DOD's High Risk Areas: Actions Needed to Reduce Vulnerabilities and Improve Business Outcomes
Published: 2009-03-12T00:00:00

Fast Facts:

Highlights:
section_title: Why GAO Did This Study
paragraphs: The Department of Defense (DOD) spends billions of dollars to sustain key business operations intended to support the warfighter. In January, GAO released its 2009 high-risk series update report for the 111th Congress. This series emphasizes federal programs and operations that are at high risk because of vulnerabilities to fraud, waste, abuse, and mismanagement and has also evolved to draw attention to areas associated with broad-based transformation needed to achieve greater efficiency, effectiveness, and sustainability. Of the 30 high-risk areas identified by GAO across government, DOD bears sole responsibility for eight defense specific high-risk areas and shares responsibility for seven other high-risk areas--all of which are related to its major business operations. The Committee asked GAO to provide its views on (1) actions needed to achieve measurable outcomes in DOD's high-risk areas and (2) DOD's progress in strengthening its management approach for business transformation, including establishing the Chief Management Officer (CMO) position. GAO was additionally asked to highlight information regarding the high-risk area related to contract management at the Department of Energy's (DOE) National Nuclear Security Administration.
section_title: What GAO Found
paragraphs: Longstanding weaknesses in DOD's business operations adversely affect the department's economy, efficiency, and effectiveness, and have resulted in a lack of adequate accountability. As a result, DOD continues to experience cost growth in many of these areas and wastes billions of dollars annually that could be freed up for higher priority needs. DOD's senior leadership has shown a commitment to transforming business operations, and taken many steps to address weaknesses. However, additional actions are needed to achieve and sustain progress. DOD has taken some steps to establish the CMO and other key positions, but still lacks some critical elements to strengthen its management approach. The National Defense Authorization Act for Fiscal Year 2008 codified the CMO position, created a Deputy CMO, directed that CMO duties be assigned to the Under Secretary of each military department, and required a strategic plan for business operations. DOD has yet to clearly define the roles, responsibilities, and relationships among key positions, including the Deputy CMO and military department CMOs. Also, its first plan, issued in July 2008, lacks clear goals, objectives, and performance measures. As DOD's approach continues to evolve, GAO remains open to the possibility of further progress. However, because of the roles and responsibilities currently assigned to key positions, it is still unclear whether DOD will provide the long-term sustained leadership needed to address significant challenges in its business operations.

section_title: Letter
paragraphs: I appreciate the opportunity to be here today to discuss the Department of  Defense’s (DOD) high-risk areas and why further action is needed to  enhance and sustain progress in transforming DOD’s business operations.  For almost two decades, we have reported on pervasive and longstanding  weaknesses in DOD’s business operations that affect its efficiency and  effectiveness, leaving it vulnerable to billions of dollars of fraud, waste,  and abuse annually. As a result, DOD continues to dominate our list of  high-risk federal programs and operations, bearing responsibility, in whole  or in part, for half of the 30 areas cited in our January 2009 high-risk series  update report. As table 1 indicates, eight of these fifteen areas are specific  to DOD and seven are governmentwide areas that apply to DOD.  Collectively, these high-risk areas relate to DOD’s major business  operations that are inextricably linked to the department’s ability to  perform its overall mission, directly affect the readiness and capabilities of  U.S. military forces, and can affect the success of a mission.
DOD is entrusted with more taxpayer dollars than any other federal  agency, representing a large part of the discretionary spending of the U.S.  budget. For example, Congress provided DOD with about $512 billion in  annual appropriations for fiscal year 2009 and recently passed the  American Recovery and Reinvestment Act that contains nearly $12.6  billion for DOD for military construction, environmental restoration, and  other purposes. In addition, since 2001, DOD has received about $808  billion in supplemental emergency funding for the Global War on  Terrorism, including support for ongoing military operations. Given the  growing longer-range fiscal imbalance facing our nation, DOD will  increasingly have to compete for constrained resources and cannot afford  to continue to conduct “business as usual” and miss opportunities to  achieve greater efficiencies and free up resources for higher priority  needs.
Common to all of DOD’s high-risk areas is the need for sustained, senior  level leadership and a more strategic decision-making approach to ensure  that programs and investments are based on plans with measurable goals,  clear objectives, validated requirements, prioritized resource needs, and  performance measures to gauge progress. Because of the complexity and  magnitude of the challenges facing the department in improving its  business operations, we have long advocated the need for a senior  management official to provide strong and sustained leadership. As a  result of legislation passed in the 110th Congress, under the leadership of  this committee and many others, DOD now has a Chief Management  Officer (CMO) who is statutorily responsible and accountable for the  department’s overall business transformation efforts.
My testimony today will discuss (1) additional actions needed to achieve  measurable outcomes in selected high-risk areas and (2) DOD’s progress  in strengthening its management approach for business transformation,  including establishing the CMO position. In particular, I will focus my  remarks on the defense-specific areas of weapon systems acquisition,  contract management, supply chain management, financial management,  and the defense-related aspects of the governmentwide areas of strategic  human capital management, protecting technologies critical to U.S.  national security interests, and protecting the federal government’s  information systems and critical infrastructure. As you requested, I will  also highlight information regarding contract management challenges at  the Department of Energy’s (DOE) National Nuclear Security  Administration (NNSA), which is also a high-risk area. Details on all of the  high-risk areas involving DOD and DOE, as well as the rest of the federal  government can be found in our January 2009 High-Risk Series update.
In preparing this testimony, we relied on our extensive body of work on  DOD’s and DOE’s high-risk areas. This work was conducted in accordance  with generally accepted government auditing standards. Those standards  require that we plan and perform the audit to obtain sufficient, appropriate  evidence to provide a reasonable basis for our findings and conclusions  based on our audit objectives. We believe that the evidence obtained  provides a reasonable basis for our findings and conclusions based on our  audit objectives.
subsections: section_title: Failure to Match Requirements with Technology and Other Resources Underlie Poor Weapons Program Outcomes and Undermine Accountability
paragraphs: Since fiscal year 2000, DOD has significantly increased the number of  major defense acquisition programs and its overall investment in them.  During this same time period, acquisition outcomes have not improved.  For example, in last year’s assessment of selected DOD weapon programs,  we found that total acquisition costs for the fiscal year 2007 portfolio of  major defense acquisition programs increased by $295 billion or 26  percent and development costs increased by 40 percent from first  estimates—both of which are higher than the corresponding increases in  DOD’s fiscal year 2000 portfolio.  In most cases, the programs we  assessed failed to deliver capabilities when promised—often forcing  warfighters to spend additional funds on maintaining legacy systems. Our  analysis showed that current programs experienced, on average, a 21- month delay in delivering initial capabilities to the warfighter, a 5-month  increase over fiscal year 2000 programs as shown in table 2. Continued  cost growth results in less funding being available for other DOD priorities  and programs, while continued failure to deliver weapon systems on time  delays providing critical capabilities to the warfighter. We are currently  updating our analysis and intend to issue our assessment of DOD’s current  portfolio later this month.
Several underlying systemic problems at the strategic level and at the  program level continue to contribute to poor weapon system program  outcomes. At the strategic level, DOD does not prioritize weapon system  investments and the department’s processes for matching warfighter  needs with resources are fragmented and broken. DOD largely continues  to define warfighting needs and make investment decisions on a service- by-service basis and assess these requirements and their funding  implications under separate decision-making processes. Ultimately, the  process produces more demand for new programs than available  resources can support, promoting an unhealthy competition for funds that  encourages programs to pursue overly ambitious capabilities, develop  unrealistically low cost estimates and optimistic schedules, and suppress  bad news. Similarly, DOD’s funding process does little to prevent  programs from going forward with unreliable cost estimates and lengthy  development cycles, which is not a sound basis for allocating resources  and ensuring program stability. Invariably, DOD and Congress end up  continually shifting funds to and from programs—undermining well- performing programs to pay for poorly performing ones.
At the program level, programs are started without knowing what  resources will truly be needed and are managed with lower levels of  product knowledge at critical junctures than expected under best  practices standards. For example, in our March 2008 assessment, we  found that only 12 percent of the 41 programs we reviewed had matured  all critical technologies at the start of the development effort.  None of the  26 programs we reviewed that were at or had passed their production  decisions had obtained adequate levels of knowledge. In the absence of  such knowledge, managers rely heavily on assumptions about system  requirements, technology, and design maturity, assumptions that are  consistently too optimistic. These gaps are largely the result of a lack of a  disciplined systems engineering analysis prior to beginning system  development, as well as DOD’s tendency to allow new requirements to be  added well into the acquisition cycle. This exposes programs to significant  and unnecessary technology, design, and production risks, ultimately  damaging cost growth and schedule delays. With high-levels of uncertainty  about technologies, design, and requirements, program cost estimates and  related funding needs are often understated, effectively setting programs  up for failure.
When DOD consistently allows unsound, unexecutable programs to pass  through the requirements, funding, and acquisition processes,  accountability suffers. Program managers cannot be held accountable  when the programs they are handed already have a low probability of  success. Moreover, program managers are not empowered to make go or  no-go decisions, have little control over funding, cannot veto new  requirements, have little authority over staffing, and are frequently  changed during a program’s development. Consequently, DOD officials are  rarely held accountable for these poor outcomes, and the acquisition  environment does not provide the appropriate incentives for contractors  to stay within cost and schedule targets, making officials strong enablers  of the status quo.
With regard to improving its acquisition of weapon systems, DOD has  made changes consistent with the knowledge-based approach to weapons  development that GAO has recommended in its work. In December 2008,  DOD revised DOD Instruction 5000.02, which provides procedures for  managing major defense acquisition programs in ways that aim to provide  key department leaders with the knowledge needed to make informed  decisions before a program starts and to maintain discipline once it  begins. For example, the revised instruction includes procedures for the  completion of key systems engineering activities before the start of the  systems development, a requirement for more prototyping early in  programs, and the establishment of review boards to monitor weapon  system configuration changes. We have previously raised concerns,  however, with DOD’s implementation of guidance on weapon systems  acquisition. At the same time, DOD must begin making better choices that  reflect joint capability needs and match requirements with resources.  DOD’s investment decisions cannot continue to be driven by the military  services that propose programs that overpromise capabilities and  underestimate costs simply to start and sustain development programs.
Recent congressional actions, including efforts by your committtes reflect  the need for achieving better acquisition outcomes. We commend this  Committee for forming a special panel on Defense Acquisition Reform to  address broad issues surrounding the defense acquisition process  including how to evaluate performance and value in the current system,  the root causes of system failures, the administrative and cultural  pressures that lead to negative outcomes, and the reform  recommendations of previous studies. The Senate Committee on Armed  Services also has proposed legislation with provisions to strengthen DOD’s  acquisition processes including provisions to improve systems  engineering, developmental testing, technology maturity assessments,  independent cost estimates and the role of the combatant commanders,  among other provisions.
section_title: DOD Continues to Face Longstanding Challenges Managing Service Contracts and Contractors
subsections: section_title: DOD Has Yet to Fully Assess Which Functions and Activities Should Be Performed by Contractors, Limiting Its Ability to Mitigate Risks
paragraphs: DOD relies increasingly on contractors to support its missions and  operations. For example, DOD estimated that more than 230,000  contractor personnel were supporting operations in Iraq and Afghanistan  as of October 2008. Officials have stated that without a significant increase  in its civilian and military workforce, the department is likely to continue  to rely on contractors both in the United States and overseas. Contractors  can provide important benefits, such as flexibility to fulfill immediate  needs. But, using contractors also comes with inherent risks, which must  be mitigated through effective management.
DOD’s reliance on contractors has not been the result of a strategic or  deliberate process but instead resulted from thousands of individual  decisions to use contractors in specific situations. DOD’s longstanding  guidance for determining the appropriate military, civilian, and contractor  mix needed to accomplish the department’s mission, focuses on individual  decisions of whether to use contractors to provide specific capabilities  and not the overarching question of what the appropriate role of  contractors should be. We have repeatedly called for DOD to be more  strategic in how it uses contractors. Without a fundamental understanding  of when, where, and how contractors should or should not be used, DOD’s  ability to mitigate the risks associated with using contractors is limited.
Our work has highlighted risks, which include differing ethical standards,  diminished institutional capacity, potentially greater costs, and mission  risks. For example:    Contractor employees often work side-by-side with government  employees, performing such tasks as studying alternative ways to  acquire desired capabilities, developing contract requirements, and  advising or assisting on source selection, budget planning, and award- fee determinations. Contractor employees are generally not subject,  however, to the same laws and regulations that are designed to prevent  conflicts of interests among federal employees.
Reliance on contractors can create mission risks when contractors are  supporting deployed forces. For example, because contractors cannot  be ordered to serve in contingency environments, the possibility that  they will not deploy can create risks that the mission they support may  not be effectively carried out. Further, if commanders are unaware of  their reliance on contractors, they may not realize that substantial  numbers of military personnel may be redirected from their primary  responsibilities to provide force protection or assume functions  anticipated to be performed by contractors, and commanders therefore  may not plan accordingly. The Chairman of the Joint Chiefs of Staff has  directed the Joint Staff to examine the use of DOD service contracts  (contractors) in Iraq and Afghanistan in order to better understand the  range and depth of contractor capabilities necessary to support the  Joint Force.
One underlying premise of using contractors is that doing so will be  more cost-effective than using government personnel. This assumption  may not always be the case. In one instance, we found that the Army  Contracting Agency’s Contracting Center of Excellence was paying up  to 27 percent more for contractor-provided contract specialists than it  would have for similarly graded government employees.
section_title: DOD Continues to Face Challenges in Employing Sound Business Practices When Contracting for and Managing Service Contracts
paragraphs: Once the decision has been made to use contractors to support DOD’s  missions or operations, it is essential that DOD clearly define its  requirements and employ sound business practices, such as using  appropriate contracting vehicles. Our work, however, has identified  weaknesses in DOD’s management and oversight, increasing the  government’s risk. For example,  In June 2007, we found significant use of time-and-materials contracts.  These contracts are considered high risk for the government because  they provide no positive profit incentive to the contractor for cost  control or labor efficiency and their use is supposed to be limited to  cases where no other contract type is suitable. We found that DOD  underreported its use of time-and-materials contracts; frequently did  not justify why time-and-materials contracts were the only contract  type suitable for the procurement; made few attempts to convert  follow-on work to less risky contract types; and was inconsistent in the  rigor with which contract monitoring occurred.  In that same month, we reported that DOD needed to improve its  management and oversight of undefinitized contract actions, under  which DOD can authorize contractors to begin work and incur costs  before reaching a final agreement on contract terms and conditions,  including price. The contractor has little incentive to control costs  during this period, creating a potential for wasted taxpayer dollars. We  found that the government’s federal procurement data system did not  track undefinitized contract actions awarded under task or delivery  order contracts. Moreover, we found that the use of some undefinitized  contract actions could have been avoided with better acquisition  planning, that DOD frequently did not definitize the undefinitized  contract actions within the required time frames thereby increasing the  cost risk to the government, and that contracting officers were not  documenting the basis for the profit or fee negotiated, as required.
In response to GAO’s recommendations relative to time-and-materials  contracts and undefinitized contract actions, DOD has taken actions to  limit risk to the government under both circumstances.
Our previous work has also demonstrated that better collection and  distribution of information on contract management could limit risks. For  example:    Our 2008 review of several Army service contracts found that  contracting offices were not documenting contract administration and  oversight actions taken in accordance with DOD policy and guidance.  As a result, incoming contract administration personnel did not know  whether the contractors were meeting their contract requirements  effectively and efficiently and therefore were limited in their ability to  make informed decisions related to award fees, which can run into the  millions of dollars.
In addition, several GAO reports and testimonies have noted that  despite years of experience using contractors to support deployed  forces in the Balkans, Southwest Asia, Iraq, and Afghanistan, DOD has  made few efforts to systematically collect and share lessons learned  regarding the oversight and management of contractors supporting  deployed forces. As a result, many of the management and oversight  problems we identified in earlier operations have recurred in current  operations.
section_title: Workforce Issues Continue to Limit DOD’s Ability to Provide Adequate Contract Oversight and Management
paragraphs: Properly managing the acquisition of contractor services requires a  workforce with the right mix of skills and capabilities. Individuals and  organizations involved in the acquisition process include not just the  contracting officers who award contracts, but also those military and  civilian officials who define requirements, receive or benefit from the  services provided, and oversee contractor performance, including the  Defense Contract Audit Agency (DCAA) and the Defense Contract  Management Agency (DCMA).
We and others have raised questions whether DOD has a sufficient number  of trained acquisition and contract oversight personnel to meet its needs.  For example, the increased volume of contracting is far in excess of the  growth in DOD contract personnel. Between fiscal years 2001 and 2008,  DOD obligations on contracts when measured in real terms, have more  than doubled to over $387 billion in total, and to more than $200 billion  just for services. Over the same time period, however, DOD reports its  contracting career field grew by only about 1 percent as shown in figure 1.  In 2008, DOD completed an assessment of its civilian contracting  workforce to provide a foundation for understanding the skills and  capabilities of its current workforce and to determine how to close any  gaps. DOD has not yet completed its assessments of the competencies and  skills in the rest of its acquisition workforce. To facilitate improvements to  DOD’s acquisition workforce, the National Defense Authorization Act for  Fiscal Year 2008 required DOD to establish and dedicate funding to an  Acquisition Workforce Development Fund. DOD is in the process of  implementing this fund and has focused its efforts in three key areas:   (1) recruiting and hiring, (2) training and development, and (3) retention  and recognition. We are currently assessing DOD’s ability to determine the  sufficiency of its acquisition workforce and its efforts to improve its  workforce management and oversight and will be issuing a report in the  spring.
Having too few contract oversight personnel presents unique difficulties at  deployed locations given the more demanding operational environment  compared to the United States because of an increased operational tempo,  security considerations, and other factors. We and others have found  significant deficiencies in DOD’s oversight of contractors because of an  inadequate number of trained personnel to carry out these duties and the  lack of training for military commanders and oversight personnel. As we  testified in 2008, limited or no pre-deployment training on the use of  contractor support can cause a variety of problems for military  commanders in a deployed location, such as being unable to adequately  plan for the use of those contractors and confusion regarding the military  commanders’ roles and responsibilities in managing and overseeing  contractors. Lack of training also affects the ability of contract oversight  personnel to perform their duties.
While performing oversight is often the responsibility of military service  contracting officers or their representatives, DCAA and DCMA play key  roles in the oversight process. DCAA provides a critical internal control  function on behalf of DOD and other federal agencies by performing a  range of contract audit services, including reviewing contractors’ cost  accounting systems, conducting audits of contractor cost proposals and  payment invoices, and providing contract advisory services to help assure  that the government pays fair and reasonable prices. To be an effective  control, DCAA must perform reliable audits. In a report we issued in July  2008, however, we identified a serious noncompliance with generally  accepted government auditing standards at three field audit offices  responsible for billions of dollars of contracting.   For example, we found  that workpapers did not support reported opinions and sufficient audit  work was not performed to support audit opinions and conclusions. As a  result, DCAA cannot assure that these audits provided reliable information  to support sound contract management business decisions or that contract  payments are not vulnerable to significant amounts of fraud, waste, abuse,  and mismanagement. The DCAA Director subsequently acknowledged  agencywide problems and initiated a number of corrective actions. In  addition, DOD included DCAA’s failure to meet professional standards as a  material internal control weakness in its fiscal year 2008 agency financial  report.  We are currently assessing DCAA’s corrective actions and  anticipate issuing a report later this spring.
Similarly, DCMA provides oversight at more than 900 contractor facilities  in the United States and across the world, providing contract  administration services such as monitoring contractors’ performance and  management systems to ensure that cost, performance, and delivery  schedules comply with the terms and conditions of the contracts. DCMA  has also assumed additional responsibility for overseeing service contracts  in Iraq, Afghanistan, and other deployed locations, including contracts that  provide logistical support and private security services. In a July 2008  report, we noted that DCMA had increased staffing in these locations only  by shifting resources from other locations and had asked the services to  provide additional staff since DCMA did not have the resources to meet  the requirement. As a result, it is uncertain whether DCMA has the  resources to meet its commitments at home and abroad.
section_title: DOD Has Taken Some Steps to Address Service Contract Management and Oversight Challenges in Response to GAO Recommendations
paragraphs: GAO’s body of work on contract management and the use of contractors  to support deployed forces has resulted in numerous recommendations  over the last several years. In response, DOD has issued guidance to  address contracting weaknesses and promote the use of sound business  arrangements. For example, in response to congressional direction and  GAO recommendations, DOD has established a framework for reviewing  major services acquisitions; promulgated regulations to better manage its  use of contracting arrangements that can pose additional risks for the  government, including time-and-materials contracts and undefinitized  contracting actions; and has efforts under way to identify and improve the  skills and capabilities of its workforce. For example, we reported in  November 2008 that DOD has been developing, revising, and finalizing  new joint policies and guidance on the department’s use of contractors to  support deployed forces (which DOD now refers to as operational  contract support) and has begun to develop training programs for non- acquisition personnel to provide information necessary to operate  effectively on contingency contracting matters and work with contractors  on the battlefield.
As the department moves forward, it needs to ensure that guidance is fully  complied with and implemented. Doing so will require continued,  sustained commitment by senior leadership to translate policy into  practice and to hold decision makers accountable. In addition, at the  departmentwide level, DOD has yet to conduct the type of fundamental  reexamination of its reliance on contractors that we called for in 2008.  Without understanding the depth and breadth of contractor support, the  department will be unable to determine if it has the appropriate mix of  military personnel, DOD civilians, and contractors. As a result, DOD may  not be totally aware of the risks it faces and will therefore be unable to  mitigate those risks in the most cost-effective and efficient manner.
section_title: DOE’s National Nuclear Security Administration Has Yet to Take Significant Action to Address Contract and Project Management Challenges
paragraphs: Contract and project management challenges are not unique to DOD. DOE  manages over 100 construction projects with estimated costs over $90  billion and 97 nuclear waste cleanup projects with estimated costs over  $230 billion. DOE is the largest civilian contracting agency in the federal  government, spending about 90 percent of its budget on contracts. It has  about 14,000 employees to oversee the work of more than 93,000  contractor employees. While other DOE program offices have recently  made progress, the National Nuclear Security Administration (NNSA),  which is responsible for maintaining the safety and reliability of the  nuclear weapons stockpile, remains on our High-Risk List for continued  weaknesses in contract and project management. As the largest  component organization within DOE, the NNSA has an annual budget of  approximately $9 billion for the management and security of the nation’s  nuclear weapons, nuclear nonproliferation, and naval reactors programs.  For the past 2 years, we have been reporting on the lack of sufficient  action by NNSA as well as specific projects that continue to face contract  and project management challenges. For example, on March 4, 2009,  we  testified on, among other things, significant cost overruns and schedule  delays on five of NNSA’s largest construction projects. These  construction projects experienced cumulative cost increases of nearly $6  billion above the initial cost estimates. These projects also experienced  cumulative schedule delays in excess of 32 years above initial estimates.  Though some of the cost and schedule delays can be tied to increased cost  of materials and labor, most of these cost and schedule increases were the  result of poor performance on the part of NNSA and its contractors.  Specifically, we have found NNSA in some instances:  failed to follow its own project guidance,    produced internal cost and schedule estimates for projects that are not    conducted insufficient and ineffective project reviews,  relied on technologies without assessing their readiness, and  lacked sufficient federal staffing and expertise for project management  oversight.
We have made a series of recommendations to strengthen DOE’s and  NNSA’s contract management, which collectively call for the agencies to  take the following actions:    ensure that project management requirements are consistently  followed,  improve oversight of contractors, and    strengthen accountability for performance.
DOE and NNSA have generally agreed with our recommendations and,  over the last 2 years, have been working to better understand the  underlying weaknesses in contract and project management and develop  appropriate corrective actions to address the weaknesses. As part of the  Office of Management and Budget initiative for federal agencies to develop  detailed corrective action plans for high-risk areas, DOE obtained input  from headquarters and field officials, including NNSA officials, with  contract and project management expertise to develop a root-cause  analysis of NNSA’s weaknesses. DOE then used this analysis to develop a  corrective action plan and performance measures to assess progress.
However, we continue to believe that further improvements are needed.  For example, as of the end of fiscal year 2008, NNSA had still not  implemented any of the 21 recommendations we had made in January  2007 that were aimed, in part, at improving NNSA contractor oversight and  project management. More recently, in a March 2, 2009, report issued to  this Committee’s Strategic Forces Subcommittee, we found that NNSA and  DOD have not effectively managed the project cost, schedule, and  technical risks for programs to extend the lifetimes of two warheads in the  nuclear weapons stockpile. We are concerned that weaknesses, such as  these, if left unaddressed, will impact NNSA’s plans to modernize its  infrastructure and create a smaller, more responsive nuclear weapon’s  complex as NNSA and DOD have recently proposed.  This effort, known  as Complex Transformation, is expected to require tens of billions of  dollars over several decades to complete.
The administration is placing greater emphasis on the need to address  contracting related challenges governmentwide. President Obama has just  issued an executive memorandum directing, in part, the Director of the  Office of Management and Budget—in collaboration with the Secretary of  Defense, the Administrator of the National Aeronautics and Space  Administration, the Administer of General Services, the Director of  Personnel Management, and the heads of any other agencies that the  Director of the Office of Management and Budget determines  appropriate— to develop and issue government-wide guidance to assist  agencies in reviewing, and creating processes for ongoing review of  existing contracts in order to identify contracts that are wasteful,  inefficient, or otherwise unlikely to meet the agencies needs, and to  formulate corrective action in a timely manner. Congress is also  emphasizing the need to address government-wide contracting related  challenges. For example, in the National Defense Authorization Act for  Fiscal Year 2008, Congress created the Commission on Wartime  contracting to study federal agency contracting for the reconstruction,  logistical support of coalition forces, and the performance of security  functions, in Iraq and Afghanistan.  The Senate Committee on Homeland  Security and Governmental Affairs also recently announced the creation of  a new Ad Hoc Subcommittee on Contracting Oversight.
section_title: Systemic Supply Chain Management Problems and Inadequate Plans Lead to Challenges in Meeting Warfighter Supply Requirements
paragraphs: Supply chain management continues to be on our high-risk list as a result  of weaknesses in the DOD’s management of supply inventories and  responsiveness to warfighter requirements. 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. DOD reported  spending approximately $178 billion on its supply chain in fiscal year 2007.  While DOD has taken a number of positive steps toward improving its  supply chain management, such as consolidating certain inventories in  regional hubs and improving transportation management of military  freight, 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.
For example, the military services continued to have billions of dollars  worth of spare parts that were in excess of current requirements,  representing a significant portion of their inventories. For example, in our  most recent reviews of inventory management, we found that, the Army  and Navy, over a 4-year period from fiscal years 2004 to 2007, averaged an  annual total of $11 billion in inventory value (in constant fiscal year 2007  dollars) that exceeded current requirements. The Navy’s portion of the  total—$7.5 billion—represented about 40 percent of the average annual  value of its total inventory ($18.7 billion). The Army’s portion—$3.6  billion—represented 22 percent of the average annual value of its total  inventory ($16.3 billion). A major cause for the services’ excess  inventories was weakness in demand forecasting. Moreover, we noted a  lack of metrics and targets focusing on the cost efficiency of inventory  management.
In addition, DOD had not instituted a coordinated management approach  to improving distribution and supply support for joint military operations,  and faced challenges in achieving widespread implementation of key  technologies aimed at improving asset visibility. We have also reported  that DOD, as it looked ahead to drawing down its forces from Iraq, lacked  a unified or coordinated command structure to plan for the management  and execution of the return of material and equipment from Iraq, worth  approximately $16.5 billion. While the U.S. Central Command has recently  taken steps to refine and solidify a theater logistics command to address  these weaknesses, corrective actions have not yet been fully implemented.
DOD has recognized the need for a comprehensive, integrated strategy for  transforming logistics and in July 2008 released its Logistics Roadmap with  the intent to provide a more coherent and authoritative framework for  logistics improvement efforts, including supply chain management.  However, we found that the road map was missing key elements that  would make the information more useful for DOD’s senior leaders. First,  it did not identify the scope of DOD’s logistics problems or gaps in  logistics capabilities. Second, it lacked outcome-based performance  measures that would enable DOD to assess and track progress toward  meeting stated goals and objectives. Third, DOD had not clearly stated  how it intended to integrate the roadmap into DOD’s logistics decision- making processes or who within the department was responsible for this  integration.
DOD has generally concurred with our recommendations, and in some  cases has committed to take action or has taken action. For example,  when DOD updates the Logistics Roadmap later this year, DOD plans to  remedy some of the weaknesses we identified. To successfully resolve key  supply chain management problems, DOD needs to:    sustain top leadership commitment and long-term institutional support  for the Logistics Roadmap and demonstrate progress in achieving the  objectives in the road map;    address the elements missing from its Logistics Roadmap, to ensure  that the road map provides a comprehensive, integrated strategy for  guiding supply chain management improvement efforts;    conduct systematic evaluations of demand forecasting used for  inventory management to identify and correct weaknesses and  establish goals and metrics for tracking and assessing the cost  efficiency of inventory management;    develop and implement a coordinated and comprehensive management  approach to guide and oversee efforts across the department to  improve distribution and supply support for U.S. Forces in a joint  theater;    collect cost and performance data on the initial implementation of  asset visibility technologies, analyze the return on investment for these  technologies, and determine whether they have received sufficient  funding priority; and  take steps to fully implement DOD’s recent initiative to establish a  unified or coordinated chain of command over logistics operations in  support of the retrograde of equipment and materiel from Iraq, and  correct incompatibility weaknesses in the various data systems used to  maintain visibility of equipment and materiel while they are in-transit.
Achieving and sustaining progress will require commitments and a  coordinated management approach at the highest level of the department  as well as the military services and other DOD components.
section_title: Weaknesses in Financial Management Adversely Affect DOD’s Ability to Effectively Manage and Account for Its Resources and Assets
paragraphs: Efficient and effective management and accountability of DOD’s hundreds  of billions of dollars worth of resources require timely, reliable, and useful  information. However, DOD’s pervasive financial and related business  management and system deficiencies continue to adversely affect its  ability to 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. To date, while the U.S. Army Corps of Engineers, Civil  Works has achieved a clean audit opinion on its financial statements, none  of the military services have. For many years, DOD has annually  acknowledged that long-standing weaknesses in its business systems and  processes have prevented auditors from determining the reliability of  DOD’s financial statement information. We also have previously reported  that a weak overall control environment and poor internal controls limit  DOD’s ability to prevent and detect fraud, waste, abuse, and improper  payments. For example, before awarding contracts or making purchases  from the General Services Administration’s Federal Supply Schedule,  contracting officers and other agency officials are required to check the  Excluded Party List System to ensure that a prospective vendor is not  prohibited from doing business with the federal government. However, in  February 2009, we reported that failure to follow contract award  procedures resulted in DOD’s contracting officers making awards to  debarred or suspended companies.
Over the years, DOD has initiated numerous efforts intended to improve  its financial management practices. In response to a congressional  mandate, DOD issued its Financial Improvement and Audit Readiness  (FIAR) Plan in December 2005, which it updates twice a year, to outline its  strategy for addressing its financial management challenges and achieving  clean audit opinions. In addition, DOD has taken steps toward developing  and implementing a framework for addressing its long-standing financial  management weaknesses and improving its capability to provide timely,  reliable, and relevant financial information for decision making and  reporting, a key defense transformation priority. This framework includes  a Standard Financial Information Structure and Business Enterprise  Information System, intended to provide standardization in financial  reporting. DOD’s efforts should help to improve the consistency and  comparability of its financial information and reporting; however, a great  deal of work needs to be done. In particular, data cleansing, improvements  in policies, processes, and controls; as well as successful system  implementations are needed to improve DOD’s financial management and  reporting.
We are in the process of reviewing the department’s September 2008 FIAR  Plan to determine if there are any areas where improvements are needed  to enhance the plan’s effectiveness as a management tool for guiding,  monitoring, and reporting on the department’s efforts to identify and  resolve its financial management weaknesses and achieve financial  statement auditability. We will provide the Committee a copy of the report  when it is issued. Key to successful transformation of DOD’s financial  management operations will continue to be:    development and sustained implementation of a comprehensive and  integrated financial management transformation strategy, within an  overall business transformation strategy, to guide financial  management improvement efforts,    prioritization of initiatives and resources, and    monitoring of progress through the establishment and utilization of  cascading performance goals, objectives, and metrics.
section_title: Opportunities Exist to Build on Recent Progress to Strengthen DOD’s Civilian Human Capital Strategic Plan
paragraphs: We designated strategic human capital management as a high risk area  because of the federal government’s long-standing lack of a consistent  approach to human capital management and the continuing need for a  governmentwide framework to advance human capital reform. Like other  federal agencies, DOD also faces challenges in managing its human capital,  particularly with its civilian workforce. With almost 30 percent of its total  civilian workforce (about 670,000) becoming eligible to retire in the next  few years, DOD may be faced with deciding how to fill numerous  mission-critical positions—positions that involve developing policy,  providing intelligence, and acquiring weapon systems. Having the right  number of civilian personnel with the right skills is critical to achieving the  department’s mission.
In recent years, Congress has passed legislation requiring DOD to conduct  human capital planning efforts for the department’s overall civilian  workforce and its senior leaders. Specifically, the National Defense  Authorization Act for Fiscal Year 2006 requires DOD to develop a  strategic human capital plan, update it annually through 2010, and address  eight requirements. The National Defense Authorization Act for 2007  added nine requirements to the annual update to shape DOD’s senior  leader workforce.
In February 2009, we reported while DOD’s 2008 strategic human capital  plan update, when compared with its 2007 plan, showed progress in  addressing the National Defense Authorization Act for Fiscal Year 2006  requirements, it only partially addressed each of the act’s requirements.  For example, DOD identified 25 critical skills and competencies—referred  to as enterprisewide mission-critical occupations, which included logistics  management and medical occupations. The update, however, did not  contain assessments for over half of the 25 occupations, and the  completed assessments of future enterprisewide mission-critical  occupations did not cover the required 10-year period. Also, DOD’s update  only partially addressed the act’s requirements for a plan of action for  closing the gaps in DOD’s civilian workforce. Although DOD recently  established a program management office whose responsibility is to  monitor DOD’s updates to the strategic human capital plan, the office, at  the time of our review, did not have and did not plan to have a  performance plan that articulates how the legislative requirements will be  met. Until such a plan is developed, DOD may not be well positioned to  design the best strategies to meet its civilian workforce needs.
Regarding plans for DOD’s senior leader workforce, DOD’s 2008 update  and related documentation addressed four of the nine requirements in the  fiscal year National Defense Authorization Act for Fiscal Year 2007, but  only partially addressed the remaining five. For example, DOD’s update  notes that the department has not completely addressed the requirement  to assess its need for senior leaders. Although DOD recently established an  executive management office to manage the career life cycle of DOD  senior leaders, as well as the National Defense Authorization Act for Fiscal  Year 2007 requirements, this office, at the time of our review, did not have  and did not plan to develop a performance plan to address the national  defense authorization act requirements. Until DOD develops a  performance plan to guide its efforts to strengthen its human capital  strategic planning, it may be unable to design the best strategies to meet  its senior leader workforce needs.
section_title: Ensuring Effective Protection of Technologies Is Critical to U.S. National Interests
paragraphs: We designated the effective protection of technologies critical to U.S.  national interests as a high risk area due to weaknesses GAO identified in  the effectiveness and efficiency of government programs designed to  protect such technologies. The U.S. government approves selling DOD  weapon systems and defense-related technologies overseas for foreign  policy, security, and economic reasons and has a number of long-standing  programs to identify and protect critical technologies from reverse  engineering and illegal export. These include the anti-tamper program,  militarily critical technologies program, and the export controls systems  for defense-related and dual-use items. DOD is responsible for  implementing several of these programs and is a key stakeholder in others.  We have identified actions specific to DOD, including that it needs to:    develop and provide departmentwide guidance to program managers in  how to implement anti-tamper protection,    develop an approach to identify and catalogue technologies that best  meet the needs of U.S. government programs that control militarily  critical technologies, and  resolve disagreements with the Department of State on export control  exemption use and guidelines.
While actions at the agency level can lead to improvements, agencies have  yet to take action to address our major underlying concern, which is the  need for a fundamental re-examination of current government programs  and evaluate the potential of alternative approaches to protect critical  technologies.
section_title: The Federal Government, Including DOD, Faces Challenges in Protecting Information Systems and Critical Infrastructures
paragraphs: Federal agencies, including DOD, face challenges in protecting the  security of information technology systems—commonly referred to as  cybersecurity, including those systems that support our nation’s critical  infrastructures (e.g., power distribution system, telecommunications  networks). Long-standing, pervasive security control weaknesses continue  to place national, federal, and DOD assets at risk of inadvertent or  deliberate misuse, financial information at risk of unauthorized  modification, sensitive information at risk of inappropriate disclosure, and  critical operations at risk of disruption. Well publicized computer-based  attacks against information technology systems in the United States and  other countries show these threats pose a potentially devastating impact  to federal systems and operations and the critical infrastructures.
To address the threats, the President in January 2008 began implementing  a series of initiatives—called the Comprehensive National Cybersecurity  Initiative—aimed primarily at improving the security of DOD and other  information technology systems within the federal government. More  recently, in February 2009, the new President initiated a review of the  government’s overall cybersecurity strategy and supporting activities with  the goal of reporting its finding in April 2009. We currently have work  under way for this Committee’s Subcommittee on Terrorism and  Unconventional Threats and Capabilities to assess the interagency  Comprehensive National Cyber Initiative and its results. We are also  examining the progress DOD has made in developing its organizational  structure, policies, plans, doctrine, and capabilities for cyber defensive  and offensive operations.
section_title: DOD Has Made Progress in Establishing Key Management Positions for Business Transformation, but Critical Actions Are Still Needed
paragraphs: Without sustained leadership and comprehensive strategic planning,  DOD’s ability to achieve and sustain measurable progress in addressing  high-risk areas and thereby improving its business operations is at risk. We  have long advocated that DOD establish a Chief Management Officer  (CMO) to be responsible and accountable for the department’s business  transformation and a strategic planning process to direct its efforts and  measure progress. DOD’s senior leadership has shown a commitment to  transforming business operations and taken many steps to strengthen its  management approach, both in response to congressional requirements  and on its own accord. For example, the Secretary of Defense designated  the Deputy Secretary of Defense as CMO of the department in May 2007.  The National Defense Authorization Act for Fiscal Year 2008 subsequently  codified the position, created a Deputy CMO, directed that CMO duties be  assigned to the Under Secretary of each military department, and required  DOD to develop a strategic management plan for business operations. In  2008, DOD issued its first Strategic Management Plan, which it  characterizes as a first step toward providing Congress with the  comprehensive plan required by law and as a primer for incoming officials  that describes newly established and existing structures and processes  within DOD to be used by the CMO for delivering effective and efficient  support to the warfighter. DOD also issued directives broadly defining  the roles and responsibilities of the CMO and Deputy CMO, established a  DCMO office, and named an Assistant Deputy CMO to lead the stand-up of  the office prior to the nomination and filling of the Deputy CMO position.  Prior to these actions, DOD had established various management and  governance entities that, in addition to the CMO and Deputy CMO, will  comprise the management framework for business transformation, such  as the Defense Business Systems Management Committee and the  Business Transformation Agency.
While DOD has taken several positive steps, it still lacks critical elements  needed to ensure successful and sustainable transformation efforts.  Specifically, it has not fully or clearly defined the authority, roles, and  relationships for some positions and entities. For example, the Deputy  CMO position has not been assigned clear decision making authority or  accountability for results, and the position appears to be advisory in  nature. Therefore, it is unclear how the creation of the Deputy CMO  position changes the existing structure of DOD’s senior leadership. It is  also unclear how the Deputy CMO will work with other senior leaders  across the department who have responsibility for business operations  and who are at the same level or even higher, such as the various Under  Secretaries of Defense and the military department CMOs. The roles and  relationships of various governance entities are similarly unclear.
In addition, DOD’s first Strategic Management Plan lacks key information  and elements of a strategic plan. For example, it does not clearly define  business operations; does not contain goals; objectives; or performance  measures; and does not assign accountability for achieving desired results  in its transformation efforts. Therefore, the plan cannot be used to link  resources to performance, measure progress, or guide efforts of the  military components. DOD plans to update its Strategic Management Plan  in July 2009 and every 2 years thereafter as required by the National  Defense Authorization Act for Fiscal Year 2008.
We recognize that DOD has only recently established the CMO position  and that DOD is in the early stages of implementation for several of its  improvement efforts. To help DOD proceed with its efforts, the new  administration needs to move quickly to nominate and fill key leadership  positions that are currently vacant. These positions include the Deputy  CMO and military department CMOs. Moving forward, DOD needs to  further:    define and clarify the roles, responsibilities, and relationships among  the various positions and governance entities within DOD’s  management framework for business transformation, and    develop its strategic management plan and implement a strategic  planning process that will allow DOD to measure progress, establish  investment priorities, and link resource needs to performance.
Because of the complexity and long-term nature of DOD’s business  transformation efforts, we have repeatedly advocated the need for the  CMO to be a separate, full-time position with significant authority,  experience, and a set term. As DOD continues to develop its approach and  carries out planned additional actions, we remain open to the possibility of  further progress and that these efforts will have a positive impact.  However, because of the current statutory requirements and the roles and  responsibilities currently assigned to key positions, it is still unclear  whether DOD will provide the long-term sustained leadership needed to  address these significant challenges in its business operations.
section_title: Concluding Observations
paragraphs: DOD and DOE have recognized they face challenges in the selected high  risk areas we have outlined today and have taken some steps to address  these challenges. However, the current fiscal climate presents an  imperative for both agencies to refocus management attention and  commitment at the highest levels and to aggressively take additional  actions to achieve greater progress in the key business areas that underpin  the ability to achieve mission success. As DOD moves forward, among  other things, it will need to continue to reform its approach to acquiring  major weapon system programs, fundamentally reexamine its reliance on  contractors as well as take action to better size and train its contractor  workforce, and develop and implement viable strategies for managing its  supply chain and improving its financial management. For DOE’s NNSA, it  is important that actions be taken to improve contract and project  management in order to reverse the historical trend of schedule delays,  cost growth, and increased risks in its major projects.
As DOD and DOE compete for resources in a constrained fiscal  environment, they can no longer afford to miss opportunities to achieve  greater efficiencies and free up resources for higher priority needs.  Furthermore, because of the complexity and magnitude of the challenges  facing DOD in transforming its business operations, it will need strong and  sustained leadership, as well as sound strategic planning to guide and  integrate its efforts. The new Deputy Secretary of Defense has been given  the unique opportunity to set the precedent going forward as DOD’s  statutory Chief Management Officer. It will be important within the first  year of this administration, that the Deputy Secretary of Defense clearly  articulate the department’s expectations for this position, clarify the roles,  responsibilities, and relationships among all individuals and entities that  share responsibility for transforming DOD’s business operations, and  establish a strategic planning process to guide efforts and assess progress  across the department.
Mr. Chairman and Members of the Committee, this concludes my  statement. I would be happy to answer any questions you may have at this  time.
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