Defense Transformation: Preliminary Observations on DOD's Proposed Civilian Personnel Reforms
Published: 2003-04-29T00:00:00

Fast Facts:

Highlights:
section_title: Why GAO Did This Study
paragraphs: DOD is in the midst of a major transformation effort including a number of initiatives to transform its forces and improve its business operations. DOD's legislative initiative would provide for major changes in the civiliean and military human capital management, make major adjustments in the DOD acquisition process, affect DOD's organization structure, and change DOD's reporting requirements to Congress, among other things. DOD's proposed National Security Personnel System (NSPS) would provide for wide-ranging changes in DOD's civilian personnel pay and performance management, collective bargaining, rightsizing, and a variety of other human capital areas. The NSPS would enable DOD to develop and implement a consistent DOD-wide civilian personnel system. This testimony provides GAO's preliminary observations on aspects of DOD's legislative proposal to make changes to its civilian personnel system and poses critical questions that need to be considered.
section_title: What GAO Found
paragraphs: Many of the basic principles underlying DOD's civilian human capital proposals have merit and deserve serious consideration. The federal personnel system is clearly broken in critical respects--designed for a time and workforce of an earlier era and not able to meet the needs and challenges of our current rapidly changing and knowledge-based environment. DOD's proposal recognizes that as GAO has stated and the experiences of leading public sector organizations here and abroad have found strategic human capital management must be the centerpiece of any serious government transformation effort. More generally, from a conceptual standpoint, GAO strongly supports the need to expand broad banding and pay for performance-based systems in the federal government. However, moving to quickly or prematurely at DOD or elsewhere, can significantly raise the risk of doing it wrong. This could also serve to severely set back the legitimate need to move to a more performance and results-based system for the federal government as a whole. Thus, while it is imperative that we take steps to better link employee pay and other personnel decisions to performance across the the federal government, how it is done, when it is done, and the basis on which it is done, can make all the difference in whether or not we are successful. In our view, one key need is to modernize performance management systems in executive agencies so that they are capable of supporting more performance-based pay and other personnel decisions. Unfortunately, based on GAO's past work, most existing federal performance appraisal systems, including a vast majority of DOD's systems, are not currently designed to support a meaningful performance-based pay system. The critical questions to consider are: should DOD and/or other agencies be granted broad-based exemptions from existing law, and if so, on what bas; and whether they have the institutional infrastructure in place to make effective use of the new authorities. This institutional infrastructure includes, at a minimum, a human capital planning process that integrates the agency's human capital policies, strategies, and programs with its program goals and mission, and desired outcomes; the capabilities to effectively develop and implement a new human capital system; and, importantly, a set of adequate safeguards, including reasonable transparency and appropriate accountability mechanisms to ensure the fair, effective, and credible implementation of a new system. In our view, Congress should consider providing governmentwide broad banding and pay for performance authorities that DOD and other federal agencies can use provided they can demonstrate that they have a performance management system in place that meets certain statutory standards, which can be certified to by a qualified and independent party, such as OPM, within prescribed timeframes. Congress should also consider establishing a governmentwide fund whereby agencies, based on a sound business case, could apply for funding to modernize their performance management systems and ensure that those systems have adequate safeguards to prevent abuse. This approach would serve as a positive step to promote high-performing organizations throughout the federal government while avoiding fragmentation within the executive branch in the critical human capital area.

section_title: Letter
paragraphs: It is a pleasure to appear before you today to provide our preliminary  observations on the Department of Defense’s (DOD) proposed National  Security Personnel System (NSPS) included as part of the Defense  Transformation for the 21st Century Act of 2003. As you know, DOD is in  the midst of a major transformation and it has undertaken a number of  related initiatives to transform its forces and fundamentally improve its  business operations. As part of DOD’s transformation process, the  Secretary of Defense and senior civilian and military leaders have  committed to adopt a capabilities-based approach to acquisition planning  and to improve the linkage between overall strategy and individual  investments. At the same time, DOD has embarked on a series of efforts to  achieve strategic savings and improve its business processes, including  financial management, support infrastructure reforms to include base  closures, information technology modernization, logistics reengineering,  and strategic human capital management. In that regard, I am pleased to  serve as an observer to the Defense Business Practice Implementation  Board. Notwithstanding these ongoing efforts, GAO has reported a range  of DOD challenges for many years. In addition, DOD also is covered by  several of GAO’s governmentwide high-risk areas, including the area of  strategic human capital management.
The proposed Defense Transformation for the 21st Century Act of 2003  represents a substantive legislative proposal that has both significant  precedent-setting implications for the government and far-reaching  implications on the way DOD is managed. Specifically, the critical  questions are whether DOD and/or other agencies should be granted  broad-based exemptions from existing law, and if so, on what basis; and  do agencies have the institutional infrastructure in place to make effective  use of the new authorities they are seeking. DOD’s legislative initiative  would, among other things, provide for major changes in civilian and  military human capital management, make important adjustments to the  DOD acquisition process, affect DOD’s organization structure, and change  DOD’s reporting requirements to Congress.
As a starting point, and as agreed with the Subcommittee, today I will  provide our preliminary observations on DOD’s legislative proposal to  make changes to its civilian personnel system. The proposed NSPS would  provide for wide-ranging changes in DOD’s civilian personnel pay and  performance management, collective bargaining, rightsizing, and a variety  of other human capital areas. The NSPS would enable DOD to develop and  implement a consistent, DOD-wide civilian personnel system bringing  together the many disparate systems that exist today. The proposal, while  providing a section-by-section analysis, does not provide an adequate  justification given the significance of the proposed changes. In addition, it  is my understanding that a document containing a fully developed  justification for the proposed changes is not available. At the same time, it  our understanding that DOD’s current thinking is that NSPS will be based  on the work done by DOD’s Human Resources Best Practices Task Force.  The Task Force reviewed federal personnel demonstration projects and  selected alternative personnel systems to identify practices that it  considered promising for a DOD civilian human resources strategy. These  practices were outlined in a April 2, 2003, Federal Register notice asking  for comment on DOD’s plan to integrate all of its current science and  technology reinvention laboratory demonstration projects under a single  human capital framework consistent with the best practices DOD  identified.
Many of the basic principles underlying DOD’s civilian human capital  proposals have merit and deserve serious consideration. The federal  personnel system is clearly broken in critical respects—designed for a  time and workforce of an earlier era and not able to meet the needs and  challenges of our current rapidly changing and knowledge-based  environment. DOD’s proposal recognizes that, as GAO has stated and the  experiences of leading public sector organizations here and abroad have  found, strategic human capital management must be the centerpiece of  any serious government transformation effort.
Human capital reforms at DOD obviously have important implications for  national security. However, given the massive size of DOD and the nature  and scope of the changes that are being considered, DOD’s proposal also  has important precedent-setting implications for federal human capital  management generally and should also be considered in that context. The  critical questions raised are should DOD and/or other agencies be granted  broad-based exemptions from existing law, and if so, on what basis; and  whether they have the institutional infrastructure in place to make  effective use of the new authorities. This institutional infrastructure  includes, at a minimum, a human capital planning process that integrates  the agency’s human capital policies, strategies, and programs with its  program goals and mission, and desired outcomes; the capabilities to  effectively develop and implement a new human capital system; and  importantly a set of adequate safeguards, including reasonable  transparency and appropriate accountability mechanisms, to ensure the  fair, effective, and credible implementation and application of a new  system.
Consistent with this view, we have long held that the first step toward  meeting the government’s human capital challenges is for agency leaders  to identify and make use of all the appropriate administrative authorities  available to them to manage their people for results, undertaken as part of  and consistent with proven change management practices. Much of the  authority agency leaders need to manage human capital strategically is  already available under current laws and regulations. This includes the  ability to develop modern, effective, and credible performance  management systems that would support more performance-based pay  decisions. The second step is for policymakers to pursue incremental  legislative reforms to give agencies additional tools and flexibilities to hire,  manage, and retain the human capital they need, particularly in critical  occupations. The third step is for all interested parties to work together to  identify, based in part on the experiences of the incremental reforms and  demonstration projects, the kinds of comprehensive legislative reforms in  the human capital area that should be enacted over time, taking into  account the extent to which existing approaches make sense in the  current and future operating environment.
subsections: section_title: Observations on Selected Provisions of the Proposed NSPS
paragraphs: With almost 700,000 civilian employees on its payroll, DOD is the second  largest federal employer of civilians in the nation, after the Postal Service.  Defense civilian personnel, among other things, develop policy, provide  intelligence, manage finances, and acquire and maintain weapon systems.  Given the current global war on terrorism, the role of DOD’s civilian  workforce is expanding, such as participation in combat support functions  that free military personnel to focus on warfighting duties for which they  are uniquely qualified. Civilian personnel are also key to maintaining  DOD’s institutional knowledge because of frequent rotations of military  personnel. However, since the end of the Cold War, the civilian workforce  has undergone substantial change, due primarily to downsizing, base  realignments and closures, competitive sourcing initiatives, and DOD’s  changing missions. For example, between fiscal years 1989 and 2002, DOD  reduced its civilian workforce by about 38 percent, with an additional  reduction of about 55,000 personnel proposed through fiscal year 2007.  Some DOD officials have expressed concern about a possible shortfall of  critical skills because downsizing has resulted in a significant imbalance in  the shape, skills, and experience of its civilian workforce while more than  50 percent of the civilian workforce will become eligible to retire in the  next 5 years. As a result, the orderly transfer of DOD’s institutional  knowledge is at risk.
These factors, coupled with the Secretary of Defense’s significant  transformation initiatives, make it imperative for DOD to strategically  manage its civilian workforce based on a total force perspective which  includes civilian personnel as well as active duty and reserve military  personnel and contractor personnel. This strategic management approach  will enable DOD to accomplish its mission by putting the right people in  the right place at the right time and at a reasonable cost.
NSPS is intended to be a major component of DOD’s efforts to more  strategically manage its workforce and respond to current and emerging  challenges. This morning I will highlight several of the key provisions of  NSPS that in our view are most in need of close scrutiny as Congress  considers the DOD proposal.
subsections: section_title: Providing the Wide- Ranging Authority to Design a New Civilian Personnel System
paragraphs: The DOD proposal would allow the Secretary of Defense to jointly  prescribe regulations with the Director of the Office of Personnel  Management (OPM) to establish a flexible and contemporary human  resources management system for DOD—NSPS. The joint issuance of  regulations is similar to that set forth in the Homeland Security Act of  2002 between the Secretary of Homeland Security and the Director of  OPM for the development of the Department of Homeland Security (DHS)  human resources management system. However, unlike the legislation  creating DHS, the Defense Transformation for the 21st Century Act would  allow the Secretary of Defense to waive the requirement for joint issuance  of regulations if, in his or her judgment, it is “essential to the national  security”—which is not defined in the act. While the act specifies a  number of key provisions of Title 5 that shall not be altered or waived,  including those concerning veterans’ preference, merit protections, and  safeguards against discrimination and prohibited personnel practices, the  act nonetheless would, in substance, provide the Secretary of Defense  with significant independent authority to develop a separate and largely  autonomous human capital system for DOD.
The DOD proposal also has significant potential implications for  governmentwide human capital policies and procedures and for OPM as  the President’s agent and advisor for human capital matters and overseer  of federal human capital management activities. In essence, the act would  allow for the development of a personnel system for the second largest  segment of the federal workforce that is not necessarily within the control  or even direct influence of OPM. To strike a better balance between  reasonable management flexibility and the need for a reasonable degree of  consistency and adequate safeguards to prevent abuse throughout the  government, Congress should consider making these provisions of the  Defense Transformation for the 21st Century Act consistent with the  Homeland Security Act of 2002, or at a minimum, providing some statutory  guidance on what would constitute a situation “essential to the national  security” that would warrant the Secretary of Defense to act independently  of the Director of OPM.
section_title: Implementing Pay Reform and Performance Management
paragraphs: DOD states that it needs a human capital management system that  provides new and increased flexibility in the way it assesses and  compensates its employees, and toward that end, we understand that in  implementing NSPS DOD plans to strengthen its performance appraisal  systems and implement pay banding approaches as core components of  any new DOD human capital system. We have a long and successful  experience in using pay banding with our analyst staff as a result of the  GAO Personnel Act of 1980. Certain DOD components have had a number  of years of experience with pay banding through OPM’s personnel  demonstration projects, authorized by the Civil Service Reform Act of  1978, to test and introduce beneficial change in governmentwide human  resources management systems. For example, in 1980, the Navy personnel  demonstration project, commonly referred to as the China Lake  demonstration project, implemented a number of reforms including pay  banding and a pay for performance system. More recently, the Civilian  Acquisition Workforce personnel demonstration project (AcqDemo) was  implemented in 1999 and created a pay banding system that covers part of  its civilian acquisition, technology, and logistics workforce. The expected  results of AcqDemo’s pay banding system include increased flexibility to  assign employees as well as increased pay potential and satisfaction with  advancement for employees. According to agency officials, an evaluation  to OPM on AcqDemo’s progress is scheduled to be available this June.  Lastly, DOD’s science and technology reinvention laboratory  demonstration projects all implemented some form of pay banding and  pay for performance. OPM reports that these reinvention laboratory  demonstration projects have been able to offer more competitive starting  salaries. Additionally some labs’ turnover experience was significantly  lower among highly-rated employees and higher among employees with  lower ratings. DOD’s demonstration projects clearly provide helpful  insights and valuable lessons learned in connection with broad banding  and pay for performance efforts. At the same time these projects and  related DOD efforts involve less than 10 percent of DOD’s civilian  workforce and expanding these concepts to the entire department will  require significant effort and likely need to be implemented in phases over  several years.
As you know, there is growing agreement on the need to better link  individual pay to performance. Establishing such linkages is essential if we  expect to maximize the performance and assure the accountability of the  federal government for the benefit of the American people. As a result,  from a conceptual standpoint, we strongly support the need to expand  broad banding approaches and pay for performance-based systems in the  federal government. However, moving too quickly or prematurely at DOD  or elsewhere can significantly raise the risk of doing it wrong. This could  also serve to severely set back the legitimate need to move to a more  performance and results-based system for the federal government as a  whole. Thus, while it is imperative that we take steps to better link  employee pay to performance across the federal government, how it is  done, when it is done, and the basis on which it is done can make all the  difference in whether or not such efforts are successful. In our view, one  key need is to modernize performance management systems in executive  agencies so that they are capable of adequately supporting more  performance-based pay and other personnel decisions. Unfortunately,  based on GAO’s past work, most existing federal performance appraisal  systems, including a vast majority of DOD’s systems, are not designed to  support a meaningful performance-based pay system.
The bottom line is that in order to receive any additional performance- based pay flexibility for broad based employee groups, agencies should  have to demonstrate that they have modern, effective, credible, and, as  appropriate, validated performance management systems in place with  adequate safeguards, including reasonable transparency and appropriate  accountability mechanisms, to ensure fairness and prevent politicalization  and abuse.
At your request Madam Chairwoman, and that of Senator Voinovich, we  identified key practices leading public sector organizations both here in  the United States and abroad have used in their performance management  systems to link organizational goals to individual performance and create  a “line of sight” between an individual’s activities and organizational  results. These practices can help agencies develop and implement  performance management systems with the attributes necessary to  effectively support pay for performance.
More specifically, Congress should consider establishing statutory  standards that an agency must have in place before it can implement broad  banding or a more performanced-based pay program. As the request of  Congressman Danny Davis, we developed an initial list of possible  safeguards to help ensure that any additional flexibility Congress may  grant for expanding pay for performance management systems in the  government are fair, effective, and credible. We provided an initial list to  Congressman Davis late last week. This initial list of safeguards was  developed based on our extensive body of work looking at the  performance management practices used by leading public sector  organizations both in the United States and in other countries as well as  our own experiences at GAO in implementing a modern performance  management system for our own staff. We believe that the following could  provide a starting point for developing a set of statutory safeguards in  connection with any additional efforts to expand pay for performance  systems.
Assure that the agency’s performance management systems (1) link to the  agency’s strategic plan, related goals, and desired outcomes, and (2) result  in meaningful distinctions in individual employee performance. This  should include consideration of critical competencies and achievement of  concrete results.  Involve employees, their representatives, and other stakeholders in the  design of the system, including having employees directly involved in  validating any related competencies, as appropriate.
Assure that certain predecisional internal safeguards exist to help achieve  the consistency, equity, nondiscrimination, and nonpoliticization of the  performance management process (e.g., independent reasonableness  reviews by Human Capital Offices and/or Offices of Opportunity and  Inclusiveness or their equivalent in connection with the establishment and  implementation of a performance appraisal system, as well as reviews of  performance rating decisions, pay determinations, and promotion actions  before they are finalized to ensure that they are merit-based; internal  grievance processes to address employee complaints; and pay panels  whose membership is predominately made up of career officials who  would consider the results of the performance appraisal process and other  information in connection with final pay decisions).
Assure reasonable transparency and appropriate accountability  mechanisms in connection with the results of the performance  management process (e.g., publish overall results of performance  management and pay decisions while protecting individual confidentiality,  and report periodically on internal assessments and employee survey  results).
The above items should help serve as a starting point for Congress to  consider in crafting possible statutory safeguards for executive agencies’  performance management systems. OPM would then issue guidance  implementing the legislatively defined safeguards. The effort to develop  such safeguards could be part of a broad-based expanded pay for  performance authority under which whole agencies and/or employee  groups could adopt broad-banding and move to more pay for performance  oriented systems if certain conditions are met. Specifically, the agency  would have to demonstrate, and OPM would have to certify, that a  modern, effective, credible, and, as appropriate, validated performance  management system with adequate safeguards, including reasonable  transparency and appropriate accountability mechanisms, is in place to  support more performance-based pay and related personnel decisions  before the agency could implement a new system. In this regard OPM  should consider adopting class exemption approaches and OPM should be  required to act on any individual certifications within prescribed time  frames (e.g., 30-60 days). This approach would allow for a broader-based  yet more conceptually consistent approach in this critical area. It would  also facilitate a phased-implementation approach throughout government.  The list is not intended to cover all the attributes of a modern, results- oriented performance management system. Rather, the items on the list  cover possible safeguards for performance management systems to help  ensure those systems are fair, effective, and credible.
Congress should also consider establishing a governmentwide fund  whereby agencies, based on a sound business case, could apply for funds  to modernize their performance management systems and ensure those  systems have adequate safeguards to prevent abuse. This approach would  serve as a positive step to promote high-performing organizations  throughout the federal government while avoiding fragmentation within  the executive branch in the critical human capital area.
section_title: Establishing Senior Executive Service Pay and Performance Management
paragraphs: The Senior Executive Service (SES) needs to lead the way in the federal  government’s effort to better link pay to performance. We have reported  that there are significant opportunities to strengthen efforts to hold senior  executives accountable for results. In particular, more progress is needed  in explicitly linking senior executive expectations for performance to  results-oriented organizational goals and desired outcomes, fostering the  necessary collaboration both within and across organizational boundaries  to achieve results, and demonstrating a commitment to lead and facilitate  change. These expectations for senior executives will be critical to keep  agencies focused on transforming their cultures to be more results- oriented, less hierarchical, more integrated, and externally focused and  thereby be better positioned to respond to emerging internal and external  challenges, improve their performance, and assure their accountability.
Given the state of agencies’ performance management systems, Congress  should consider starting federal results-oriented pay reform with the SES.  In that regard and similar to the Homeland Security Act, the proposed  NSPS would increase the current total allowable annual compensation  limit for senior executives up to the Vice President’s total annual  compensation. However, the Homeland Security Act provides that OPM,  with the concurrence of the Office of Management and Budget, certify that  agencies have performance appraisal systems that, as designed and  applied, make meaningful distinctions based on relative performance.  NSPS does not include such a certification provision.  Congress should  consider requiring OPM to certify that the DOD SES performance  management system makes meaningful distinctions in performance and  employs the other practices used by leading organizations to develop  effective performance management systems that I mentioned earlier,  before DOD could increase the annual compensation limit for senior  executives.
section_title: Employees and Employee Organizations Involvement in Creating NSPS
paragraphs: The proposed Defense Transformation for the 21st Century Act includes  provisions intended to ensure collaboration with employee representatives  in the planning, development, and implementation of a human resources  management system. For example, employee representatives are to be  given the opportunity to review and make recommendations on the  proposed NSPS. The Secretary of Defense and the Director of OPM are to  provide employee representatives with a written description of the  proposed system, give these representatives at least 30 calendar days to  review and make recommendations on the proposal, and fully and fairly  consider each recommendation. DOD may immediately implement the  parts of the proposed system that did not receive recommendations or  those recommendations they chose to accept from the employee  representatives. While these provisions are designed to help assure that  employees and their authorized representatives play a meaningful role on  the design and implementation of any new human capital system, DOD  does not have a good track record in reaching out to key stakeholders. In  fact, it is my understanding that neither DOD employees nor their  authorized representatives played a meaningful role in connection with the  design of the legislative proposal that is the subject of this hearing.
For the recommendations from the employee representatives that the  Secretary and the Director do not accept, the Secretary and the Director  are to notify Congress and meet and confer with employee representatives  in an attempt to reach agreement on how to proceed with these  recommendations. If an agreement has not been reached after 30 days, and  the Secretary determines that further consultation with employee  representatives will not produce agreement, the Secretary may implement  any or all parts of the proposal, including any modifications made in  response to the recommendations. The Secretary is to notify Congress of  the implementation of any part of the proposal, any changes made to the  proposal as a result of recommendations from the employee  representatives, and the reasons why implementation is appropriate.
Although the procedures called for in the DOD proposal are similar to  those enacted in the Homeland Security Act, the latter states explicitly the  intent of Congress on the importance for employees to be allowed to  participate in a meaningful way in the creation of any human resources  management system affecting them. To underscore the importance that  Congress places on employee involvement in the development and  implementation of NSPS, Congress should consider including similar  language as that found in the Homeland Security Act.
More generally, and aside from the specific statutory provisions on  consultation, the active involvement of employees will be critical to the  success of NSPS. We have reported that the involvement of employees  both directly and indirectly is crucial to the success of new initiatives,  including implementing a pay for performance system. High-performing  organizations have found that actively involving employees and  stakeholders, such as unions or other employee associations when  developing results-oriented performance management systems helps  improve employees’ confidence and belief in the fairness of the system  and increases their understanding and ownership of organizational goals  and objectives. This involvement must be early, active, and continuing if  employees are to gain a sense of understanding and ownership for the  changes that are being made.
section_title: Attracting Key Talent
paragraphs: The legislation has a number of provisions designed to give DOD flexibility  to help obtain key critical talent. Specifically, it allows DOD greater  flexibility to (1) augment the use of temporary appointment authorities,  (2) hire experts and consultants and pay them special rates, (3) define  benefits for overseas employees, and (4) enter into personal services  contracts for experts and consultants for national security missions,  including for service outside of the United States. Specifically, the  Secretary would have the authority to establish a program to attract highly  qualified experts in needed occupations with the flexibility to establish the  rate of pay, eligibility for additional payments, and terms of the  appointment. These authorities give DOD considerable flexibility to obtain  and compensate individuals and exempt them from several provisions of  current law. While we have strongly endorsed providing agencies with  additional tools and flexibilities to attract and retain needed talent, the  broad exemption from some existing ethics and other personnel  authorities without prescribed limits on their use raises some concern.  Accordingly, Congress should consider placing numerical or percentage  limitations on the use of these provisions or otherwise specifically outline  basic safeguards to ensure such provisions are used appropriately.
section_title: Rightsizing and Organizational Alignment
paragraphs: The proposed Defense Transformation for the 21st Century Act would  provide the Secretary with a number of broad authorities related to  rightsizing and organizational alignment. These include authorizing the  Secretary to restructure or reduce the workforce by establishing programs  using voluntary early retirement eligibility and separation payments, or  both. In addition, the Secretary would be allowed to appoint U.S. citizens  who are at least 55 years of age to the excepted service for a period of 2  years, with a possible 2-year extension, subject only to certain provisions  preventing displacement of current employees. The proposal also provides  that annuitants who receive an annuity from the Civil Service Retirement  and Disability Fund and become employed in a position within the  Department of Defense shall continue to receive their unreduced annuity.  This and selected other NSPS provisions will clearly have incremental  budget implications for which we have not seen any related cost estimate.  Furthermore, this and other selected NSPS provisions would create an  unlevel playing field for experienced talent within the civilian workforce.
Authorities such as voluntary early retirements have proven to be effective  tools in strategically managing the shape of the workforce. I have  exercised the authority that Congress granted me to offer voluntary early  retirements in GAO in both fiscal years 2002 and 2003 as one element of  our strategy to shape the GAO workforce. However, given DOD’s past  efforts in using existing rightsizing tools, there is reason to be concerned  that DOD may struggle to effectively manage additional authorities that  may be provided. While DOD has used existing authorities in the past to  mitigate the adverse effects of force reductions, the approach to  reductions was not oriented toward strategically shaping the makeup of  the workforce. We have previously reported that the net effect of lack of  attention to workforce shaping is a civilian workforce that is not balanced  by age or experience, which risks the orderly transfer of institutional  knowledge. DOD thus may be challenged in using new authorities in a  cohesive, integrated way that supports achieving mission results, absent a  comprehensive and integrated human capital strategy and workforce plan.
In the past, OPM has managed its authority to reemploy an annuitant with  no reduction in annuity on a case-by-case basis. The NSPS proposal, which  broadly grants such treatment, raises basic questions about the intent and  design of the federal benefits or total compensation of federal employees  and obviates the importance of establishing an effective DOD partnership  with OPM in prescribing the use of this authority. As noted previously,  providing such authority only to DOD would provide DOD a competitive  advantage in the market place that would place other agencies at a  disadvantage. It would also involve incremental costs that have yet to be  estimated. Flexible approaches to shaping the workforce, such as 2-year  excepted service appointments, may be helpful in avoiding long-term  commitments for short-term requirements, addressing transition gaps, and  smoothing outsourcing strategies. At the same time, these authorities  represent tools that are not effective on their own, rather they are  elements that need to be developed into an effective strategy and aligned  with program goals and missions.
The legislation could also allow DOD to revise Reduction-in-Force (RIF)  rules to place greater emphasis on an employee’s performance. DOD has  indicated that it will be considering for application DOD-wide, personnel  practices that were identified in the April 2, 2003, Federal Register notice.  This notice describes revised RIF procedures that change the order in  which employees would be retained under a RIF order. Specifically,  employees could be placed on a retention list in the following order: type  of employment (i.e., permanent, temporary), level of performance, and  veterans’ preference eligibility (disabled veterans will be given additional  priority), which we note would reduce the order in which veterans’  preference is currently provided.  While we conceptually support revised  RIF procedures that involve much greater consideration of an employee’s  performance, as I pointed out above, agencies must have modern, effective  and credible performance management systems in place to properly  implement such authorities.
section_title: Establishing Employee Appeals Procedures
paragraphs: The proposed NSPS would allow the Secretary, after consultation with the  Merit Systems Protection Board (MSPB), to prescribe regulations  providing fair treatment in any appeals brought by DOD employees  relating to their employment. The proposal states that the appeals  procedures shall ensure due process protections and expeditious handling,  to the maximum extent possible. In this regard, the proposal provides that  presently applicable appeals procedures should only be modified insofar  as such modifications are designed to further the fair, efficient, and  expeditious resolution of matters involving DOD employees. This  provision is substantially the same as a similar provision in the Homeland  Security Act of 2002 allowing DHS to prescribe regulations for employee  appeals related to their employment. As required of the Secretary of DHS,  the Secretary of Defense would be required to consult with MSPB prior to  issuing regulations. However, neither the Homeland Security Act nor the  proposed legislation expressly requires that employee appeals be heard  and decided by the MSPB. There is also no express provision for judicial  review of decisions regarding employee appeals decisions.
Given the transparency of the federal system dispute resolution and its  attendant case law, the rights and obligations of the various parties  involved is well developed. It is critical that any due process changes that  are implemented after consultation with MSPB result in dispute resolution  processes that are not only fair and efficient but, as importantly, minimize  any possible perception of unfairness.
section_title: Building the Institutional Infrastructure Needed to Support NSPS
paragraphs: The critical need for an institutional infrastructure to develop and support  change has been a consistent theme raised throughout the observations I  have been providing on some of the specific aspects of the proposed  NSPS. This institutional infrastructure includes, at a minimum, a human  capital planning process that integrates the department’s human capital  policies, strategies, and programs with DOD’s mission, goals, and desired  outcomes; the capabilities to effectively develop and implement a new  human capital system; and a set of adequate safeguards, including  reasonable transparency and appropriate accountability mechanisms to  ensure the fair and merit-based implementation and application of a new  system. Quite simply, in the absence of the right institutional  infrastructure, granting additional human capital authorities will provide  little advantage and could actually end up doing damage if the new  flexibilities are not implemented properly. Our work looking at DOD’s  strategic human capital planning efforts and our work looking across the  federal government at the use of human capital flexibilities and related   human capital efforts underscores the critical steps that DOD needs to  take to properly develop and effectively implement any new personnel  authorities.
subsections: section_title: Strategic Human Capital Planning at DOD
paragraphs: Our work here and abroad has consistently demonstrated that leading  organizations align their human capital approaches, policies, strategies,  and programs with their mission and programmatic goals. Human capital  plans that are aligned with mission and program goals integrate the  achievement of human capital objectives with the agency’s strategic and  program goals. Careful and thoughtful human capital planning efforts are  critical to making intelligent competitive sourcing decisions. The  Commercial Activities Panel, which I was privileged to chair, called for  federal sourcing policy to be “consistent with human capital practices  designed to attract, motivate, retain, and reward a high performing  workforce” and highlighted a number of human capital approaches to help  achieve that objective.
In April 2002, DOD published a strategic plan for civilian personnel.  However, as we reported in March 2003, top-level leadership at the  department and the component levels has not until recently been  extensively involved in strategic planning for civilian personnel; however,  civilian personnel issues appear to be a higher priority for top-level leaders  today than in the past. Although DOD began downsizing its civilian  workforce more than a decade ago, top-level leadership has not, until  recently, developed and directed reforms to improve planning for civilian  personnel. With the exception of the Army and the Air Force, neither the  department nor the components in our March review had developed  strategic plans to address challenges affecting the civilian workforce until  2001 or 2002, which is indicative of civilian personnel issues being an  emerging priority.
In addition, we reported that top-level leaders in the Air Force, the Marine  Corps, the Defense Contract Management Agency, and the Defense  Finance and Accounting Service have been or are working in partnership  with their civilian human capital professionals to develop and implement  civilian strategic plans; such partnership is increasing in the Army and not  as evident in the Navy. Moreover, DOD’s issuance of its departmentwide  civilian human capital plan begins to lay a foundation for strategically  addressing civilian human capital issues; however, DOD has not provided  guidance on aligning the component-level plans with the department-level  plan to obtain a coordinated focus to carry out the Secretary of Defense’s  transformation initiatives in an effective manner. High-level leadership  attention is critical to developing and directing reforms because, without  the overarching perspective of such leaders as Chief Operating Officers  and the Chief Human Capital Officers, reforms may not be sufficiently  focused on mission accomplishment, and without their support, reforms  may not receive the resources needed for successful implementation. We  have previously reported that the concept of a Chief Operating Officer  (COO) could offer the leadership to help elevate attention on key  management issues and transformational change, integrate these various  efforts, and institutionalize accountability for addressing management  issues and leading transformational change both within and between  administrations. In our view, DOD is a prime candidate to adopt this COO  concept. In addition, if Congress provides DOD with many of the  flexibilities it is seeking under the NSPS, the basis for adding a COO  position at DOD would be even stronger.
Despite the progress that has been made recently, the DOD human capital  strategic plans we reviewed, for the most part, were not fully aligned with  the overall mission of the department or respective components, results  oriented, or based on data about the future civilian workforce. For  example, the goals and objectives contained in strategic plans for civilian  personnel were not explicitly aligned with the overarching missions of the  respective organizations. Consequently, it is difficult to determine whether  DOD’s and the components’ strategic goals are properly focused on  mission achievement. In addition, none of the plans contained results- oriented performance measures that could provide meaningful data  critical to measuring the results of their civilian human capital initiatives  (i.e., programs, policies, and processes). Thus, DOD and the components  cannot gauge the extent to which their human capital initiatives contribute  to achieving their organizations’ mission. Also, for the most part, the  civilian human capital plans in our review did not contain detailed  information on the skills and competencies needed to successfully  accomplish future missions. Without information about what is needed in  the future workforce, it is unclear if DOD and its components are  designing and funding initiatives that are efficient and effective in  accomplishing the mission, and ultimately contributing to force readiness.
Lastly, the DOD civilian strategic plans we reviewed did not address how  the civilian workforce will be integrated with their military counterparts or  with sourcing initiatives. At the department level, the strategic plan for  civilian personnel was prepared separately from corresponding plans for  military personnel and not integrated to form a seamless and  comprehensive strategy and did not address how DOD plans to link its  human capital initiatives with its sourcing plans, such as efforts to  outsource non-core responsibilities. For the most part, at the component  level, the plans set goals to integrate planning for the total workforce, to  include civilian, military, and contractor personnel. The Air Force and the  Army, in particular, have begun to integrate their strategic planning efforts  for civilian and military personnel, also taking contractor responsibilities  into consideration. Without integrated planning, goals for shaping and  deploying civilian, military, and contractor personnel may not be  consistent with and support each other. Consequently, DOD and its  components may not have the workforce with the skills and competencies  needed to accomplish tasks critical to assuring readiness and achieving  mission success.
In our March report we recommended, among other things, that DOD  improve future revisions and updates to the departmentwide strategic  human capital plan by more explicitly aligning its elements with DOD’s  overarching mission, including performance measures, and focusing on  future workforce needs. DOD only partially concurred with our  recommendation, and, as explanation, stated that the recommendation did  not recognize the involvement in and impact of DOD’s Quadrennial  Defense Review on the development of the departmentwide plan. We also  recommended that DOD develop a departmentwide human capital  strategic plan that integrates both military and civilian workforces and  takes into account contractor roles and sourcing initiatives. DOD did not  concur with this recommendation stating that it has both a military and  civilian plan, and the use of contractors is just another tool to accomplish  the mission, not a separate workforce with separate needs to manage. The  intent of our recommendation is not to say that DOD has a direct  responsibility to manage contractor employees, but rather to recognize  that strategic planning for the civilian workforce should be undertaken in  the context of the total force—civilian, military, and contractors—since  the three workforces need to perform their responsibilities in a seamless  manner to accomplish DOD’s mission. In commenting on our  recommendations, the Under Secretary of Defense for Personnel and  Readiness stated that DOD is in the early stages of its strategic planning  efforts. We recognize this and believe that our recommendations represent  opportunities that exist to strengthen its developing planning efforts.
section_title: The Capabilities Needed to Effectively Develop and Implement Human Capital Flexibilities
paragraphs: Our work has identified a set of key practices that appear to be central to  the effective use of human capital authorities. These practices, which are  shown in figure 1, center on effective planning and targeted investments,  involvement and training, and accountability and cultural change.
Congress should consider the extent to which an agency is capable of  employing these practices before additional human capital flexibilities are  implemented. In the context of NSPS, Congress should consider whether  and to what extent DOD is using those practices.
section_title: Adequate Safeguards, Reasonable Transparency, and Appropriate Accountability
paragraphs: I have discussed throughout my statement today the importance of moving  to a new human capital system which provides reasonable management  flexibility along with adequate safeguards, reasonable transparency, and  appropriate accountability mechanisms to prevent abuse of employees. In  addition to the suggestions made above, Congress should consider  requiring DOD to fully track and periodically report on its performance.  This requirement would be fully consistent with those contained in our  calendar year 2000 human capital legislation, which required us to  comprehensively assess our use of the authorities granted to us under the  act. More generally, Congress should consider requiring DOD to  undertake evaluations that are broadly modeled on the evaluation  requirements of OPM’s personnel demonstration program. Under the  demonstration project authority, agencies must evaluate and periodically  report on results, implementation of the demonstration project, cost and  benefits, impacts on veterans and other EEO groups, adherence to merit  principles, and extent to which the lessons from the project can be applied  elsewhere, including governmentwide. This evaluation and reporting  requirement would facilitate congressional oversight of NSPS, allow for  any mid-course corrections in its implementation, and serve as a tool for  documenting best practices and sharing lessons learned with employees,  stakeholders, other federal agencies, and the public. DOD has stated that it  would continue its evaluation of the science and technology reinvention  laboratory demonstration projects when they are integrated under a single  human capital framework.
section_title: Concluding Observations
paragraphs: In summary, DOD’s civilian human capital proposals raise several critical  questions. Should DOD and/or other federal agencies be granted broad- based exemptions from existing law, and if so, on what basis? Does DOD  have the institutional infrastructure in place to make effective use of the  new authorities? This institutional infrastructure includes, at a minimum, a  human capital planning process that integrates the agency’s human capital  policies, strategies, and programs with its program goals and mission, and  desired outcomes; the capabilities to effectively develop and implement a  new human capital system; and a set of adequate safeguards, including  reasonable transparency and appropriate accountability mechanisms to  ensure the fair, effective, and credible implementation and application of a  new system.
Many of the basic principles underlying DOD’s civilian human capital  proposals have merit and deserve the serious consideration they are  receiving here today and will no doubt be received by others in the coming  weeks and months. However, the same critical questions should be posed  to the DOD proposal. Should DOD and/or other federal agencies be  granted broad-based exemptions from existing law, and if so, on what  basis? In addition, Congress and DOD should carefully assess the degree  to which DOD has the institutional infrastructure in place to make  effective use the new authorities it is seeking. Our work has shown that  while progress has been and is being made, additional efforts are needed  by DOD to integrate its human capital planning process with the  department’s program goals and mission. The practices that have been  shown to be critical to the effective use of flexibilities provide a validated  roadmap for DOD and Congress to consider. Finally, as I have pointed out  in several key areas, Congress should consider, if the authorities are  granted, establishing additional safeguards to ensure the fair, merit-based,  transparent, and accountable implementation and application of NSPS.
In our view, Congress should consider providing governmentwide broad  banding and pay for performance authorities that DOD and other federal  agencies can use provided they can demonstrate that they have a  performance management system in place that meets certain statutory  standards, which can be certified to by a qualified and independent party,  such as OPM. Congress should also consider establishing a  governmentwide fund whereby agencies, based on a sound business case,  could apply for funds to modernize their performance management  systems and ensure that those systems have adequate safeguards to  prevent abuse. This would serve as a positive step to promote high- performing organizations throughout the federal government while  avoiding further fragmentation within the executive branch in the critical  human capital area.
This morning, I have offered some preliminary observations on some  aspects of the proposal. However, these preliminary observations have not  included some serious concerns I have with other sections of the proposed  legislation that go beyond the civilian personnel proposal. My observations  have included suggestions for how Congress can help DOD effectively  address its human capital challenges and ensure that NSPS is designed and  implemented in an effective, efficient, and fair manner that meets the  current and future needs of DOD, its employees, and the American people.  Human capital reforms at DOD obviously have important implications for  national security and precedent-setting implications for governmentwide  human capital management. Given the massive size of DOD and the  magnitude of the nature and scope of the changes that are being  considered, such reform at DOD also has important precedent-setting  implications for federal human capital management generally and should  be considered in that context.
We look forward to continuing to support Congress and work with DOD in  addressing the vital transformation challenges it faces. Madam  Chairwoman and Mr. Davis, this concludes my prepared statement. I  would be pleased to respond to any questions that you may have.
section_title: Contacts and Acknowledgments
paragraphs: For further information on human capital issues at DOD, please contact  Derek Stewart, Director, Defense Capabilities and Management on (202)  512-5559 or at stewartd@gao.gov. For further information on  governmentwide human capital issues, please contact J. Christopher  Mihm, Director, Strategic Issues, on (202) 512-6806 or at mihmj@gao.gov.  Individuals making key contributions to this testimony included William  Doherty, Clifton G. Douglas, Jr., Christine Fossett, Bruce Goddard, Judith  Kordahl, Janice Lichty, Bob Lilly, Lisa Shames, Ellen Rubin, Edward H.  Stephenson, Jr., Tiffany Tanner, Marti Tracy, and Michael Volpe.