Department of Defense: Further Actions Needed to Establish and Implement a Framework for Successful Business Transformation
Published: 2004-03-31T00:00:00

Fast Facts:

Highlights:
section_title: Why GAO Did This Study
paragraphs: GAO has issued several reports pertaining to the Department of Defense's (DOD) architecture and systems modernization efforts which revealed that many of the underlying conditions that contributed to the failure of prior DOD efforts to improve its business systems remain fundamentally unchanged. The Subcommittee on Terrorism, Unconventional Threats and Capabilities, House Committee on Armed Services, asked GAO to provide its perspectives on (1) the impact long-standing financial and related business weaknesses continue to have on DOD, (2) the underlying causes of DOD business transformation challenges, and (3) DOD business transformation efforts. In addition, GAO reiterates the key elements to successful reform: (1) an integrated business transformation strategy, (2) sustained leadership and resource control, (3) clear lines of responsibility and accountability, (4) results-oriented performance, (5) appropriate incentives and consequences, (6) an enterprise architecture to guide reform efforts, and (7) effective monitoring and oversight. GAO also offers two suggestions for legislative consideration that are intended to improve the likelihood of meaningful, broad-based financial management and related business reform at DOD.
section_title: What GAO Found
paragraphs: DOD's senior civilian and military leaders are committed to transforming the department and improving its business operations and have taken positive steps to begin this effort. However, overhauling the financial management and related business operations of one of the largest and most complex organizations in the world represents a huge management challenge. Six DOD program areas are on GAO's "high risk" list, and the department shares responsibility for three other governmentwide high-risk areas. DOD's substantial financial and business management weaknesses adversely affect not only its ability to produce auditable financial information, but also to provide timely, reliable information for management and Congress to use in making informed decisions. Further, the lack of adequate transparency and appropriate accountability across all of DOD's major business areas results in billions of dollars in annual wasted resources in a time of increasing fiscal constraint. Four underlying causes impede reform: (1) lack of sustained leadership, (2) cultural resistance to change, (3) lack of meaningful metrics and ongoing monitoring, and (4) inadequate incentives and accountability mechanisms. To address these issues, GAO reiterates the keys to successful business transformation and offers two suggestions for legislative action. First GAO suggests that a senior management position be established to spearhead DOD-wide business transformation efforts. Second, GAO proposes that the leaders of DOD's functional areas, referred to as departmentwide domains, receive and control the funding for system investments, as opposed to the military services. Domain leaders would be responsible for managing business system and process reform efforts within their business areas and would be accountable to the new senior management official for ensuring their efforts comply with DOD's business enterprise architecture.

section_title: Letter
paragraphs: It is a pleasure to be here to discuss key aspects of business  transformation efforts at the Department of Defense (DOD). At the outset,  we would like to thank the Subcommittee for having this hearing and  acknowledge the important role hearings such as this one serve. The  involvement of this Subcommittee is critical to ultimately assuring public  confidence in DOD as a steward that is accountable for its finances. DOD’s  substantial long-standing business management systems and related  problems adversely affect the economy, effectiveness, and efficiency of its  operations, and have resulted in a lack of adequate transparency and  appropriate accountability across all major business areas. As a result,  DOD does not have timely, reliable information for management to use in  making informed decisions. Further, as our reports continue to show,  these problems result in significant fraud, waste, and abuse and hinder  DOD’s attempts to develop world-class operations and activities to  support its forces. Of the 25 areas on GAO’s governmentwide “high risk”  list, 6 are DOD program areas, and the department shares responsibility  for 3 other high-risk areas that are governmentwide in scope. The  problems we continue to identify relate to human capital challenges,  ineffective internal control and processes, and duplicative and stovepiped  business systems. The seriousness of DOD’s business management  weaknesses underscores the importance of no longer condoning “status  quo” business operations at DOD.
Over the last 3 years, DOD has taken action to begin addressing a number  of these challenges as part of its business transformation effort. Business  transformation has been a priority of Secretary Rumsfeld. For example,  DOD has been granted additional human capital flexibilities and is in the  process of developing a new personnel management system for its civilian  employees. In addition, through its Business Management Modernization  Program (BMMP), DOD is continuing its efforts to develop and implement  a business enterprise architecture and establish effective management and  control over its business system modernization investments. To date,  however, the underlying operational conditions remain fundamentally  unchanged and tangible evidence of improvements in DOD business  operations remains limited to specific business process areas, such as  DOD’s purchase card program, where improvements have generally  resulted from increased management focus and better internal control  rather than from major modifications to automated systems. It is  important to note that some of the key elements we highlight in this  testimony as necessary for successful business transformation were  critical to the success of several of the interim initiatives that we will  discuss today.
Because DOD is one of the largest and most complex organizations in the  world, overhauling its business operations represents a huge management  challenge. In fiscal year 2003, DOD reported that its operations involved  over $1 trillion in assets, nearly $1.6 trillion in liabilities, approximately   3.3 million military and civilian personnel, and disbursements of over   $416 billion. Moreover, execution of DOD operations spans a wide range  of defense organizations, including the military services and their  respective major commands and functional activities, numerous large  defense agencies and field activities, and various combatant and joint  operational commands that are responsible for military operations for  specific geographic regions or theaters of operations. To execute these  military operations, the department performs an assortment of interrelated  and interdependent business process areas, including logistics  management, procurement, healthcare management, and financial  management. Secretary Rumsfeld has estimated that successful  improvements to DOD’s business operations could save the department 5  percent of its budget a year. Using DOD’s reported fiscal year 2004 budget  authority amounts, this percentage would equate to approximately $22  billion a year in savings.
Over the last 3 years, we have made a series of recommendations to DOD  and suggestions for legislative changes that provide a framework for  effectively addressing the challenges DOD faces in transforming its  financial management and related business operations and systems and  offered several key elements necessary for reform to succeed. This  framework recognizes the complexity of the challenge and the long-term  nature of overcoming it. Moreover, it recognizes the underlying causes of  the challenge, such as lack of sustained leadership, cultural resistance to  change, parochialism, and stovepiped operations, that impeded the  success of previous administrations in addressing DOD’s problems that  continue today. DOD has agreed with our recommendations and launched  efforts intended to implement them, but progress has been slow. If DOD is  unable to address these underlying causes that have resulted in the failure  of previous broad-based reform efforts, improvements will remain  marginal, confined to narrowly defined business process areas and  incremental improvements in human capital policies, business processes,  internal control systems, and information technologies.
Today, we will provide our perspectives on (1) the impact that long- standing financial management and related business process weaknesses  continue to have on DOD, (2) underlying causes that have impeded the  success of prior efforts, (3) keys to successful reform, and (4) DOD’s  business transformation efforts. In addition, we will offer two suggestions  for legislative consideration, which we believe will provide the sustained  top-level leadership and accountability necessary for the business  transformation effort to succeed. Our statement is based on previous GAO  reports as well as on our review of the work of other DOD auditors and  recent DOD reports and studies.
subsections: section_title: Impact of Financial Management and Related Business Process Weaknesses
paragraphs: For several years we have reported that DOD faces a range of financial  management and related business process challenges that are complex,  long-standing, pervasive, and deeply rooted in virtually all business  operations throughout the department. As the Comptroller General  recently testified and as discussed in our latest financial audit report,  DOD’s financial management deficiencies, taken together, continue to  represent the single largest obstacle to achieving an unqualified opinion on  the U.S. government’s consolidated financial statements. To date, none of  the military services has passed the test of an independent financial audit  because of pervasive weaknesses in internal control and processes and  fundamentally flawed business systems.
In identifying improved financial performance as one of its five  governmentwide initiatives, the President’s Management Agenda  recognized that obtaining a clean (unqualified) financial audit opinion is a  basic prescription for any well-managed organization. At the same time, it  recognized that without sound internal control and accurate and timely  financial and performance information, it is not possible to accomplish the  President’s agenda and secure the best performance and highest measure  of accountability for the American people. The Joint Financial  Management Improvement Program (JFMIP) principals have defined  certain measures, in addition to receiving an unqualified financial  statement audit opinion, for achieving financial management success.  These additional measures include (1) being able to routinely provide  timely, accurate, and useful financial and performance information,   (2) having no material internal control weaknesses or material  noncompliance with laws and regulations, and (3) meeting the  requirements of the Federal Financial Management Improvement Act of  1996 (FFMIA). Unfortunately, DOD does not meet any of these conditions.  For example, for fiscal year 2003, the DOD Inspector General (DOD IG)  issued a disclaimer of opinion on DOD’s financial statements, citing 11  material weaknesses in internal control and noncompliance with FFMIA  requirements.
Recent audits and investigations by GAO and DOD auditors continue to  confirm the existence of pervasive weaknesses in DOD’s financial  management and related business processes and systems. These problems  have (1) resulted in a lack of reliable information needed to make sound  decisions and report on the status of DOD activities, including  accountability of assets, through financial and other reports to Congress  and DOD decision makers, (2) hindered its operational efficiency,   (3) adversely affected mission performance, and (4) left the department  vulnerable to fraud, waste, and abuse, as the following examples illustrate.
Four hundred and fifty of the 481 mobilized Army National Guard soldiers  from six GAO case study Special Forces and Military Police units had at  least one pay problem associated with their mobilization. DOD’s inability  to provide timely and accurate payments to these soldiers, many of whom  risked their lives in recent Iraq or Afghanistan missions, distracted them  from their missions, imposed financial hardships on the soldiers and their  families, and has had a negative impact on retention. (GAO-04-89, Nov. 13,  2003)
DOD incurred substantial logistical support problems as a result of weak  distribution and accountability processes and controls over supplies and  equipment shipments in support of Operation Iraqi Freedom activities,  similar to those encountered during the prior gulf war. These weaknesses  resulted in (1) supply shortages, (2) backlogs of materials delivered in  theater but not delivered to the requesting activity, (3) a discrepancy of  $1.2 billion between the amount of materiel shipped and that  acknowledged by the activity as received, (4) cannibalization of vehicles,  and (5) duplicate supply requisitions. (GAO-04-305R, Dec. 18, 2003)  Inadequate asset visibility and accountability resulted in DOD selling new  Joint Service Lightweight Integrated Suit Technology (JSLIST)—the  current chemical and biological protective garment used by our military  forces—on the internet for $3 each (coat and trousers) while at the same  time buying them for over $200 each. DOD has acknowledged that these  garments should have been restricted to DOD use only and therefore  should not have been available to the public. (GAO-02-873T, June 25, 2002)  Inadequate asset accountability also resulted in DOD’s inability to locate  and remove over 250,000 defective Battle Dress Overgarments (BDOs)— the predecessor of JSLIST—from its inventory. Subsequently, we found  that DOD had sold many of these defective suits to the public, including  379 that we purchased in an undercover operation. In addition, DOD may  have issued over 4,700 of the defective BDO suits to local law enforcement  agencies. Although local law enforcement agencies are most likely to be  the first responders to a terrorist attack, DOD failed to inform these  agencies that using these BDO suits could result in death or serious injury.  (GAO-04-15NI, Nov. 19, 2003)
Tens of millions of dollars are not being collected each year by military  treatment facilities from third-party insurers because key information  required to effectively bill and collect from third-party insurers is often not  properly collected, recorded, or used by the military treatment facilities.  (GAO-04-322R, Feb. 20, 2004)
Our analysis of data on more than 50,000 maintenance work orders  opened during the deployments of six battle groups indicated that about  29,000 orders (58 percent) could not be completed because the needed  repair parts were not available on board ship. This condition was a result  of inaccurate ship configuration records and incomplete, outdated, or  erroneous historical parts demand data. Such problems not only have a  detrimental impact on mission readiness, they may also increase  operational costs due to delays in repairing equipment and holding  unneeded spare parts inventory. (GAO-03-887, Aug. 29, 2003)
DOD sold excess biological laboratory equipment, including a biological  safety cabinet, a bacteriological incubator, a centrifuge, and other items  that could be used to produce biological warfare agents. Using a fictitious  company and fictitious individual identities, we were able to purchase a  large number of new and usable equipment items over the Internet from  DOD. Although the production of biological warfare agents requires a high  degree of expertise, the ease with which these items were obtained  through public sales increases the risk that terrorists could obtain and use  them to produce biological agents that could be used against the United  States. (GAO-04-81TNI, Oct. 7, 2003)
Based on statistical sampling, we estimated that 72 percent of the over  68,000 premium class airline tickets DOD purchased for fiscal years 2001  and 2002 was not properly authorized and that 73 percent was not  properly justified. During fiscal years 2001 and 2002, DOD spent almost  $124 million on premium class tickets that included at least one leg in  premium class—usually business class. Because each premium class  ticket cost the government up to thousands of dollars more than a coach  class ticket, unauthorized premium class travel resulted in millions of  dollars of unnecessary costs being incurred annually. (GAO-04-229T, Nov.  6, 2003)
Some DOD contractors have been abusing the federal tax system with  little or no consequence, and DOD is not collecting as much in unpaid  taxes as it could. Under the Debt Collection Improvement Act of 1996,  DOD is responsible—working with the Treasury Department—for  offsetting payments made to contractors to collect funds owed, such as  unpaid federal taxes. However, we found that DOD had collected only  $687,000 of unpaid taxes as of September 2003. We estimated that at least  $100 million could be collected annually from DOD contractors through  effective implementation of levy and debt collection programs. (GAO-04- 95, Feb. 12, 2004)
Our review of fiscal year 2002 data revealed that about $1 of every $4 in  contract payment transactions in DOD’s Mechanization of Contract  Administration Services (MOCAS) system was for adjustments to  previously recorded payments—$49 billion of adjustments out of $198  billion in disbursement, collection, and adjustment transactions.  According to DOD, the cost of researching and making adjustments to  accounting records was about $34 million in fiscal year 2002, primarily to  pay hundreds of DOD and contractor staff. (GAO-03-727, Aug. 8, 2003)    DOD’s information technology (IT) budget submission to Congress for  fiscal year 2004 contained material inconsistencies, inaccuracies, or  omissions that limited its reliability. For example, we identified  discrepancies totaling about $1.6 billion between two primary parts of the  submission—the IT budget summary report and the detailed Capital  Investments Reports on each IT initiative. These problems were largely  attributable to insufficient management attention and limitations in  departmental policies and procedures, such as guidance in DOD’s  Financial Management Regulation, and to shortcomings in systems that  support budget-related activities. (GAO-04-115, Dec. 19, 2003)
Since the mid 1980s, we have reported that DOD uses overly optimistic  planning assumptions to estimate its annual budget request. These same  assumptions are reflected in its Future Years Defense Program, which  reports projected spending for the current budget year and at least 4  succeeding years. In addition, in February 2004 the Congressional Budget  Office projected that DOD’s demand for resources could grow to about  $490 billion in fiscal year 2009. DOD’s own estimate for that same year was  only $439 billion. As a result of DOD’s continuing use of optimistic  assumptions, DOD has too many programs for the available dollars, which  often leads to program instability, costly program stretch-outs, and  program termination. Over the past few years, the mismatch between  programs and budgets has continued, particularly in the area of weapons  systems acquisition. For example, in January 2003, we reported that the  estimated costs of developing eight major weapons systems had increased  from about $47 billion in fiscal year 1998 to about $72 billion by fiscal year  2003. (GAO-03-98, January 2003)
These examples clearly demonstrate not only the severity of DOD’s  current problems, but also the importance of business systems  modernization as a critical element in the department’s transformation  efforts to improve the economy, efficiency, and effectiveness of it’s  operations, and to provide for transparency and accountability to  Congress and American taxpayers.
section_title: Underlying Causes of Financial and Related Business Process Transformation Challenges
paragraphs: Since May 1997, we have highlighted in various testimonies and reports  what we believe are the underlying causes of the department’s inability to  resolve its long-standing financial management and related business  management weaknesses and fundamentally reform its business  operations. We found that one or more of these causes were contributing  factors to the financial management and related business process  weaknesses we just described. Over the years, the department has  undertaken many initiatives intended to transform its business operations  departmentwide and improve the reliability of information for decision  making and reporting but has not had much success because it has not  addressed the following four underlying causes:    a lack of sustained top-level leadership and management accountability for    deeply embedded cultural resistance to change, including military service  parochialism and stovepiped operations;    a lack of results-oriented goals and performance measures and  monitoring; and  inadequate incentives and accountability mechanisms relating to business  transformation efforts.
If not properly addressed, these root causes will likely result in the failure  of current DOD initiatives.
subsections: section_title: Lack of Sustained Leadership and Adequate Accountability
paragraphs: DOD has not routinely assigned accountability for performance to specific  organizations or individuals who have sufficient authority to accomplish  desired goals. For example, under the Chief Financial Officers Act of  1990, it is the responsibility of the agency Chief Financial Officer (CFO)  to establish the mission and vision for the agency’s future financial  management and to direct, manage, and provide oversight of financial  management operations. However, at DOD, the Comptroller—who is by  statute the department’s CFO—has direct responsibility for only an  estimated 20 percent of the data relied on to carry out the department’s  financial management operations. The other 80 percent comes from DOD’s  other business operations and is under the control and authority of other  DOD officials.
In addition, DOD’s past experience has suggested that top management  has not had a proactive, consistent, and continuing role in integrating daily  operations for achieving business transformation related performance  goals. It is imperative that major improvement initiatives have the direct,  active support and involvement of the Secretary and Deputy Secretary of  Defense to ensure that daily activities throughout the department remain  focused on achieving shared, agencywide outcomes and success. While  the current DOD leadership, such as the Secretary, Deputy Secretary, and  Comptroller, have certainly demonstrated their commitment to reforming  the department, the magnitude and nature of day-to-day demands placed  on these leaders following the events of September 11, 2001, clearly affect  the level of oversight and involvement in business transformation efforts  that these leaders can sustain. Given the importance of DOD’s business  transformation effort, it is imperative that it receive the sustained  leadership needed to improve the economy, efficiency, and effectiveness  of DOD’s business operations. Based on our surveys of best practices of  world-class organizations, strong executive CFO and Chief Information  Officer (CIO) leadership and centralized control over systems investments  are essential to (1) making financial management an entitywide priority,  (2) providing meaningful information to decision makers, (3) building a  team of people that delivers results, and (4) effectively leveraging  technology to achieve stated goals and objectives.
section_title: Cultural Resistance and Parochialism
paragraphs: Cultural resistance to change, military service parochialism, and  stovepiped operations have all contributed significantly to the failure of  previous attempts to implement broad-based management reforms at  DOD. The department has acknowledged that it confronts decades-old  problems deeply grounded in the bureaucratic history and operating  practices of a complex, multifaceted organization. Recent audits reveal  that DOD has made only small inroads in addressing these challenges. For  example, the Bob Stump National Defense Authorization Act for Fiscal  Year 2003 requires the DOD Comptroller to determine that each financial  system improvement meets the specific conditions called for in the act  before DOD obligates funds in amounts exceeding $1 million. However,  we found that most system improvement efforts involving obligations over  $1 million were not reviewed by the DOD Comptroller for the purpose of  making that determination and that DOD continued to lack a mechanism  for proactively identifying system improvement initiatives. We asked for,  but DOD did not provide, comprehensive data for obligations in excess of  $1 million for business system modernization. Based on a comparison of  the limited information available for fiscal years 2003 and 2004, we  identified $479 million in reported obligations by the military services that  were not submitted to the DOD Comptroller for review.
In addition, in September 2003, we reported that DOD continued to use a  stovepiped approach to develop and fund its business system investments.  Specifically, we found that DOD components receive and control funding  for business systems investments without being subject to the scrutiny of  the DOD Comptroller. DOD’s ability to address its current “business-as- usual” approach to business system investments is further hampered by its  lack of (1) a complete inventory of business systems (a condition we first  highlighted in 1998), (2) a standard definition of what constitutes a  business system, (3) a well-defined enterprise architecture, and (4) an  effective approach for the control and accountability over business system  investments. Until DOD develops and implements an effective strategy for  overcoming resistance, parochialism, and stovepiped operations, its  transformation efforts will not be successful.
section_title: Lack of Results-Oriented Goals and Performance Measures
paragraphs: A key element of any major program is its ability to establish clearly  defined goals and performance measures to monitor and report its  progress to management. However, DOD has not yet established  measurable, results-oriented goals to evaluate BMMP’s cost, schedule and  performance outcomes and results, or explicitly defined performance  measures to evaluate the architecture quality, content, and utility of  subsequent major updates to its initial business enterprise architecture  (BEA). For example, in our September 2003 report, we stated that DOD  had not defined specific plans outlining how it intends to extend and  evolve the initial BEA to include the missing scope and details that we  identified. Instead, DOD’s primary BEA goal was to complete as much of  the architecture as it could within a set period of time. According to DOD,  it intends to refine the initial BEA through at least six different major  updates of its architecture between February 2004 and the second quarter  of 2005. However, it remains unclear what these major updates will  individually or collectively provide and how they contribute to achieving  DOD’s goals.
In its March 15, 2004, progress report to defense congressional committees  on the status of BMMP’s business transformation efforts, DOD reported  that it plans to establish an initial approved program baseline to evaluate  the cost, schedule, and performance of the BMMP. Given that DOD has  reported disbursements of $111 million since development efforts began in  fiscal year 2002, it is critical that it establish meaningful, tangible, and  measurable program goals and objectives—short-term and long-term.
Until DOD develops and implements clearly defined results-oriented goals  for the overall program, including the architecture content of each major  update of its architecture, the department will continue to lack a clear  measure of the BMMP’s progress in transforming the department’s  business operations and in providing the Congress reasonable assurance  that funds are being directed towards resolving the department’s long- standing business operational problems.
section_title: Lack of Incentives for Change
paragraphs: The final underlying cause of the department’s long-standing inability to  carry out needed fundamental reform has been the lack of incentives for  making more than incremental change to existing “business-as-usual”  operations, systems, and organizational structures. Traditionally, DOD has  focused on justifying its need for more funding rather than on the  outcomes its programs have produced. DOD has historically measured its  performance by resource components such as the amount of money spent,  people employed, or number of tasks completed. Incentives for its  decision makers to implement changed behavior have been minimal or  nonexistent.
The lack of incentive to change is evident in the business systems  modernization area. Despite DOD’s acknowledgement that many of its  systems are error prone, duplicative, and stovepiped, DOD continues to  allow its component organizations to make their own investments  independently of one another and implement different system solutions to  solve the same business problems. These stovepiped decision-making  processes have contributed to the department’s current complex, error- prone environment. The DOD Comptroller recently testified that DOD’s  actual systems inventory could be twice as many as the number of systems  the department currently recognizes as its systems inventory. In March  2003, we reported that ineffective program management and oversight, as  well as a lack of accountability, resulted in DOD continuing to invest  hundreds of millions of dollars in system modernization efforts without  any assurance that the projects will produce operational improvements  commensurate with the amount invested.
For example, the estimated cost of one of the business system investment  projects that we reviewed increased by as much as $274 million, while its  schedule slipped by almost 4 years. After spending $126 million, DOD  terminated that project in December 2002, citing poor performance and  increasing costs. GAO and the DOD IG have identified numerous business  system modernization efforts that are not economically justified on the  basis of cost, benefits and risk; take years longer than planned; and fall  short of delivering planned or needed capabilities. Despite this track  record, DOD continues to increase spending on business systems while at  the same time it lacks the effective management and oversight needed to  achieve real results. Without appropriate incentives to improve their  project management, ongoing oversight, and adequate accountability  mechanisms, DOD components will continue to develop duplicative and  nonintegrated systems that are inconsistent with the Secretary’s vision for  reform.
To effect real change, actions are needed to (1) break down parochialism  and reward behaviors that meet DOD-wide goals, (2) develop incentives  that motivate decision makers to initiate and implement efforts that are  consistent with better program outcomes, including saying “no” or pulling  the plug early on a system or program that is failing, and (3) facilitate a  congressional focus on results-oriented management, particularly with  respect to resource allocation decisions.
section_title: Keys to Successful Reform
paragraphs: As we have previously reported, and the success of the more narrowly  defined DOD initiatives we will discuss later illustrate, the following key  elements collectively will enable the department to effectively address the  underlying causes of its inability to resolve its long-standing financial and  business management problems. These elements are    addressing the department’s financial management and related business  operational challenges as part of a comprehensive, integrated, DOD-wide  strategic plan for business reform;    providing for sustained and committed leadership by top management,  including but not limited to the Secretary of Defense;    establishing resource control over business systems investments;    establishing clear lines of responsibility, authority, and accountability;  incorporating results-oriented performance measures and monitoring  progress tied to key financial and business transformation objectives;    providing appropriate incentives or consequences for action or inaction;    establishing an enterprise architecture to guide and direct business  systems modernization investments; and    ensuring effective oversight and monitoring.
These elements, which should not be viewed as independent actions but  rather as a set of interrelated and interdependent actions, are reflected in  the recommendations we have made to DOD and are consistent with those  actions discussed in the department’s April 2001 financial management  transformation report. The degree to which DOD incorporates them into  its current reform efforts—both long and short term—will be a deciding  factor in whether these efforts are successful. Thus far, the department’s  progress in implementing our recommendations has been slow.
section_title: DOD Business Transformation Efforts
paragraphs: Over the years, we have given DOD credit for beginning numerous  initiatives intended to improve its business operations. Unfortunately,  most of these initiatives failed to achieve their intended objective in part,  we believe, because they failed to incorporate key elements that in our  experience are critical to successful reform. Today, we would like to  discuss one very important broad-based initiative, the BMMP, DOD  currently has underway that, if properly developed and implemented, will  result in significant improvements in DOD’s business operations. Within  the next few months we intend to issue a report on the status of DOD’s  efforts to refine and implement its enterprise architecture and the results  of our review of two on going DOD system initiatives. In addition to the  BMMP, DOD has undertaken several interim initiatives in recent years that  have resulted in tangible, although limited, improvements. We believe that  these tangible improvements were possible because DOD has accepted  our recommendations and incorporated many of the key elements critical  for reform. Furthermore, we would like to offer two suggestions for  legislative consideration that we believe could significantly increase the  likelihood of a successful business transformation effort at DOD.
subsections: section_title: Business Management Modernization Program
paragraphs: The BMMP, which the department established in July 2001 following our  recommendation that DOD develop and implement an enterprise  architecture, is vital to the department’s efforts to transform its business  operations. The purpose of the BMMP is to oversee development and  implementation of a departmentwide BEA, transition plan, and related  efforts to ensure that DOD business system investments are consistent  with the architecture. A well-defined and properly implemented BEA can  provide assurance that the department invests in integrated  enterprisewide business solutions and, conversely, can help move  resources away from nonintegrated business system development efforts.  As we reported in July 2003, DOD had developed an initial version of its  departmentwide architecture for modernizing its current financial and  business operations and systems and had expended tremendous effort and  resources in doing so. However, substantial work remains before the  architecture will be sufficiently detailed and the means for implementing it  will be adequately established to begin to have a tangible impact on  improving DOD’s overall business operations. We cannot overemphasize  the degree of difficulty DOD faces in developing and implementing a well- defined architecture to provide the foundation that will guide its overall  business transformation effort.
On the positive side, during its initial efforts to develop the architecture,  the department established some of the architecture management  capabilities advocated by best practices and federal guidance, such as  establishing a program office, designating a chief architect, and using an  architecture development methodology and automated tool. Further,  DOD’s initial version of its business enterprise architecture provided a  foundation on which to build and ultimately produce a well-defined  business enterprise architecture. For example, in September 2003, we  reported that the “To Be” descriptions address, to at least some degree,  how DOD intends to operate in the future, what information will be  needed to support these future operations, and what technology standards  should govern the design of future systems.
While some progress has been made, DOD has not yet taken important  steps that are critical to its ability to successfully use the enterprise  architecture to drive reform throughout the department’s overall business  operations. For example, DOD has not yet defined and implemented the  following.
Detailed plans to extend and evolve its initial architecture to include the  missing scope and detail required by the Bob Stump National Defense  Authorization Act for Fiscal Year 2003 and other relevant architectural  requirements. Specifically, (1) the initial version of the BEA excluded  some relevant external requirements, such as requirements for recording  revenue, and lacked or provided little descriptive content pertaining to its  “As Is” and “To Be” environments and (2) DOD had not yet developed the  transition plan needed to provide a temporal road map for moving from  the “As Is” to the “To Be” environment.
An effective approach to select and control business system investments  for obligations exceeding $1 million. As we previously stated, and it bears  repeating here, DOD components currently receive direct funding for their  business systems and continue to make their own parochial decisions  regarding those investments without having received the scrutiny of the  DOD Comptroller as required by the Bob Stump National Defense  Authorization Act for Fiscal Year of 2003. Later, we will offer a suggestion  for improving the management and oversight of the billions of dollars DOD  invests annually in business systems.
DOD invests billions of dollars annually to operate, maintain, and  modernize its business systems. For fiscal year 2004, the department  requested approximately $28 billion in IT funding to support a wide range  of military operations as well as DOD business systems operations, of  which approximately $18.8 billion—$5.8 billion for business systems and  $13 billion for business systems infrastructure—relates to the operation,  maintenance, and modernization of the department’s reported thousands  of business systems. The $18.8 billion is spread across the military services  and defense agencies, with each receiving its own funding for IT  investments.
However, as we reported, DOD lacked an efficient and effective process  for managing, developing, and implementing its business systems. These  long-standing problems continue despite the significant investments in  business systems by DOD components each year. For example, in March  2003 we reported that DOD’s oversight of four DFAS projects we reviewed  had been ineffective. Investment management responsibility for the four  projects rested with the Defense Finance and Accounting Service (DFAS),  the DOD Comptroller, and the DOD CIO. In discharging this responsibility,  each had allowed project investments to continue year after year, even  through the projects had been marked by cost increases, schedule  slippages, and capability changes. As a result DOD had invested  approximately $316 million in four DFAS system modernization projects  without demonstrating that this substantial investment would markedly  improve DOD financial management information for decision making and  financial reporting purposes.
Specifically, we found that four DFAS projects reviewed lacked an  approved economic analysis that reflected the fact that expected project  costs had increased, while in some cases the benefits had decreased. For  instance as we previously stated, the estimated cost of one project—  referred to as the Defense Procurement Payment System (DPPS)— had  increased by as much as $274 million, while its schedule slipped by almost  4 years. Such project analyses provide the requisite justification for  decision makers to use in determining whether to invest additional  resources in anticipation of receiving commensurate benefits and mission  value. For each of the four projects we reviewed we found that DOD  oversight entities—DFAS, the DOD Comptroller, and the DOD CIO—did  not question the impact of the cost increases and schedule delays, and  allowed the projects to proceed in the absence of the requisite analytical  justification. Furthermore, in one case, they allowed a project estimated to  cost $270 million, referred to as the DFAS Corporate Database/DFAS  Corporate Warehouse (DCD/DCW), to proceed without an economic  analysis. In another case, they allowed DPPS to continue despite known  concerns about the validity of the project’s economic analysis.
DOD subsequently terminated two—DPPS and the Defense Standard  Disbursing System (DSDS)—of the four DFAS system modernization  projects reviewed. As we previous mentioned, DPPS was terminated due  to poor program performance and increasing costs after 7 years of effort  and an investment of over $126 million. DFAS terminated DSDS after  approximately 7 years of effort and an investment of about $53 million,  noting that a valid business case for continuing the effort could not be  made. These two terminated projects were planned to provide DOD the  capability to address some of DOD’s long-standing contract and vendor  payment problems.
In addition to project management issues that continue to result in  systems that do not perform as expected and cost more than planned, we  found that DOD continues to lack a complete and reliable inventory of its  current systems. In September 2003, we reported that DOD had created a  repository of information about its existing systems inventory of  approximately 2,300 business systems (up from 1,731 in October 2002) as  part of its ongoing business systems modernization program, and  consistent with our past recommendation. Due to its lack of visibility  over systems departmentwide, DOD had to rely upon data calls to obtain  its information. Unfortunately, due to its lack of an effective methodology  and process for identifying business systems, including a clear definition  of what constitutes a business system, DOD continues to lack assurance  that its systems inventory is reliable and complete. In fact, the DOD  Comptroller testified last week before the Senate Armed Services  Subcommittee on Readiness and Management Support that the size of  DOD’s actual systems inventory could be twice the size currently reported.  This lack of visibility over current business systems in use throughout the  department hinders DOD’s ability to identify and eliminate duplicate and  nonintegrated systems and transition to its planned systems environment  in an efficient and effective manner.
Of the 2,274 business systems recorded in DOD’s systems inventory  repository, the department reportedly has 665 systems to support human  resource management, 565 systems to support logistical functions, 542  systems to perform finance and accounting functions, and 210 systems to  support strategic planning and budget formulation. Table 1, which  presents the composition of DOD business systems by functional area,  reveals the numerous and redundant systems operating in the department  today.
As we have previously reported, these numerous systems have evolved  into the overly complex and error-prone operation that exists today,  including (1) little standardization across DOD components, (2) multiple  systems performing the same tasks, (3) the same data stored in multiple  systems, (4) manual data entry into multiple systems, and (5) a large  number of data translations and interfaces that combine to exacerbate  problems with data integrity. The department has recognized the  uncontrolled proliferation of systems and the need to eliminate as many  systems as possible and integrate and standardize those that remain. In  fact, the two terminated DFAS projects were intended to reduce the  number of systems or eliminate a portion of different systems that perform  the same function. For example, DPPS was intended to consolidate eight  contract and vendor pay systems and DSDS was intended to eliminate four  different disbursing systems.
Until DOD completes its efforts to refine and implement its enterprise  architecture and transition plan, and develop and implement an effective  approach for selecting and controlling business system investments, DOD  will continue to lack (1) a comprehensive and integrated strategy to guide  its business process and system changes, and (2) results-oriented  measures to monitor and measure progress, including whether system  development and modernization investment projects adequately  incorporate leading practices used by the private sector and federal  requirements and achieve performance and efficiency commensurate with  the cost. These elements are critical to the success of DOD’s BMMP.
Developing and implementing a BEA for an organization as large and  complex as DOD is a formidable challenge, but it is critical to effecting the  change required to achieve the Secretary’s vision of relevant, reliable, and  timely financial and other management information to support the  department’s vast operations. As mandated, we plan to continue to report  on DOD’s progress in developing the next version of its architecture,  developing its transition plan, validating its “As Is” systems inventory, and  controlling its system investments.
section_title: Interim Initiatives
paragraphs: Since DOD’s overall business process transformation is a long-term effort,  in the interim it is important for the department to focus on improvements  that can be made using, or requiring only minor changes to, existing  automated systems and processes. As demonstrated by the examples we  will highlight in this testimony, leadership, real incentives, accountability,  and oversight and monitoring—key elements to successful reform—have  brought about improvements in some DOD operations, such as more  timely commercial payments, reduced payment recording errors, and  significant reductions in individually billed travel card delinquency rates.
To help achieve the department’s goal of improved financial information,  the DOD Comptroller has developed a Financial Management Balanced  Scorecard that is intended to align the financial community’s strategy,  goals, objectives, and related performance measures with the  departmentwide risk management framework established as part of DOD’s  Quadrennial Defense Review, and with the President’s Management  Agenda. To effectively implement the balanced scorecard, the Comptroller  is planning to cascade the performance measures down to the military  services and defense agency financial communities, along with certain  specific reporting requirements. DOD has also developed a Web site where  implementation information and monthly indicator updates will be made  available for the financial communities’ review. At the departmentwide  level, certain financial metrics will be selected, consolidated, and reported  to the top levels of DOD management for evaluation and comparison.  These “dashboard” metrics are intended to provide key decision makers,  including Congress, with critical performance information at a glance, in a  consistent and easily understandable format.
DFAS has been reporting the metrics cited below for several years, which,  under the leadership of DFAS’ Director and DOD’s Comptroller, have  reported improvements, including the following.
From April 2001 to January 2004, DOD reduced its commercial pay  backlogs (payment delinquencies) by 55 percent.
From March 2001 to December 2003, DOD reduced its payment recording  errors by 33 percent.
The delinquency rate for individually billed travel cards dropped from 18.4  percent in January 2001 to 10.7 percent in January 2004.
Using DFAS’ metrics, management can quickly see when and where  problems are arising and can focus additional attention on those areas.  While these metrics show significant improvements from 2001 to today,  statistics for the last few months show that progress has slowed or even  taken a few steps backward for payment recording errors and commercial  pay backlogs. Our report last year on DOD’s metrics program included a  caution that, without modern integrated systems and the streamlined  processes they engender, reported progress may not be sustainable if  workload is increased.
Since we reported problems with DOD’s purchase card program, DOD and  the military services have taken actions to address all of our 109  recommendations. In addition, we found that DOD and the military  services took action to improve the purchase card program consistent  with the requirements of the Bob Stump National Defense Authorization  Act for Fiscal Year 2003 and the DOD Appropriations Act for Fiscal Year  2003. Specifically, we found that DOD and the military services had done  the following.
Substantially reduced the number of purchase cards issued. According to  GSA records, DOD had reduced the total number of purchase cards from  about 239,000 in March 2001 to about 134,609 in January 2004. These  reductions have the potential to significantly improve the management of  this program.  Issued policy guidance to field activities to (1) perform periodic reviews of  all purchase card accounts to reestablish a continuing bona fide need for  each card account, (2) cancel accounts that were no longer needed, and  (3) devise additional controls over infrequently used accounts to protect  the government from potential cardholder or outside fraudulent use.  Issued disciplinary guidelines, separately, for civilian and military  employees who engage in improper, fraudulent, abusive, or negligent use  of a government charge card.
In addition, to monitor the purchase card program, the DOD IG and the  Navy have prototyped and are now expanding a data-mining capability to  screen for and identify high-risk transactions (such as potentially  fraudulent, improper, and abusive use of purchase cards) for subsequent  investigation. On June 27, 2003, the DOD IG issued a reportsummarizing  the results of an in-depth review of purchase card transactions made by  1,357 purchase cardholders. The report identified 182 cardholders who  potentially used their purchase cards inappropriately or fraudulently.
We believe that consistent oversight played a major role in bringing about  these improvements in DOD’s purchase and travel card programs. During  2001, 2002, and 2003, seven separate congressional hearings were held on  the Army and Navy purchase and individually billed travel card programs.  Numerous legislative initiatives aimed at improving DOD’s management  and oversight of these programs also had a positive impact.
Another important initiative underway at the department pertains to  financial reporting. Under the leadership of DOD Comptroller, the  department is working to instill discipline into its financial reporting  processes to improve the reliability of the department’s financial data.  Resolution of serious financial management and related business  management weaknesses is essential to achieving any opinion on the DOD  consolidated financial statements. Pursuant to the requirements in section  1008 of the National Defense Authorization Act for Fiscal Year 2002, DOD  has reported for the past 3 years on the reliability of the department’s  financial statements, concluding that the department is not able to provide  adequate evidence supporting material amounts in its financial statements.  Specifically, DOD stated that it was unable to comply with applicable  financial reporting requirements for (1) property, plant, and equipment,   (2) inventory and operating materials and supplies, (3) environmental  liabilities, (4) intragovernmental eliminations and related accounting  entries, (5) disbursement activity, and (6) cost accounting by  responsibility segment. Although DOD represented that the military  retirement health care liability data had improved for fiscal year 2003, the  cost of direct health care provided by DOD-managed military treatment  facilities was a significant amount of DOD’s total recorded health care  liability and was based on estimates for which adequate support was not  available. DOD has indicated that by acknowledging its inability to  produce reliable financial statements, as required by the act, the  department saves approximately $23 million a year through reduction in  the level of resources needed to prepare and audit financial statements.  However, DOD has set the goal of obtaining a favorable opinion on its  fiscal year 2007 departmentwide financial statements. To this end, DOD  components and agencies have been tasked with addressing material line  item deficiencies in conjunction with the BMMP. This is an ambitious goal  and we have been requested by Congress to review the feasibility and cost  effectiveness of DOD’s plans for obtaining such an opinion within the  stated time frame.
To instill discipline in its financial reporting process, the DOD Comptroller  requires DOD’s major components to prepare quarterly financial  statements along with extensive footnotes that explain any improper  balances or significant variances from previous year quarterly statements.  All of the statements and footnotes are analyzed by Comptroller office  staff and reviewed by the Comptroller. In addition, the midyear and end-of- year financial statements must be briefed to the DOD Comptroller by the  military service Assistant Secretary for Financial Management or the head  of the defense agency. We have observed several of these briefings and  have noted that the practice of preparing and explaining interim financial  statements has led to the discovery and correction of numerous recording  and reporting errors.
If DOD continues to provide for active leadership, along with appropriate  incentives and accountability mechanisms, improvements will continue to  occur in its programs and initiatives.
section_title: Suggestions for Legislative Consideration
paragraphs: We would like to offer two suggestions for legislative consideration that  we believe could contribute significantly to the department’s ability to not  only address the impediments to DOD success but also to incorporate  needed key elements to successful reform. These suggestions would  include the creation of a chief management official and the centralization  of responsibility and authority for business system investment decisions  with the domain leaders responsible for the department’s various  business areas, such as logistics and human resource management.
subsections: section_title: Chief Management Official
paragraphs: Previous failed attempts to improve DOD’s business operations illustrate  the need for sustained involvement of DOD leadership in helping to assure  that the DOD’s financial and overall business process transformation  efforts remain a priority. While the Secretary and other key DOD leaders  have certainly demonstrated their commitment to the current business  transformation efforts, the long-term nature of these efforts requires the  development of an executive position capable of providing strong and  sustained executive leadership over a number of years and various  administrations. The day-to-day demands placed on the Secretary, the  Deputy Secretary, and others make it difficult for these leaders to maintain  the oversight, focus, and momentum needed to resolve the weaknesses in  DOD’s overall business operations. This is particularly evident given the  demands that the Iraq and Afghanistan postwar reconstruction activities  and the continuing war on terrorism have placed on current leaders.  Likewise, the breadth and complexity of the problems preclude the Under  Secretaries, such as the DOD Comptroller, from asserting the necessary  authority over selected players and business areas.
While sound strategic planning is the foundation upon which to build,  sustained leadership is needed to maintain the continuity needed for  success. One way to ensure sustained leadership over DOD’s business  transformation efforts would be to create a full-time executive level II  position for a chief management official who would serve as the Principal  Under Secretary of Defense for Management. This position would  provide the sustained attention essential for addressing key stewardship  responsibilities such as strategic planning, performance and financial  management, and business systems modernization in an integrated  manner, while also facilitating the overall business transformation  operations within DOD. This position could be filled by an individual,  appointed by the President and confirmed by the Senate, for a set term of  7 years with the potential for reappointment. Such an individual should  have a proven track record as a business process change agent in large,  complex, and diverse organizations—experience necessary to spearhead  business process transformation across the department, and potentially  administrations, and serve as an integrator for the needed business  transformation efforts. In addition, this individual would enter into an  annual performance agreement with the Secretary that sets forth  measurable individual goals linked to overall organizational goals in  connection with the department’s overall business transformation efforts.  Measurable progress towards achieving agreed upon goals would be a  basis for determining the level of compensation earned, including any  related bonus. In addition, this individual’s achievements and  compensation would be reported to Congress each year.
section_title: Central Control Over System Investments
paragraphs: We have made numerous recommendations to DOD intended to improve  the management oversight and control of its business systems  investments. However, as previously mentioned, progress in achieving this  control has been slow and, as a result, DOD has little or no assurance that  current business systems investments are being spent in an economically  efficient and effective manner. DOD’s current systems funding process has  contributed to the evolution of an overly complex and error-prone  information technology environment containing duplicative,  nonintegrated, and stovepiped systems. Given that DOD plans to spend  approximately $19 billion on business systems and related infrastructure  for fiscal year 2004—including an estimated $5 billion in modernization  money—it is critical that actions be taken to gain more effective control  over such business systems funding.
The second suggestion we have for legislative action to address this issue,  consistent with our open recommendations to DOD, is to establish specific  management oversight, accountability, and control of funding with the  “owners” of the various functional areas or domains. This legislation  would define the scope of the various business areas (e.g., acquisition,  logistics, finance and accounting) and establish functional responsibility  for management of the portfolio of business systems in that area with the  relevant Under Secretary of Defense for the six departmental domains and  the CIO for the Enterprise Information Environment Mission (information  technology infrastructure). For example, planning, development,  acquisition, and oversight of DOD’s portfolio of logistics business systems  would be vested in the Under Secretary of Defense for Acquisition,  Technology, and Logistics.
We believe it is critical that funds for DOD business systems be  appropriated to the domain owners in order to provide for accountability,  transparency, and the ability to prevent the continued parochial approach  to systems investment that exists today. The domains would establish a  hierarchy of investment review boards with DOD-wide representation,  including the military services and Defense agencies. These boards would  be responsible for reviewing and approving investments to develop,  operate, maintain, and modernize business systems for the domain  portfolio, including ensuring that investments were consistent with DOD’s  BEA. All domain owners would be responsible for coordinating their  business systems investments with the chief management official who  would chair the Defense Business Systems Modernization Executive  Committee and provide a cross-domain perspective. Domain leaders  would also be required to report to Congress through the chief  management official and the Secretary of Defense on applicable business  systems that are not compliant with review requirements and to include a  summary justification for noncompliance.
section_title: Conclusion
paragraphs: As seen again in Iraq, the excellence of our military forces is unparalleled.  However, that excellence is often achieved in the face of enormous  challenges in DOD’s financial management and other business areas,  which have serious and far-reaching implications related to the  department’s operations and critical national defense mission. Our recent  work has shown that DOD’s long-standing financial management and  business problems have resulted in fundamental operational problems,  such as failure to properly pay mobilized Army Guard soldiers and the  inability to provide adequate accountability and control over supplies and  equipment shipments in support of Operation Iraqi Freedom. Further, the  lack of adequate transparency and appropriate accountability across all  business areas has resulted in certain fraud, waste, and abuse and hinders  DOD’s attempts to develop world-class operations and activities to  support its forces. As our nation continues to be challenged with growing  budget deficits and increasing pressure to reduce spending levels, every  dollar that DOD can save through improved economy and efficiency of its  operations is important.
DOD’s senior leaders have demonstrated a commitment to transforming  the department and improving its business operations and have taken  positive steps to begin this effort. We believe that implementation of our  open recommendations and our suggested legislative initiatives would  greatly improve the likelihood of meaningful, broad-based reform at DOD.  The continued involvement and monitoring by congressional committees  will also be critical to ensure that DOD’s initial transformation actions are  sustained and extended and that the department achieves its goal of  securing the best performance and highest measure of accountability for  the American people. We commend the Subcommittee for holding this  hearing and we encourage you to use this vehicle, on at least an annual  basis, as a catalyst for long overdue business transformation at DOD.
Mr. Chairman, this concludes our statement. We would be pleased to  answer any questions you or other members of the Subcommittee may  have at this time.
section_title: Contacts and Acknowledgments
paragraphs: For further information about this testimony, please contact Gregory D.  Kutz at (202) 512-9095 or kutzg@gao.gov, Randolph Hite at (202) 512-3439  or hiter@gao.gov, or Evelyn Logue at 202-512-3881. Other key contributors  to this testimony include Bea Alff, Meg Best, Molly Boyle, Art Brouk,  Cherry Clipper, Mary Ellen Chervenic, Francine Delvecchio, Abe Dymond,  Eric Essig, Gayle Fischer, Geoff Frank, John Kelly, Patricia Lentini,  Elizabeth Mead, Mai Nguyen, Greg Pugnetti, Cary Russell, John Ryan,  Darby Smith, Carolyn Voltz, Marilyn Wasleski, and Jenniffer Wilson.
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