretary may be at the right level, the substantial demands of  the position make it exceedingly difficult for the incumbent to maintain  the focus, oversight, and momentum needed to resolve business  operational weaknesses, including the high-risk areas. Furthermore, the  assignment of CMO duties to an individual with a limited term in the  position does not ensure continuity of effort or that sustained success will  be ensured both within and across administrations.
In the interest of the department and the American taxpayers, we maintain  that the department needs a separate, full-time CMO position over the long  term in order to devote the needed focus and continuity of effort to  transform its key business operations and avoid billions more in waste  each year. Therefore, we continue to believe that the CMO position at  DOD should be:    Codified in statute as a separate and full-time position. The CMO should be  a separate position from the Deputy Secretary of Defense in order to  provide full-time attention to business transformation. The CMO would be  responsible and accountable for planning, integrating, and executing  DOD’s overall business transformation effort. The CMO also would  develop and implement a strategic plan for overall business  transformation. It should become a permanent position to ensure  continuity of business transformation efforts, with the specific duties  authorized in statute.
Designated as an Executive Level II appointment. The CMO should be at  Executive Level II and report directly to the Secretary of Defense so that  the individual in this position has the stature needed to successfully  address integration challenges, adjudicate disputes, and monitor progress  on overall business transformation across defense organizations.
Subject to an extended term appointment. The CMO’s appointment could  span administrations to ensure transformation efforts are sustained across  administrations. Because business transformation is a long-term and  complex process, a term of at least 5 to 7 years is recommended to provide  sustained leadership and accountability.
In the absence of a CMO with these characteristics to focus solely on the  integration and execution of business transformation efforts, and an  enterprisewide plan to guide these efforts, it is highly unlikely that DOD  will ever resolve its pervasive weaknesses and get the most out of every  dollar it invests in these times of growing fiscal constraint to better  support the warfighter. Transforming DOD’s business operations is an  absolute necessity in the context of an increasingly demanding security  environment and the pressures of our nation’s long-term fiscal outlook.  Further, the current deployment of tens of thousands of servicemembers,  civilians, and contractor personnel to support ongoing operations provides  an even greater sense of urgency for the department to aggressively  address weaknesses in its business operations and achieve transformation  goals in the near and long term.
section_title: DOD-Specific High- Risk Areas Highlight the Need for Further Change and Transformation in the Department
paragraphs: I would like to discuss the remaining seven programs and activities within  DOD that have been designated as high risk. Some of these areas have  remained on the high-risk list for nearly 20 years and have continued to be  a challenge for DOD, while others have newly emerged as a challenge for  the department in more recent years. The remaining high-risk areas  include DOD’s financial management, business systems modernization,  personnel security clearance program, support infrastructure  management, supply chain management, weapon systems acquisition, and  contract management. Each area was added to our high-risk list due to  weaknesses that make DOD more vulnerable to waste, fraud, and abuse.  DOD has made progress in addressing each of these areas, but serious  challenges remain that will require continued attention and sustained  leadership over a number of years to achieve success.
subsections: section_title: DOD Financial Management
paragraphs: DOD’s pervasive financial and related business management and system  deficiencies adversely affect its ability to assess resource requirements;  control costs; ensure basic accountability; anticipate future costs and  claims on the budget; measure performance; maintain funds control;  prevent and detect fraud, waste, and abuse; and address pressing  management issues. Therefore, we first designated DOD financial  management as high risk in 1995.
A major component of DOD’s business transformation effort is the defense  Financial Improvement and Audit Readiness (FIAR) Plan, initially issued  in December 2005 and updated periodically pursuant to section 376 of the  National Defense Authorization Act for Fiscal Year 2006. Section 376  limited DOD’s ability to obligate or expend funds for fiscal year 2006 on  financial improvement activities until the department submitted a  comprehensive and integrated financial management improvement plan to  the congressional defense committees. Section 376 required the plan to   (1) describe specific actions to be taken to correct deficiencies that impair  the department’s ability to prepare timely, reliable, and complete financial  management information and (2) systematically tie these actions to  process and control improvements and business systems modernization  efforts described in the business enterprise architecture and transition  plan. The John Warner National Defense Authorization Act for Fiscal Year  2007 continued to limit DOD’s ability to obligate or expend funds for  financial management improvement activities until the Secretary of  Defense submits a determination to the committees that the activities are  consistent with the plans required by section 376.
DOD intends the FIAR Plan to provide DOD components with a  framework for resolving problems affecting the accuracy, reliability, and  timeliness of financial information, and obtaining clean financial statement  audit opinions. In its June 2007 FIAR Plan update, DOD introduced a  change in its audit strategy in which it moved from a line item approach to  a segment approach for addressing its financial management weaknesses  and achieving auditability. According to the limited information provided  in the June update, DOD has loosely defined a segment as a business  process (Civilian Pay), financial statement line item (Cash and Other  Monetary Assets), group of related financial statement line items (Fund  Balance with Treasury, Accounts Payable, and Accounts Receivable), or a  sub-line (Military Equipment). According to DOD officials, the FIAR Plan  and the enterprise transition plan are key efforts in improving financial  information for decision makers and obtaining unqualified (clean) audit  opinions on their annual financial statements. According to the DOD FIAR  Director, the September 2007 FIAR Plan update, which the department  intends to release by mid-October 2007, and the March 2008 update of the  FIAR Plan, are expected to provide more details on DOD’s new audit  strategy and respective changes in its business rules and oversight process  for ensuring that its goals are achieved. We cannot comment on specific  changes in DOD’s audit strategy until we have had an opportunity to  review these more substantive updates of the FIAR Plan.
We will continue to monitor DOD’s efforts to transform its business  operations and address its financial management deficiencies as part of  our continuing DOD business enterprise architecture work and our  oversight of DOD’s financial statement audit.
Furthermore, the department invests billions of dollars annually to  operate, maintain, and modernize its over 2,900 business systems,  including financial management systems. Despite this significant  investment, the department is severely challenged in implementing  business systems on time, within budget, and with the promised capability.  As previously reported, many of the department’s business systems are  nonintegrated, stovepiped, and not capable of providing department  management and Congress with accurate and reliable information on  DOD’s day-to-day operations. Effective process improvement and  information technology investment management and oversight will be  critical to the department’s success in transforming its business  management systems and operations. Many of the problems related to  DOD’s inability to effectively implement its business systems on time,  within budget, and with the promised capability can be attributed to its  failure to implement the disciplined processes necessary to reduce the  risks associated with these projects to acceptable levels. Disciplined  processes have been shown to reduce the risks associated with software  development and acquisition efforts and are fundamental to successful  systems acquisition.
section_title: DOD Business Systems Modernization
paragraphs: DOD is still not where it needs to be in managing its departmentwide  business systems modernization. Until DOD fully defines and consistently  implements the full range of business systems modernization management  controls (institutional and program-specific), it will be not be positioned to  effectively and efficiently ensure that its business systems and information  technology services investments are the right solutions for addressing its  business needs, that they are being managed to produce expected  capabilities efficiently and cost effectively, and that business stakeholders  are satisfied.
For decades, DOD has been challenged in modernizing the thousands of  timeworn business systems. We designated DOD’s business systems  modernization program as high risk in 1995. Since then, we have made  scores of recommendations aimed at strengthening DOD’s institutional  approach to modernizing its business systems, and reducing the risks  associated with key business system investments. In addition, in recent  legislation, Congress included provisions that are consistent with our  recommendations, such as in the Ronald W. Reagan National Defense  Authorization Act for Fiscal Year 2005. In response, the department has  taken, or is taking, actions to implement both our recommendations and  the legislative requirements, and as a result has made progress in  establishing corporate management controls, such as its evolving business  enterprise architecture (BEA), corporate investment management  structures and processes, increased business system life-cycle  management discipline on its largest business system investments, and  leveraging highly skilled staff on its largest business system investments.
However, much more remains to be accomplished to address this high-risk  area, particularly with respect to ensuring that effective corporate  approaches and controls are extended to and employed within each of  DOD’s component organizations (military departments and defense  agencies). To this end, our recent work has highlighted challenges that the  department still faces in “federating” (i.e., extending) its corporate BEA to  its component organizations’ architectures, as well as in establishing  institutional structures and processes for selecting, controlling, and  evaluating business systems investments within each component  organization. Beyond this, making sure that effective system acquisition  management controls are actually implemented on each and every  business system investment also remains a formidable challenge, as our  recent reports on management weaknesses associated with individual  programs have disclosed. Among other things, these reports have  identified program-level weaknesses relative to architecture alignment,  economic justification, and performance management.
More specifically, we recently reported that DOD has continued to take  steps to comply with legislative requirements and related guidance  pertaining to its business systems modernization high-risk area, and that  these steps addressed several of the missing elements that we previously  identified relative to, for example, its BEA, enterprise transition plan,  business system investment management, and business systems budgetary  disclosure. However, we reported that additional steps were still needed  to fully comply with legislative requirements and relevant guidance.
The latest version of the BEA does a good job of defining DOD-wide  corporate policies, capabilities, rules, and standards, which are essential  to meeting the act’s requirements. However, this version had yet to be  augmented by the DOD component organizations’ subsidiary  architectures, which are also necessary to meeting statutory requirements  and the department’s goal of having a federated family of architectures.  Compounding this are our reports showing the military departments’  architecture programs were not mature and the strategy that the  department had developed for federating its BEA needed more definition  to be executable. To address these limitations, we made  recommendations aimed at ensuring that DOD’s federated BEA provides a  more sufficient frame of reference to optimally guide and constrain DOD- wide system investments. DOD agreed with these recommendations and  has since taken some actions, such as developing an updated draft of its  federation strategy, which according to DOD officials, addresses our  recommendations but has yet to be released.
The March 2007 enterprise transition plan continued to identify more  systems and initiatives that are to fill business capability gaps and address  DOD-wide and component business priorities, and it continues to provide  a range of information for each system and initiative in the plan (e.g.,  budget information, performance metrics, and milestones). However, this  version still does not include system investment information for all the  defense agencies and combatant commands. Moreover, the plan does not  sequence the planned investments based on a range of relevant factors,  such as technology opportunities, marketplace trends, institutional system  development and acquisition capabilities, legacy and new system  dependencies and life expectancies, and the projected value of competing  investments. According to DOD officials, they intend to address such  limitations in future versions of the transition plan as part of their plans  for addressing our prior recommendations. DOD recently released its  September 2007 version of the plan which, according to DOD, continues to  provide time-phased milestones, performance metrics, and statement of  resource needs for new and existing systems that are part of the BEA and  component architectures, and includes a schedule for terminating old  systems and replacing them with newer, improved enterprise solutions.  We have yet to review the updated transition plan.
The department has established and has begun to implement legislatively  directed investment review structures and processes. However, it has yet  to do so in a manner that is fully consistent with relevant guidance.  Specifically, the department has yet to fully define a range of policies and  procedures needed to effectively execute both project-level and portfolio- based information technology investment management practices. For  example, while DOD has established an enterprisewide information  technology investment board that is responsible for defining and  implementing its business systems investment governance process, it has  not fully defined the policies and procedures needed for oversight of and  visibility into operations and maintenance-focused investments.  Accordingly, we made recommendations aimed at improving the  department’s ability to better manage the billions of dollars it invests  annually in its business systems. DOD largely agreed with these  recommendations and has since undertaken several initiatives to  strengthen business system investment management. For example, it has  drafted and intends to shortly begin implementing a new Business  Capability Lifecycle approach that is intended to consolidate management  of business system requirements, acquisition, and compliance with  architecture disciplines into a single governance process. Further, it has  established an Enterprise Integration directorate in the Business  Transformation Agency to support the implementation of Enterprise  Resource Planning systems by ensuring that best practices are leveraged  and BEA-related business rules and standards are adopted.
The department has continued to review and approve business systems as  directed in legislation. As of March 2007, the department reported that its  senior investment review body had approved 285 such systems. However,  the military departments reported that their review and approval  processes were still evolving and that additional work was needed for  them to mature. Because of the importance of the military departments’  investment management structures and processes, we have ongoing work  to determine their maturity.  Beyond having a well-defined federated architecture for the business  mission area and business systems investment management policies and  procedures across the department, the more formidable challenge facing  DOD is how well it can implement these and other acquisition  management controls for each and every business system investment and  information technology services outsourcing program. In this regard, we  have continued to identify program-specific weaknesses.
Most recently, for example, we reported that the Army’s approach for  investing about $5 billion over the next several years in its General Fund  Enterprise Business System, Global Combat Support System-Army  Field/Tactical, and Logistics Modernization Program did not include  alignment with Army enterprise architecture or use of a portfolio-based  business system investment review process.  Moreover, we reported that  the Army did not have reliable processes, such as an independent  verification and validation function, or analyses, such as economic  analyses, to support its management of these programs. We concluded that  until the Army adopts a business system investment management  approach that provides for reviewing groups of systems and making  enterprise decisions on how these groups will collectively interoperate to  provide a desired capability, it runs the risk of investing significant  resources in business systems that do not provide the desired functionality  and efficiency.
We also reported that the Navy’s approach for investing in both system  and information technology services, such as the Naval Tactical Command  Support System (NTCSS) and Navy Marine Corps Intranet (NMCI), did  not include effective program performance management. For NTCSS, we  reported that, for example, earned value management, which is a means  for determining and disclosing actual performance against budget and  schedule estimates, and revising estimates based on performance to date,  had not been implemented effectively. We also reported that complete and  current reporting of NTCSS progress and problems in meeting cost,  schedule, and performance goals had not occurred, leaving oversight  entities without the information needed to mitigate risks, address  problems, and take corrective action. We concluded that without this  information, the Navy cannot determine whether NTCSS, as it was defined  and was being developed, was the right solution to meet its strategic  business and technological needs. For NMCI, we reported that  performance management practices, to include measurement of progress  against strategic program goals and reporting to key decision makers on  performance against strategic goals and other important program aspects,  such as examining service-level agreement satisfaction from multiple  vantage points and ensuring customer satisfaction, had not been adequate.  We concluded that without a full and accurate picture of program  performance, the risk of inadequately informing important NMCI  investment management decisions was increased.
section_title: DOD Personnel Security Clearance Program
paragraphs: We first designated DOD’s personnel security clearance program as a high- risk area in January 2005. The designation followed about 20 years of our  reports documenting delays in determining clearance eligibility and other  clearance-related challenges. The type of information accessed by  individuals with clearances and the scope of DOD’s clearance program are  two factors to consider in understanding the risk present in this area. For  example, personnel with clearances can gain access to classified  information that could cause damage to U.S. national defense and foreign  relations through unauthorized disclosure. In our 1999 report, we noted  that the damage had included intelligence personnel being killed, critical  information being compromised, and U.S. military forces being put at  risk. Furthermore, problems with DOD’s program have effects outside of  the department. DOD is responsible for about 2.5 million security  clearances issued to servicemembers, DOD civilians, and industry  personnel who work on contracts for DOD and 23 other federal agencies.
Our reports have documented a wide variety of problems present in DOD’s  clearance program. Some of the problems that we noted in our 2007 high- risk report included (1) DOD’s consistently inaccurate projections of  clearance requests and their negative effects on workload planning and  funding, (2) incomplete and delayed investigative reports from the Office  of Personnel Management (OPM)—DOD’s primary provider of clearance  investigations, and (3) DOD personnel (namely, adjudicators) granting  clearance eligibility despite data missing from the investigative reports  used to make such determinations. While some of those findings were  reported on data which are now over 1 ½ years old, our May 2007  testimony noted that problems continue to exist such as OPM not fully  counting all of days required for investigations and limited information  being provided to Congress on reinvestigations for clearance updating.  Delays in determining initial clearance eligibility can increase the cost of  performing classified work, and delays in updating clearances may  increase the risk to national security. Additionally, incomplete  investigative or adjudicative reports could undermine governmentwide  efforts to achieve clearance reciprocity (e.g., an agency accepting a  clearance awarded by another agency).
High-level attention has been focused on improving the personnel security  clearance processes in DOD and governmentwide. Since June 2005, the  Office of Management and Budget’s (OMB) Deputy Director of  Management has been responsible for improving the governmentwide  processes. During that time, OMB has overseen, among other things, the  issuance of reciprocity standards, the growth of OPM’s investigative  workforce, and greater use of OPM’s automated clearance-application  system. An August 9, 2007, memorandum from the Deputy Secretary of  Defense indicates that DOD’s clearance program is drawing attention at  the highest levels of the department. Specifically, streamlining security  clearance processes is one of the 25 DOD transformation priorities  identified in the memorandum. Another indication of high-level  involvement in addressing clearance problems is a memorandum of  agreement that seeks to develop, in phases, a reformed DOD and  intelligence community security clearance process that allows granting  high-assurance security clearances in the least time at the lowest  reasonable cost. While the Office of Director of National Intelligence and  the Office of the Under Secretary of Defense posted a request for  information on the Federal Business Opportunities’ website for August 7  through September 4, 2007, the request indicated that they plan to deliver  “a transformed, modernized, and reciprocal security clearance process  that is universally applicable” to DOD, the intelligence community, and  other U.S. government agencies no later than December 31, 2008.
section_title: DOD Support Infrastructure Management
paragraphs: Since 1997, we have identified DOD’s management of its support  infrastructure as a high-risk area because infrastructure costs continue to  consume a larger than necessary portion of its budget. We have frequently  reported in recent years on the long-term challenges DOD faces in  managing its portfolio of facilities, halting the degradation of facilities, and  reducing unneeded infrastructure to free up funds to better maintain  enduring facilities and meet other needs. DOD officials have likewise been  concerned for several years that much of the department’s infrastructure  is outdated, inadequately maintained, and that DOD has more  infrastructure than needed, which affects its ability to devote more funds  to weapon systems modernization and other needs the department deems  critical. Inefficient management practices and outdated business  processes also have contributed to the problem.
While DOD has made progress and expects to continue making  improvements in its support infrastructure management, DOD officials  recognize they must achieve greater efficiencies. To its credit, the  department has continued to give high-level emphasis to reforming its  support operations and infrastructure, including continued efforts to  reduce excess infrastructure, promote transformation, and foster jointness  through the base realignment and closure (BRAC) process. Also, DOD is  updating its Defense Installations Strategic Plan to better address  infrastructure issues, and has revised its installations readiness reporting  to better measure facility conditions, established core real property  inventory data requirements to better support the needs of real property  asset management, and continued to modify its suite of analytical tools to  better forecast funding requirements for the sustainment and restoration  of facilities. It also has achieved efficiencies through demolishing  unneeded buildings at military installations and privatizing military family  housing.
Our work examining DOD’s management of its facilities infrastructure  shows that much work remains for DOD to fully rationalize and transform  its support infrastructure to improve operations, achieve efficiencies, and  allow it to concentrate its resources on the most critical needs. For  example, we have reported that the cleanup of environmental  contamination on unneeded property resulting from prior BRAC rounds  has been a key impediment to the transfer of these properties and could be  an issue in the transfer and reuse of unneeded property resulting from the  2005 BRAC round. Impediments to transfer continue to be related  primarily to a variety of interrelated environmental cleanup issues,  including limited technology to address unexploded ordnance and  protracted negotiations on compliance with environmental regulations.  We have also recently reported that projected savings from past BRAC  rounds have been significantly overstated. During recent visits to  installations in the United States and overseas, service officials continue to  report inadequate funding to provide base operations support and  maintain their facilities. They express concern that unless this is  addressed, future upkeep and repair of many new facilities to be  constructed as a result of BRAC, overseas rebasing, and the Army’s move  to the modular brigade structure will suffer and the facilities’ condition  and base services will deteriorate. We have also found that DOD’s outline  of its strategic plan for addressing this high-risk area had a number of  weaknesses and warranted further clarification and specification. For  example, DOD’s outline does not identify DOD’s short- and long-term goals  or the desired end state for its facilities infrastructure—information  critical for a meaningful plan. Instead, the outline focuses on completing  administrative actions and producing paper products, and it does not  describe how the completion of these actions and products will directly  affect DOD infrastructure, including major support functions, and  ultimately meet DOD’s short- and long-term goals. We will continue to  meet with OMB and DOD officials to discuss the department’s efforts in  addressing this high-risk area.
Through future work examining DOD’s strategic plan for this area and  through our monitoring of DOD base realignment and closures, overseas  rebasing, and the sustainment and operations of military installations and  facilities, we will be able to determine what other work needs to be done  to assist DOD in its efforts to improve the management of its support  infrastructure. As demands on the military continue to change and  increase, organizations throughout DOD will need to continue  reengineering their business processes and striving for greater operational  effectiveness and efficiency. Having a comprehensive, long-range plan for  its infrastructure that addresses facility requirements, recapitalization, and  maintenance and repair will help DOD provide adequate resources to meet  these requirements and improve facility conditions and base services.
section_title: DOD Supply Chain Management
paragraphs: The availability of spare parts and other critical supply items that are  procured and delivered through DOD’s supply chain network affects the  readiness and capabilities of U.S. military forces, and can affect the  success of a mission. Moreover, the investment of resources in the supply  chain is substantial, amounting to more than $150 billion a year according  to DOD, and supply inventory levels have grown by 35 percent from     $63.3 billion in fiscal year 2001 to $85.6 billion in fiscal year 2006. While  DOD has taken a number of positive steps toward improving its supply  chain management, it has continued to experience weaknesses in its  ability to provide efficient and effective supply support to the warfighter.  Consequently, the department has been unable to consistently meet its  goal of delivering the “right items to the right place at the right time” to  support the deployment and sustainment of military forces. As a result of  weaknesses in DOD’s management of supply inventories and  responsiveness to warfighter requirements, supply chain management has  been on our high-risk list since 1990. Our prior work over the last several  years has identified three focus areas that are critical to resolving supply  chain management problems: requirements forecasting, asset visibility,  and materiel distribution.
Beginning in 2005, DOD developed a plan to address long-term systemic  weaknesses in supply chain management. Since the January 2007 update  of the high-risk series, DOD has made progress in developing and  implementing supply chain management improvement initiatives in its  supply chain management plan. However, the long-term time frames for  many of these initiatives present challenges to the department in  sustaining progress toward substantially completing their implementation.  The plan also lacks outcome-focused performance measures for many  individual initiatives as well as its three focus areas: requirements  forecasting, asset visibility, and materiel distribution. Together, these  weaknesses limit DOD’s ability to fully demonstrate the results it hopes to  achieve through its plan.
Our recent work has also identified problems related to the three focus  areas in DOD’s plan. In the requirements area, for example, the military  services are experiencing difficulties estimating acquisition lead times to  acquire spare parts for equipment and weapon systems, hindering their  ability to efficiently and effectively maintain spare parts inventories for  military equipment. In March 2007, we reported that 44 percent of the  services’ lead time estimates varied either earlier or later than the actual  lead times by at least 90 days. Overestimates and underestimates of  acquisition lead time contribute to inefficient use of funds and potential  shortages or excesses of spare parts. Challenges in the asset visibility area  include the lack of interoperability among information technology  systems, problems with container management, and inconsistent  application of radio frequency identification technology, all of which make  it difficult to obtain timely and accurate information on assets in theater.  In the materiel distribution area, challenges remain in coordinating and  consolidating distribution and supply support within a theater.  Furthermore, we recently reviewed DOD’s joint theater logistics initiative,  which is aimed at improving the ability of a joint force commander to  direct various logistics functions, including distribution and supply  support activities. Our work raises concerns as to whether DOD can  effectively implement this initiative without reexamining fundamental  aspects of its logistics governance and strategy. In this respect, joint  theater logistics may serve as a microcosm of some of the challenges DOD  faces in resolving supply chain management problems.
section_title: DOD Weapon Systems Acquisition
paragraphs: For more than a decade, we have identified DOD’s acquisition of major  weapon systems as high risk. The weapon acquisitions process continues  to produce systems that are the best in the world but cost more than first  promised, take longer to field than first promised, and do less than first  promised. Weapon acquisitions are demanding a larger share of the DOD  budget at a time when the nation’s fiscal imbalance is growing. DOD has  doubled its planned investment in new weapon systems from  approximately $750 billion in 2001 to almost $1.5 trillion in 2007. During  the same period, the government’s total liabilities and unfunded  commitments have increased from about $20 trillion to about $50 trillion.  In this context, DOD simply must maximize its return on investment to  provide needed capabilities to the warfighter and to provide the best value  to the taxpayer. We have found that knowledge at key decision points is  critical in the development of new weapon systems if they are to meet  their promised costs, schedules, and capabilities—in other words, using a  knowledge-based approach to acquisitions. The link between knowledge  and cost is real and predictable. It provides three choices for decision  makers: (1) accept the status quo, (2) require demonstrations of high  knowledge levels before approving individual programs, or (3) increase  cost estimates to accurately reflect consequences of insufficient  knowledge. With over $880 billion remaining to invest in the current  portfolio of major systems, the status quo is both unacceptable and  unsustainable.
The inability to deliver new weapon systems at promised times and costs  has significant consequences for both the taxpayer and the warfighter.  When time and costs increase, quantities often decrease to compensate.  The result is the warfighter gets less capability than planned and the  taxpayer’s dollar does not go as far. For example, table 2 depicts the  following programs that experienced both cost increases and quantity  decreases:  DOD knows what to do to achieve more successful outcomes but finds it  difficult to apply the necessary discipline and controls or assign much- needed accountability. DOD has written into policy an approach that  emphasizes attaining a certain level of knowledge at critical junctures  before managers agree to invest more money in the next phase of weapon  system development. This knowledge-based approach should result in  evolutionary—that is incremental, manageable, and predictable— development and inserts several controls to help managers gauge progress  in meeting cost, schedule, and performance goals. However, as we  reported in our March 2007 report on selected DOD weapon systems, DOD  has not been employing the knowledge-based approach, proceeds with  lower levels of knowledge at critical junctures, and attains key elements of  product knowledge later in development than specified in DOD policy. In  particular, the department accepts high levels of technology risk at the  start of major acquisition programs. DOD’s acquisition community often  takes on responsibility for technology development and product  development concurrently. Without mature technologies at the outset, a  program will almost certainly incur cost and schedule problems. Without  mature technologies, it is difficult to know whether the product being  designed and produced will deliver the desired capabilities or,  alternatively, if the design allows enough space for technology integration.  Our work has shown that very few DOD programs start with mature  technologies.
We continue to annually assess DOD’s weapon system acquisition  programs, and the breadth of our work gives us insights into a broad range  of programs as well as the overall direction of weapon system acquisitions.  In examining our defense work, we have observed 15 systemic acquisition  challenges facing DOD—which we have included as appendix I to my  statement. DOD is depending on the weapons currently under  development to transform military operations for the 21st century. As we  have recently reported, the complexity of DOD’s transformational efforts  is especially evident in the development of several megasystems or major  weapon systems that depend on the integration of multiple systems— some of which are developed as separate programs—to achieve desired  capabilities. This strategy often requires interdependent programs to be  developed concurrently and to be closely synchronized and managed, as  they may, for example, depend on integrated architectures and common  standards as a foundation for interoperability. If dependent systems are  not available when needed, then a program could face cost increases,  schedule delays, or reduced capabilities. Furthermore, the larger scope of  development associated with these megasystems produces a much greater  fiscal impact when cost and schedule estimates increase.
The current fiscal environment also presents challenges for DOD’s plans to  transform military operations. As the nation begins to address long-term  fiscal imbalances, DOD is likely to encounter considerable pressure to  reduce its investment in new weapons. Within DOD’s own budget,  investment in new weapon systems competes with funds needed to  replace equipment and sustain military operations in Iraq and Afghanistan.  The nation’s long-term fiscal imbalances also will likely place pressure on  DOD’s planned investment in major weapon systems. As entitlement  programs like Social Security, Medicare, and Medicaid consume a growing  percentage of available resources, discretionary programs—including  defense—face competition for the increasingly scarce remaining funds.  Sustaining real, top-line budget increases in any discretionary program will  be difficult in this constrained resource environment. DOD budget  projections conform to this tightening framework by offsetting growth in  procurement spending with reductions in research and development,  personnel, and other accounts. The minimal real increases projected in  defense spending through fiscal year 2011 depend on these offsets.  However, these projections do not reflect recent experience, nor do they  take into account higher than anticipated cost growth and schedule delays,  which can compound the fiscal impact and affordability of DOD’s planned  investment.
Program approvals in DOD have also shown a decided lack of restraint.  DOD’s requirements process generates more demand for new programs  than fiscal resources can support. DOD compounds the problem by  approving so many highly complex and interdependent programs. Once  too many programs are approved, the budgeting process must broker  trades to stay within realistic funding levels, Because programs are funded  annually and departmentwide, cross-portfolio priorities have not been  established, competition for funding continues over time, forcing  programs to view success as the ability to secure the next funding  increment rather than delivering capabilities when and as promised. DOD  recognizes this dilemma and has embraced best practices in its policies,  instilled more discipline in requirements setting, strengthened training for  program managers, and reorganized offices that support and oversee  programs. However, this intention has not been fully implemented and it  has not had a material effect on weapon system programs. To translate  policy into better programs, several additional elements are essential,  including having a sound business case for each program that focuses on  real needs and embodies best practices, sound business arrangements, and  clear lines of responsibility and accountability.
section_title: DOD Contract Management
paragraphs: DOD’s management of its contracts has been on our high-risk list since  1992. Our work has found that DOD is unable to ensure that it is using  sound business practices to acquire the goods and services needed to meet  warfighters’ needs, creating unnecessary risks of paying higher prices than  justified. DOD’s long-standing problems with contract management have  become more prominent as DOD’s reliance on contractors to provide  services continues to grow.
Recently, I have been quite vocal about the large and growing long-range  structural deficits the federal government faces. Given this fiscal reality, it  is imperative that DOD gets the best return it can on not only major  weapon systems, but also on its investments in goods and services. In our  recent testimony we noted that within the federal government, DOD is the  largest purchaser of a variety of goods and services. In fiscal year 2006  DOD spent about $297 billion, or 71 percent of the more than $400 billion  spent by the federal government, on goods and services to equip and  support the military forces, but is not able to ensure it is using sound  business practices to acquire the goods and services needed to meet the  warfighters’ needs.
In November 2006, we reported that DOD’s approach to managing service  acquisitions has tended to be reactive and has not fully addressed the key  factors for success at either the strategic or transactional level. At the  strategic level, DOD has yet to set the direction or vision for what it needs,  determine how to go about meeting those needs, capture the knowledge to  enable more informed decisions, or assess the resources it has to ensure  departmentwide goals and objectives are achieved. Actions at the  transactional level continue to focus primarily on awarding contracts and  do not always ensure that user needs are translated into well-defined  requirements or that postcontract award activities result in expected  performance. In June 2007, we reported that DOD used time-and-materials  contracts, one of the riskiest contract types for the government because  they could be awarded quickly and labor hours or categories can be  adjusted if requirements are unclear or funding uncertain. Even though  these contracts call for appropriate government monitoring of contractor  performance, there were wide discrepancies in the rigor with which  monitoring was performed and most of the contract files we reviewed did  not include documented monitoring plans. DOD also used undefinitized  contract actions (UCA) to rapidly fill urgent needs. While this is permitted  in a variety of circumstances, we reported in June 2007 that DOD did not  meet the definitization time frame requirement of 180 days after award on  60 percent of the 77 UCAs we reviewed. Since DOD tends to obligate the  maximum amount of funding permitted—up to 50 percent of the not-to- exceed amount—immediately at award of UCAs, contractors may have  little incentive to quickly submit proposals. Lack of timely negotiations  contributed significantly to DOD’s decision on how to address $221 million  in questioned costs on the $2.5 billion Restore Iraqi Oil contract. All 10  task orders for this contract were negotiated more than 180 days after the  work commenced. As a result, the contractor had incurred almost all its  costs at the time of negotiations, which influenced DOD’s decision to pay  nearly all of the questioned costs.
Additionally, DOD management and oversight of contractors continues to  be problematic for two reasons: inadequate numbers of trained contract  oversight personnel and second, insufficient training for those officials  responsible for contract oversight.
On multiple occasions, we and others have reported on the challenges  caused by DOD’s lack of contract management and oversight personnel.  For example, in our June 2004 report on Iraq contract award procedures,  we found that inadequate acquisition workforce resources presented  challenges to several agencies involved in Iraq reconstruction efforts and,  at times, resulted in inadequate oversight of contractor activities.  Similarly, in 2004, we reported that administrative contracting officers  from the Defense Contract Management Agency, who were responsible for  monitoring the LOGCAP contract in Iraq, believe that they needed an  increase in the number of qualified staff to fully meet their oversight  mission. In an April 2005 report, we found that DOD, faced with an urgent  need for interrogation and other services in support of military operations  in Iraq, turned to the Department of the Interior for contract assistance.  However, numerous breakdowns occurred in the issuance and  administration of the orders for these services, including inadequate  oversight of contractor performance.
More recently, in December 2006 we reported that DOD does not have  sufficient numbers of contractor oversight personnel at deployed  locations, which limits its ability to obtain reasonable assurance that  contractors are meeting contract requirements efficiently and effectively.  For example, an Army official acknowledged that the Army is struggling to  find the capacity and expertise to provide the contracting support needed  in Iraq. In addition, officials responsible for contracting with MNF-I stated  that they did not have enough contract oversight personnel and quality  assurance representatives to allow MNF-I to reduce the Army’s use of the  LOGCAP contract by awarding more sustainment contracts for base  operations support in Iraq. Additionally, a Defense Contract Management  Agency official responsible for overseeing the LOGCAP contractor’s  performance at 27 installations in Iraq told us he was unable to personally  visit all 27 locations himself during his 6-month tour in Iraq. As a result, he  was unable to determine the extent to which the contractor was meeting  the contract’s requirements at each of those 27 sites. Moreover, he only  had one quality assurance representative to assist him. The official told us  that in order to properly oversee this contract, he should have had at least  three quality assurance representatives assisting him. The contracting  officer’s representative for an intelligence support contract in Iraq told us  he was also unable to visit all of the locations that he was responsible for  overseeing. At the locations he did visit he was able to work with the  contractor to improve its efficiency. However, because he was not able to  visit all of the locations at which the contractor provided services in Iraq,  he was unable to duplicate those efficiencies at all of the locations in Iraq  where the contractor provided support.
Since the mid-1990s, our work has shown the need for better pre- deployment training for military commanders and contract oversight  personnel on the use of contractor support. Training is essential for  military commanders because of their responsibility for identifying and  validating requirements to be addressed by the contractor. In addition,  commanders are responsible for evaluating the contractor’s performance  and ensuring the contract is used economically and efficiently. Similarly,  training is essential for DOD contract oversight personnel who monitor  contractor performance for the contracting officer.
As we reported in 2003, military commanders and contract management  and oversight personnel we met in the Balkans and throughout Southwest  Asia frequently cited the need for better preparatory training.  Additionally, in our 2004 review of logistics support contracts, we reported  that many individuals using logistics support contracts such as LOGCAP  were unaware that they had any contract management or oversight roles.  Army customers stated that they knew nothing about LOGCAP before  their deployment and that they had received no pre-deployment training  on their roles and responsibilities in ensuring that the contract was used  economically and efficiently. In July 2005 and again in June 2006, we  reported that military units did not receive any training on private security  contractors in Iraq and the military’s roles and responsibilities regarding  private security contractors.
In our December 2006 report, we noted that many officials responsible for  contract management and oversight in Iraq stated that they received little  or no training on the use of contractors prior to their deployment, which  led to confusion over their roles and responsibilities. For example, in  several instances, military commanders attempted to direct (or ran the  risk of directing) a contractor to perform work even though commanders  are not authorized to do so. Such cases can result in increased costs to the  government.
Mr. Chairman and Members of the Subcommittee, this concludes my  statement. I would be happy to answer any questions you may have at this  time.
section_title: GAO Contact
paragraphs: For questions regarding this testimony, please contact Sharon L. Pickup at  (202) 512-9619 or pickups@gao.gov.
section_title: Appendix I: Systemic Acquisition Challenges at the Department of Defense
paragraphs: 1.  Service budgets are allocated largely according to top line historical  percentages rather than Defense-wide strategic assessments and  current and likely resource limitations.  2.  Capabilities and requirements are based primarily on individual service  wants versus collective Defense needs (i.e., based on current and  expected future threats) that are both affordable and sustainable over  time.  3.  Defense consistently overpromises and underdelivers in connection  with major weapons, information, and other systems (i.e., capabilities,  costs, quantities, and schedule).  4.  Defense often employs a “plug and pray approach” when costs escalate  (i.e., divide total funding dollars by cost per copy, plug in the number  that can be purchased, then pray that Congress will provide more  funding to buy more quantities).  5.  Congress sometimes forces the department to buy items (e.g., weapon  systems) and provide services (e.g., additional health care for non- active beneficiaries, such as active duty members’ dependents and  military retirees and their dependents) that the department does not  want and we cannot afford.  6.  DOD tries to develop high-risk technologies after programs start  instead of setting up funding, organizations, and processes to conduct  high-risk technology development activities in low-cost environments,  (i.e., technology development is not separated from product  development). Program decisions to move into design and production  are made without adequate standards or knowledge.  7.  Program requirements are often set at unrealistic levels, then changed  frequently as recognition sets in that they cannot be achieved. As a  result, too much time passes, threats may change, or members of the  user and acquisition communities may simply change their mind. The  resulting program instability causes cost escalation, schedule delays,  smaller quantities, and reduced contractor accountability.  8.  Contracts, especially service contracts, often do not have definitive or  realistic requirements at the outset in order to control costs and  facilitate accountability.  9.  Contracts typically do not accurately reflect the complexity of projects  or appropriately allocate risk between the contractors and the  taxpayers (e.g., cost plus, cancellation charges).  10. Key program staff rotate too frequently, thus promoting myopia and  reducing accountability (i.e., tours based on time versus key  milestones). Additionally, the revolving door between industry and the  department presents potential conflicts of interest.  11. The acquisition workforce faces serious challenges (e.g., size, skills,  knowledge, and succession planning).  12. Incentive and award fees are often paid based on contractor attitudes  and efforts versus positive results (i.e., cost, quality, and schedule).  13. Inadequate oversight is being conducted by both the department and  Congress, which results in little to no accountability for recurring and  systemic problems.  14. Some individual program and funding decisions made within the  department and by Congress serve to undercut sound policies.  15. Lack of a professional, term-based Chief Management Officer at the  department serves to slow progress on defense transformation and  reduce the chance of success in the acquisitions/contracting and other  key business areas.
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