Business Systems Modernization: DOD Needs to Fully Define Policies and Procedures for Institutionally Managing Investments
Released: 2007-05-11T00:00:00

Letter

Background

DOD is a massive and complex organization. To illustrate, the department reported that its fiscal year 2006 operations involved approximately $1.4 trillion in assets and $2.0 trillion in liabilities, more than 2.9 million military and civilian personnel, and $581 billion in net cost of operations. To date, for fiscal year 2007, the department received appropriations of about $501 billion. Organizationally, the department includes the Office of the Secretary of Defense (OSD), the Chairman of the Joint Chiefs of Staff, the military departments, numerous defense agencies and field activities, and various unified combatant commands that are responsible for either specific geographic regions or specific functions. (See fig. 1 for a simplified depiction of DOD’s organizational structure.)

In support of its military operations, the department performs an assortment of interrelated and interdependent business functions, including logistics management, procurement, health care management, and financial management. As we have previously reported, the systems environment that supports these business functions is overly complex and error-prone, and is characterized by (1) little standardization across the department, (2) multiple systems performing the same tasks, (3) the same data stored in multiple systems, and (4) the need for data to be entered manually into multiple systems. Moreover, according to DOD, this systems environment is comprised of approximately 3,100 separate business systems. For fiscal year 2007, Congress appropriated approximately $15.7 billion to DOD, and for fiscal year 2008, DOD has requested about $15.9 billion in appropriated funds to operate, maintain, and modernize these business systems and the associated infrastructures.

As we have previously reported, the department’s nonintegrated and duplicative systems impair DOD’s ability to combat fraud, waste, and abuse. In fact, DOD currently bears responsibility, in whole or in part, for 15 of our 27 high-risk areas. Eight of these areas are specific to DOD, and the department shares responsibility for 7 other governmentwide high- risk areas. DOD’s business systems modernization is one of the high-risk areas, and it is an essential enabler to addressing many of the department’s other high-risk areas. For example, modernized business systems are integral to the department’s efforts to address its financial, supply chain, and information security management high-risk areas.

IT Investment Management Is Critical to Achieving Successful Systems Modernization

A corporate approach to IT investment management is characteristic of successful public and private organizations. Recognizing this, Congress enacted the Clinger-Cohen Act of 1996, which requires the Office of Management and Budget (OMB) to establish processes to analyze, track, and evaluate the risks and results of major capital investments in IT systems made by executive agencies. In response to the Clinger-Cohen Act and other statutes, OMB has developed policy and issued guidance for the planning, budgeting, acquisition, and management of federal capital assets. We have also issued guidance in this area, which defines institutional structures, such as the IRBs; processes for developing information on investments (such as costs and benefits); and practices to inform management decisions (such as whether a given investment is aligned with an enterprise architecture).

IT Investment Management: A Brief Description

IT investment management is a process for linking IT investment decisions to an organization’s strategic objectives and business plans. Consistent with this, the federal approach to IT investment management focuses on selecting, controlling, and evaluating investments in a manner that minimize risks while maximizing the return of investment.

During the selection phase, the organization (1) identifies and analyzes each project’s risks and returns before committing significant funds to any project and (2) selects those IT projects that will best support its mission needs.

During the control phase, the organization ensures that projects, as they develop and investment expenditures continue, meet mission needs at the expected levels of cost and risk. If the project is not meeting expectations or if problems arise, steps are quickly taken to address the deficiencies.

During the evaluation phase, expected results are compared with actual results after a project has been fully implemented. This comparison is done to (1) assess the project’s impact on mission performance, (2) identify any changes or modifications to the project that may be needed, and (3) revise the investment management process based on lessons learned.

Overview of GAO’s ITIM Maturity Framework

Our ITIM framework consists of five progressive stages of maturity for any given agency relative to selecting, controlling, and evaluating its investment management capabilities. (See fig. 2 for the five ITIM stages of maturity.) This framework is grounded in our research of IT investment management practices of leading private and public sector organizations. The maturity stages are cumulative; that is, to attain a higher stage, an agency must institutionalize all of the critical processes at the lower stages, in addition to the higher stage critical processes.

The framework can be used to assess the maturity of an agency’s investment management processes and as a tool for organizational improvement. The overriding purpose of the framework is to encourage investment selection and control and to evaluate processes that promote business value and mission performance, reduce risk, and increase accountability and transparency. We have used the framework in several of our evaluations, and a number of agencies have adopted it.

With the exception of the first stage, each maturity stage is composed of “critical processes” that must be implemented and institutionalized for the organization to achieve that stage. Each ITIM critical process consists of “key practices”—to include organizational structures, policies, and procedures—that must be executed to implement the critical process. It is not unusual for an organization to perform key practices from more than one maturity stage at the same time. However, our research shows that agency efforts to improve investment management capabilities should focus on implementing all lower-stage practices before addressing higher- stage practices.

In the ITIM framework, Stage 2 critical processes lay the foundation by establishing successful, predictable, and repeatable investment control processes at the project level. At this stage, the emphasis is on establishing basic capabilities for selecting new IT projects; controlling projects so that they finish predictably within the established cost, schedule, and performance expectations; and identifying and mitigating exposure to risk.

Stage 3 is where the agency moves from project-centric processes to portfolio-based processes and evaluates potential investments according to how well they support the agency’s missions, strategies, and goals. This stage focuses on continually assessing both proposed and ongoing projects as part of complete investment portfolios—integrated and competing sets of investment options. It also focuses on maintaining mature, integrated selection (and reselection); control; and postimplementation evaluation processes. This portfolio perspective allows decision makers to consider the interaction among investments and the contributions to organizational mission goals and strategies that could be made by alternative portfolio selections, rather than to focus exclusively on the balance between the costs and benefits of individual investments. Organizations implementing Stages 2 and 3 practices have in place capabilities that assist in establishing selection, control, and evaluation structures, policies, procedures, and practices that are required by the investment management provisions of the Clinger-Cohen Act.

Stages 4 and 5 require the use of evaluation techniques to continuously improve both investment processes and portfolios to better achieve strategic outcomes. At Stage 4, an organization has the capacity to conduct IT succession activities and, therefore, can plan and implement the deselection of obsolete, high-risk, or low-value IT investments. An organization with Stage 5 maturity conducts proactive monitoring for breakthrough technologies that will enable it to change and improve its business performance.

Overview of DOD’s Corporate Approach for Identifying, Funding, and Acquiring All System Investments

DOD’s major system investments (i.e., weapon and business systems) are governed by three management systems—the Joint Capabilities Integration and Development System (JCIDS); the Planning, Programming, Budgeting, and Execution (PPBE) system; and the Defense Acquisition System (DAS).

JCIDS is a need-driven, capabilities-based approach to identify warfighting needs and meet future joint forces challenges. It is intended to identify future capabilities for DOD; address capability gaps and mission needs recognized by the Joint Chiefs of Staff or derived from strategic guidance, such as the National Security Strategy Report or Quadrennial Defense Review; and identify alternative solutions by considering a range of doctrine, organization, training, materiel, leadership and education, personnel, and facilities solutions. According to DOD, the Joint Chiefs of Staff, through the Joint Requirements Oversight Council, has primary responsibility for defining and implementing JCIDS.

PPBE is a calendar-driven approach that is composed of four phases that occur over a moving 2-year cycle. The four phases—planning, programming, budgeting, and executing—define how budgets for each DOD component and the department as a whole are created, vetted, and executed. As recently reported, the components start programming and budgeting for addressing a JCIDS-identified capability gap or mission need several years before actual product development under DAS begins, and before OSD formally reviews the components’ programming and budgeting proposals (i.e., Program Objective Memorandums). Once reviewed and approved, the financial details in the Program Objective Memorandums become part of the President’s budget request to Congress. During budget execution, components may submit program change proposals or budget change proposals, or both (e.g., program cost increases or schedule delays). According to DOD, the OSD Under Secretary of Defense (Policy), the Director for Program Analysis and Evaluation, and the Under Secretary of Defense (Comptroller) have primary responsibility for defining and implementing the PPBE system.

DAS is described in the DOD Directive 5000.1 and the DOD Instruction 5000.2 and establishes the procedures for the Defense Acquisition Management Framework, which consists of three event-based milestones associated with five key program life-cycle phases. These five phases are as follows: 1. Concept Refinement: Intended to refine the initial JCIDS-validated system solution (concept) and create a strategy for acquiring the investment solution. A decision is made at the end of this phase (milestone A decision) regarding whether to move to the next phase (Technology Development). 2. Technology Development: Intended to determine the appropriate set of technologies to be integrated into the investment solution by iteratively assessing the viability of various technologies while simultaneously refining user requirements. Once the technology has been demonstrated in a relevant environment, a decision is made at the end of this phase (milestone B decision) regarding whether to move to the next phase (System Development and Demonstration). 3. System Development and Demonstration: Intended to develop a system or a system increment and demonstrate through developer testing that the system/system increment can function in its target environment. A decision is made at the end of this phase (milestone C decision) regarding whether to move to the next phase (Production and Deployment). 4. Production and Deployment: Intended to achieve an operational capability that satisfies the mission needs, as verified through independent operational test and evaluation, and ensures that the system is implemented at all applicable locations. 5. Operations and Support: Intended to operationally sustain the system in the most cost-effective manner over its life cycle.

A key principle of DAS is that investments are assigned a category, where programs of increasing dollar value and management interest are subject to more stringent oversight. For example, Major Defense Acquisition Programs (MDAP) and Major Automated Information Systems (MAIS) are large, expensive programs subject to the most extensive statutory and regulatory reporting requirements and, unless delegated, are reviewed by acquisition boards at the DOD corporate level. Smaller and less risky acquisitions are generally reviewed at the component executive or lower levels. Another key principle is that DAS requires acquisition management under the direction of a milestone decision authority. The milestone decision authority—with support from the program manager and advisory boards, such as the Defense Acquisition Board and the IT Acquisition Board—determines the project’s baseline cost, schedule, and performance commitments. The Under Secretary of Defense for Acquisition, Technology, and Logistics (USD(AT&L)) has primary responsibility for defining and implementing DAS.

DOD Business System Investments Are Subject to a Fourth Management System

DOD’s business system investments are also governed by a fourth management system that addresses how these investments are reviewed, certified, and approved for compliance with the business enterprise priorities and activities outlined by the business enterprise architecture (BEA). For the purposes of this report, we refer to this fourth management system as the Business Investment Management System. This fourth management system is described in the following text in terms of governance entities, tiered accountability, and business system investment certification reviews and approvals. According to DOD, these four management systems are the means by which DOD selects, controls, and evaluates its business system investments.

Business System Investment Roles and Responsibilities

In 2005, the department reassigned responsibility for providing executive leadership for the direction, oversight, and execution of its business systems modernization efforts to several entities. These entities and their responsibilities include the following: The Defense Business Systems Management Committee (DBSMC) serves as the highest-ranking governance body for business systems modernization activities.

The Principal Staff Assistants serve as the certification authorities for business system modernizations in their respective core business missions.

The IRBs are chartered by the Principal Staff Assistants and are the review and decision-making bodies for business system investments in their respective areas of responsibility.

The component pre-certification authority (PCA) is accountable for the component’s business system investments and acts as the component’s principal point of contact for communication with the IRBs.

The Business Transformation Agency (BTA) is responsible for leading and coordinating business transformation efforts across the department. The BTA is organized into seven directorates, one of which is the Defense Business Systems Acquisition Executive (DBSAE)—the component acquisition executive for DOD enterprise-level (DOD-wide) business systems and initiatives. This directorate is responsible for developing, coordinating, and integrating enterprise-level projects, programs, systems, and initiatives—including managing resources such as fiscal, personnel, and contracts for assigned systems and programs.

Table 1 lists these entities and provides greater detail on their roles, responsibilities, and composition. Figure 3 provides a simplified illustration of the relationships among these entities.

According to DOD, in 2005 it adopted a tiered accountability approach to business transformation. Under this approach, responsibility and accountability for business investment management is allocated between the DOD corporate (i.e., OSD) and the components on the basis of the amount of development/modernization funding involved and the investment’s “tier.” DOD corporate is responsible for ensuring that all business systems with a development/modernization investment in excess of $1 million are reviewed by the IRBs for compliance with the BEA, certified by the Principal Staff Assistants, and approved by the DBSMC. Components are responsible for certifying development/modernization investments with total costs of $1 million or less. All DOD development and modernization efforts are also assigned a tier on the basis of the acquisition category or the size of the financial investment, or both. According to DOD, a system is given a tier designation when it passes through the certification process. Table 2 describes the four investment tiers and identifies the associated reviewing and approving entities.

DOD’s business investment management system includes two types of reviews for business systems: certification and annual reviews. Certification reviews apply to new modernization projects with total cost over $1 million. This review focuses on program alignment with the BEA and must be completed before components obligate funds for programs. The annual review applies to all business programs. The focus for the annual review is to determine whether the system development effort is meeting its milestones and addressing its IRB certification conditions.

Certification reviews and approvals: Tiers 1 through 3 business system investments are certified at two levels—component-level precertification and corporate-level certification and approval. At the component level, program managers prepare, enter, maintain, and update information about their investments in the DOD IT Portfolio Repository (DITPR), such as regulatory compliance reporting, an architectural profile, and requirements for investment certification and annual reviews. The component PCA validates that the system information is complete and accessible on the IRB Portal, reviews system compliance with the BEA and enterprise transition plan, and verifies the economic viability analysis. The PCA asserts the status and validity of the investment information by submitting a component precertification letter to the appropriate IRB for its review.

At the corporate level, the IRB reviews the system information and precertification letter submitted by the PCA to determine whether to recommend investment certification. On completion of its review, a certification memorandum is prepared and signed by the designated certification authority that documents the IRB’s system certification decisions and any related conditions. The memorandum is then forwarded to the DBSMC, which either approves or disapproves the IRB’s decisions and issues a memorandum containing its decisions. If the DBSMC disapproves a system investment, it is up to the component PCA to decide whether to resubmit the investment after it has resolved the relevant issues. Figure 4 provides a simplified overview of the process flow of certification reviews and approvals.

Annual reviews: Tiers 1 through 4 business system investments are annually reviewed at two levels—the component level and the corporate level. At the component level, program managers review and update information on all tiers of investments, both in modernization and operations and maintenance, on an annual basis in DITPR. The updates for Tiers 1 through 3 with system development/modernization include cost, milestone, and risk variances and actions or issues related to certification conditions. The PCA then verifies and submits the information for Tiers 1 through 3 systems in development/modernization for IRB review in an annual review assertion letter. The letter addresses system compliance with the BEA and the enterprise transition plan, and includes investment cost, schedule, and performance information.

At the corporate level, the IRBs annually review certified Tiers 1 through 3 investments in development/modernization. These reviews focus on program compliance with the BEA, program performance against cost and milestone baselines, and progress in meeting certification conditions. The IRBs can revoke an investment’s certification when the system has significantly failed to achieve performance commitments (i.e., capabilities and costs). When this occurs, the component must address the IRB’s concerns and resubmit the investment for certification. Figure 5 shows a simplified overview of the process flow of annual reviews.

DOD Has Established the Structures Needed to Effectively Manage Business System Investments, but Has Not Fully Defined Many of the Related Policies and Procedures

According to our ITIM framework, organizations should establish the management structures needed to manage their investments and build an investment foundation by having defined policies and procedures for selecting and controlling individual projects (Stage 2 capabilities), and organizations also should manage projects as a portfolio of investments according to defined policies and procedures, treating them as an integrated package of competing investment options and pursuing those that best meet the strategic goals, objectives, and mission of the agency (Stage 3 capabilities). These Stages 2 and 3 capabilities assist agencies in complying with the investment management provisions of the Clinger- Cohen Act.

The department has defined four of nine practices that call for project- level policies and procedures (see table 4) and one of the five practices that call for portfolio-level policies and procedures (see table 6). Specifically, it has established the management structures contained in our ITIM framework, but it has not fully defined many of the related policies and procedures.

With respect to project-level investment management practices, DOD officials stated that these are performed at the component level, and that departmental policies and procedures established for overseeing components’ execution of these practices are sufficient. With respect to portfolio-level practices, however, these officials stated that they intend to improve departmental policies and procedures for business system investments by, for example, establishing a single governance structure, but plans or time frames for doing so have not been established. According to our ITIM framework, adequately documenting both the policies and the associated procedures that govern how an organization manages its IT investment portfolio(s) is important because doing so provides the basis for having rigor, discipline, and repeatability in how investments are selected and controlled across the entire organization. Until DOD fully defines departmentwide policies and procedures for both individual projects and the portfolios of projects, it risks selecting and controlling these business system investments in an inconsistent, incomplete, and ad hoc manner, which in turn reduces the chances that these investments will meet mission needs in the most cost-effective manner.

DOD Has Begun to Build a Foundation for Project- Level Investment Management, but Key Policies and Procedures Are Not Fully Defined

At ITIM Stage 2, an organization has attained repeatable and successful IT project-level investment control and basic selection processes. Through these processes, the organization can identify project expectation gaps early and take the appropriate steps to address them. ITIM Stage 2 critical processes include (1) defining investment board operations, (2) identifying the business needs for each investment, (3) developing a basic process for selecting new proposals and reselecting ongoing investments, (4) developing project-level investment control processes, and (5) collecting information about existing investments to inform investment management decisions. Table 3 describes the purpose of each of these Stage 2 critical processes.

Within these five critical processes are nine key practices that call for policies and procedures associated with effective project-level management. DOD has fully defined the policies and procedures needed to ensure that four of these nine practices are performed in a consistent and repeatable manner. Specifically, DOD has established the management structures by instituting an enterprisewide investment board—the DBSMC—composed of senior executives, including the Deputy Secretary of Defense, with final approval authority over associated subsidiary investment boards. These lower-level investment boards include representatives from combatant commands, components, and the Joint Chiefs of Staff. In addition, DOD’s business transformation and IRB guidance define a process for ensuring that programs support the department’s ongoing and future business needs. DOD also has policies and procedures for submitting, updating, and maintaining investment information in DITPR and the IRB Portal. Furthermore, the department has assigned the component’s PCA the responsibility to ensure that specific investment information contained in the portfolio repository and the IRB Portal is accurate and complete.

However, the policies and procedures associated with the remaining five project-level management practices are missing critical elements needed to effectively carry out essential investment management activities. For example: Policies and procedures for instituting the investment board do not address how investments that are past the development/modernization stage (i.e., in operations and maintenance) are to be governed. Given that DOD invests billions of dollars annually in operating and maintaining business systems, this is significant. While DOD officials stated that component-level policies and procedures address systems outside of development/modernization, our ITIM framework emphasizes that the corporate investment boards should continue to review important information about an investment, such as cost and performance baselines, throughout the investment’s life cycle. In addition, the IRB Concept of Operations and other IRB documentation do not explicitly outline how the business investment management system is coordinated with JCIDS, PPBE, and DAS. Without clearly defined visibility into all investments with an understanding of decisions reached through other management systems, inconsistent decisions may result.

Procedures do not specify how the full range of cost, schedule, and benefit data is used by the IRBs in making selection (i.e., certification) decisions. According to BTA officials, each IRB decides how to ensure compliance and determines additional factors to consider when making certification decisions. However, DOD did not provide us with any supplemental policies or procedures for any of the four IRBs. Without documenting how IRBs consider factors such as cost, schedule, and benefits when making selection decisions, the department cannot ensure that the IRBs and the DBSMC consistently and objectively select proposals that best meet the department’s needs and priorities. Furthermore, while the procedures specify decision criteria that address statutory requirements for alignment to the BEA, the criteria allow programs to postpone demonstrating full compliance with several BEA artifacts until the final phases of the acquisition process. As a result, programs risk beginning production and deployment before ensuring that a business system is fully aligned to the BEA.

Policies and procedures do not specify how reselection decisions at the corporate level (i.e., annual review decisions) consider investments that are in operations and maintenance. Without an understanding of how the IRBs are to consider these investments when making reselection decisions, their ability to make informed and consistent reselection and termination decisions is limited.

Policies and procedures do not specify how funding decisions are integrated with the process of selecting an investment at the corporate level. Without considering component and corporate budget constraints and opportunities, the IRBs risk making investment decisions that do not effectively consider the relative merits of various projects and systems when funding limitations exist.

Policies and procedures do not exist that provide for sufficient oversight and visibility into component-level investment management activities, including component reviews of systems in operations and maintenance and Tier 4 investments. According to DOD officials, investment oversight is implemented through tiered accountability, which, among other things, allocates responsibility and accountability for business system investments with total costs of $1 million or less and those in operations and maintenance to the components. However, the department did not provide policies and procedures defining how the DBSMC and the IRBs ensure visibility into these component processes. This is particularly important because, according to DOD’s March 15, 2007, annual report to Congress, only 285 of approximately 3,100 total business systems have completed the IRB certification process and have been approved by the DBSMC. DOD officials also stated that the remaining business systems have not been through the certification process and have not been given a tier designation. Without policies and procedures defining how the DBSMC and the IRBs have visibility into and oversight of all business system investments, DOD risks components continuing to invest in systems that are duplicative, stovepiped, nonintegrated, and unnecessarily costly to manage, maintain, and operate.

Table 4 summarizes our findings relative to DOD’s execution of the nine practices that call for the policies and procedures needed to manage IT investments at the project level.

According to BTA officials, the IRB Concept of Operations and the Investment Certification and Annual Review Process User Guidance are not intended to describe the detailed approach that each IRB will use when making certification decisions, adding that the components are responsible for selection, annual review, budgeting, and acquisition. While the ITIM framework does allow for multiple entities to carry out investment selection, control, and evaluation, building a sound investment foundation requires that the enterprisewide investment review board has documented criteria and decision-making procedures, clear integration among investment decision-support systems, and policies to ensure board access to system information throughout the life cycle for all investments. Until DOD’s documented IT investment management policies and procedures include fully defined policies and procedures for Stage 2 activities, specify the linkages between the various related processes, and describe how investments are to be governed in the operations and maintenance phase, DOD risks that investment management activities will not be carried out consistently and in a disciplined manner. Moreover, DOD also risks selecting investments that will not cost-effectively meet its mission needs.

DOD Has Assigned Responsibility, but Has Not Defined the Policies and Procedures Associated with Effective Portfolio- Level Management

At Stage 3, an organization has defined critical processes for managing its investments as a portfolio or set of portfolios. Portfolio management is a conscious, continuous, and proactive approach to allocating limited resources among competing initiatives in light of the investments’ relative benefits. Taking an agencywide perspective enables an organization to consider its investments comprehensively, so that collectively the investments optimally address the organization’s missions, strategic goals, and objectives. Managing IT investments as portfolios also allows an organization to determine its priorities and make decisions about which projects to fund on the basis of analyses of the relative organizational value and risks of all projects, including projects that are proposed, under development, and in operation. Although investments may initially be organized into subordinate portfolios—on the basis of, for example, business lines or life-cycle stages—and managed by subordinate investment boards, they should ultimately be aggregated into enterprise- level portfolios.

According to ITIM, Stage 3 involves (1) defining the portfolio criteria; (2) creating the portfolio; (3) evaluating (i.e., overseeing) the portfolio; and (4) conducting postimplementation reviews. Table 5 summarizes the purpose of each of these activities.

DOD is executing one of the five practices within these four critical processes that call for policies and procedures associated with effective portfolio-level management. Specifically, DOD has issued departmentwide guidance that assigns responsibilities to the USD(AT&L) for managing and establishing business system investment portfolios, including leveraging or establishing a governance forum to oversee these business system investment portfolio activities.

However, DOD has not fully defined the policies and procedures needed to effectively execute the remaining four portfolio management practices relative to business system investments. Specifically, DOD does not have policies and procedures for defining the portfolio criteria or for creating and evaluating the portfolio. In addition, while DOD has policies and procedures for conducting postimplementation reviews as part of DAS, these reviews do not address systems at all tier levels. Furthermore, there are no procedures detailing how lessons learned from these reviews are used during investment review as the basis for management and process improvements.

Table 6 summarizes the rating for each critical process required to manage investment as a portfolio and summarizes the evidence that supports these ratings.

According to BTA officials, while portfolio management is primarily a component responsibility, they are working toward developing more effective departmentwide portfolio management processes, but plans or time frames for doing so have not been established. Without defining corporate policies and procedures for managing business system investment portfolios, DOD is at risk of not consistently selecting the mix of investments that best supports the departmentwide mission needs and ensuring that investment-related lessons learned are shared and applied departmentwide.

Conclusions

Given the importance of business systems modernization to DOD’s mission, performance, and outcomes, it is vital for the department to adopt and employ an effective institutional approach to managing business system investments. While the department has established aspects of such an approach and, thus, has a foundation on which to build, it is lacking other important elements, such as specific policies and procedures needed for project-level and portfolio-level investment management, including integration with DOD’s other key management systems and sufficient oversight and visibility into operations and maintenance investments and Tier 4 investments. This means that DOD lacks an institutional capability to ensure that it is investing in business systems that best support its strategic needs, and that ongoing projects meet cost, schedule, and performance expectations. Until DOD develops this capability, the department will be impaired in its ability to optimize business mission area performance and accountability.

Recommendations for Executive Action

To strengthen DOD’s business system investment management capability and address the weaknesses discussed in this report, we recommend that the Secretary of Defense direct the Deputy Secretary of Defense, as the chair of the DBSMC, to ensure that well-defined and disciplined business system investment management policies and procedures are developed and issued. At a minimum, this should include project-level management policies and procedures that address the following five areas: instituting the investment boards, including assigning the investment boards responsibility, authority, and accountability for programs throughout the investment life cycle and specifying how the business investment management system is coordinated with JCIDS, PPBE, and DAS; selecting new investments, including specifying how cost, schedule, and benefit data are to be used in making certification decisions; defining the criteria used to select investments as enterprisewide; and establishing consistent and effective guidance for BEA compliance; reselecting ongoing investments, including specifying how cost, schedule, and performance data are to be used in the annual review process and providing for the reselection of investments that are in operations and maintenance; integrating funding with the process of selecting an investment, including specifying how the DBSMC and the IRBs use funding information in carrying out decisions on system certification and approvals; and overseeing IT projects and systems, including providing sufficient oversight and visibility into component-level investment management activities.

These well-defined and disciplined business system investment management policies and procedures should also include portfolio-level management policies and procedures that address the following four areas: creating and modifying IT portfolio selection criteria for business system analyzing, selecting, and maintaining business system investment reviewing, evaluating, and improving the performance of its portfolio(s) by using project indicators, such as cost, schedule, and risk; and conducting postimplementation reviews for all investment tiers and directing the investment boards, which are accountable for corporate business system investments, to consider the information gathered and to develop lessons learned from these reviews.

Agency Comments and Our Evaluation

In written comments on a draft of this report, signed by the Deputy Under Secretary of Defense (Business Transformation) and reprinted in appendix II, the department stated that it agreed with the report’s overall conclusions, and it described efforts under way and planned that it said would address many of the gaps identified in the report. In this regard, the department partially concurred with five of the report’s recommendations, adding that our recommendations and feedback are helpful in guiding DOD’s business transformation and related improvement efforts. Nevertheless, the department disagreed with the remaining four recommendations on the grounds that their intent had already been met through DOD’s existing business system investment management structure and processes, or that they contradicted the tiered accountability concept embedded in this structure and processes. The department’s comments relative to each of our project-level and portfolio-level recommendations, along with our responses to its comments, are provided below.

With respect to our five project-level recommendations, the department stated that it partially agreed with two and disagreed with three.

DOD partially agreed with our recommendation to define and implement policies and procedures that assign the investment boards responsibility for programs throughout the investment life cycle and specify how the business investment management system is coordinated with JCIDS, PPBE, and DAS. In particular, it stated that under its tiered accountability approach to business systems investment management, the components are currently required to review all programs throughout their investment life cycles. We do not question this requirement, and we recognize it in our report. However, consistent with our ITIM framework, the corporate investment boards should continue to review investments that meet the defined threshold criteria throughout their life cycles (i.e., when they are in operations and maintenance). In contrast, DOD’s corporate boards focus only on those investments that are in the development/modernization stage. The department also stated that a linkage is currently depicted in existing guidance among its investment selection, acquisition, and funding processes. While we do not question that this guidance contains an illustration depicting such a link, neither this guidance nor supporting procedures define how this linkage is executed (e.g., how investment funding decisions are in fact integrated with investment selection decisions). DOD’s comments appear to acknowledge this point by stating that the department has begun to define and implement a Business Capability Lifecycle concept, which is intended to integrate the investment selection and acquisition management processes for Tier 1 and enterprise systems into a single oversight process that leverages the existing IRB and DBSMC oversight framework.

DOD partially agreed with our recommendation to define and implement policies and procedures that specify how cost, schedule, and benefit data are to be used in making certification and annual review decisions; define the criteria used to select investments as enterprisewide; and establish consistent and effective guidance for BEA compliance. In particular, the department agreed that additional criteria are required for selecting enterprisewide investments, noting that initial criteria have been defined and will be incorporated in the investment management process. However, the department did not agree that cost, schedule, and BEA compliance information are not sufficiently used for certification and annual review decisions, adding that such information is required in its current policies. We do not agree. Specifically, while we do not question whether investment data are provided to the DBSMC and the IRBs, the department’s policies and procedures do not include specific decision criteria that explain how these data are to be used to make consistent, repeatable selection and reselection decisions across all investments. In addition, while BEA compliance policies have been developed and are being used, the guidance is not fully defined. For example, the guidance allows programs to defer demonstrating full compliance with important BEA artifacts until the final phases of the acquisition process, at which time addressing instances of noncompliance would be more expensive and difficult. Furthermore, the compliance criteria are not consistently described in different guidance documentation. As a result, DOD risks beginning system production and deployment before ensuring that a system is sufficiently aligned to the BEA.

DOD did not agree with our recommendation to define and implement policies and procedures that provide for the reselection of investments that are in operations and maintenance. According to DOD, components are required by policy to annually review all business systems, including investments for which there is no planned development or modernization spending. We agree that the annual review process does require this. However, consistent with our ITIM framework, the corporate investment boards should continue to reselect investments that meet the defined threshold criteria throughout their life cycles (i.e., when they are in operations and maintenance). In contrast, DOD’s corporate boards focus only on reselecting those investments that are in the development/modernization stage.

DOD did not agree with our recommendation to define and implement policies and procedures that specify how the corporate boards use funding information in carrying out decisions on system certification and approvals. In this regard, it stated that such information is required in its current policies and considered during board deliberations. We do not agree. Our recommendation does not address whether existing policies or guidance provide for the collection of this information; our recommendation addresses the definition of policy, guidance, and supporting procedures that fall short of satisfying the best practices embodied in our ITIM framework. Specifically, while we do not question whether funding data are provided to investment decision-making bodies, the department’s policies and procedures do not include specific decision criteria that explain how these data are to be used to make consistent, repeatable selection and reselection decisions across all investments.

DOD did not agree with our recommendation to define and implement policies and procedures that provide for sufficient oversight and visibility into component-level investment management activities. In particular, it stated that this recommendation contradicts the department’s “tiered accountability” approach to investment management. We do not agree. Under the department’s current policies and guidance, most DOD investments are not subject to corporate visibility and oversight, either because they do not involve development/modernization (i.e., they are in operations and maintenance) or because they do not exceed a certain dollar threshold. Our framework recognizes that effective implementation of a tiered accountability concept should include appropriate corporate visibility into and oversight of investments, either through review and approval of those investments that meet certain criteria or through awareness of a subordinate board’s investment management activities. Moreover, this visibility and oversight should extend to the entire portfolio of investments, including those that are in operations and maintenance. To ensure that this occurs, applicable policies and procedures need to explicitly cover all such investments and need to define how this is to be accomplished.

With respect to our four portfolio-level recommendations, the department stated that it partially agreed with three and disagreed with one.

DOD partially agreed with our recommendation to define and implement policies and procedures for creating and modifying portfolio selection criteria for business system investments. In particular, it stated that while components are responsible for developing and managing their own portfolio management processes, upcoming initiatives, such as the Business Capability Lifecycle concept, will lead to revisions in the department’s investment review policies and procedures, such as including portfolio selection criteria for enterprise systems that span components. However, while these are important steps, the concept, as defined by the department, does not apply to the thousands of investments that are not enterprisewide.

DOD partially agreed with our recommendation to define and implement policies and procedures that address analyzing, selecting, and maintaining business system investment portfolios. In particular, it stated that the implementation of the Business Capability Lifecyle concept will provide the corporate boards with improved visibility into all investments in a given portfolio and a broader set of criteria for analyzing, selecting, and maintaining business system investment portfolios.

DOD partially agreed with our recommendation to define and implement policies and procedures that address reviewing, evaluating, and improving the performance of its portfolio(s) by using cost, schedule, and risk indicators. In particular, it stated that while such indicators are part of the investment certification and review processes, efforts are now under way to better understand the nature and impact of program risks through application of an Enterprise Risk Assessment Methodology. While we recognize the role and value of such tools in understanding and addressing program risks, this tool is program-specific and not portfolio-focused.

DOD did not agree with our recommendation to define and implement policies and procedures that address conducting postimplementation reviews and having the corporate investment boards consider the review results and develop lessons learned from them. In particular, it stated that this process should not be managed by the Deputy Secretary of Defense, and also stated that our recommendation is redundant with postimplementation reviews currently required under OMB Circular A- 130. We do not agree with DOD’s statements. Our recommendation does not call for the Deputy Secretary to manage the postimplementation review process. Rather, it provides for developing policies and procedures for performing postimplementation reviews for all tiers of business systems and having the DBSMC and IRBs, which are the corporate investment boards, consider the information gathered from these reviews and develop lessons learned.

We are sending copies of this report to interested congressional committees; the Director, Office of Management and Budget; the Secretary of Defense; the Deputy Secretary of Defense; the Under Secretary of Defense for Acquisition, Technology, and Logistics; the Under Secretary of Defense (Comptroller); the Assistant Secretary of Defense (Networks and Information Integration)/Chief Information Officer; the Under Secretary of Defense (Personnel and Readiness); and the Director, Defense Finance and Accounting Service. Copies of this report will be made available to other interested parties upon request. This report will also be available at no charge on our Web site at http://www.gao.gov.

If you or your staffs have any questions on matters discussed in this report, please contact me at (202) 512-3439 or hiter@gao.gov. Contact points for our Offices of Congressional Relations and Public Affairs may be found on the last page of this report. GAO staff who made major contributions to this report are listed in appendix III.

Appendix I: Objective, Scope, and Methodology

Our objective was to determine whether the Department of Defense’s (DOD) corporate investment management approach comports with relevant federal guidance. Our analysis was based on the best practices contained in GAO’s Information Technology Investment Management (ITIM) framework, and the framework’s associated evaluation methodology, and focused on DOD’s establishment of departmental-level policies and procedures for business system investments needed to assist organizations in complying with the investment management provisions of the Clinger-Cohen Act of 1996 (Stages 2 and 3). It did not include case studies to verify the implementation of established policies and procedures.

To address our objective, we asked DOD to complete a self-assessment of its corporate investment management process and provide the supporting documentation. We then reviewed the results of the department’s self- assessment of Stages 2 and 3 organizational commitment practices— meaning those practices related to structures, policies, and procedures— and compared them against our ITIM framework. We also validated and updated the results of the self-assessment through document reviews and interviews with officials, such as the Director of Investment Management and the Defense Business Systems Acquisition Executive. In doing so, we reviewed written policies, procedures, and guidance and other documentation providing evidence of executed practices, including the Defense Acquisition System guidance, the Investment Review Board (IRB) Concept of Operations and Guidance, the Business Enterprise Architecture Compliance Guidance, IRB charters and meeting minutes, and the Business Transformation Guidance.

We compared the evidence collected from our document reviews and interviews with the key practices in ITIM. We rated the key practices as “executed” on the basis of whether the agency demonstrated (by providing evidence of performance) that it had met all of the criteria of the key practice. A key practice was rated as “not executed” when we found insufficient evidence of all elements of a practice being fully performed or when we determined that there were significant weaknesses in DOD’s execution of the key practice. In addition, we provided DOD with the opportunity to produce evidence for the key practices rated as “not executed.”

We conducted our work at DOD headquarters offices in Arlington, Virginia, from August 2006 through April 2007 in accordance with generally accepted government auditing standards.

Appendix II: Comments from the Department of Defense

Appendix III: GAO Contact and Staff Acknowledgments

GAO Contact

Staff Acknowledgments

In addition to the contact person named above, key contributors to this report were Neil Doherty, Nalani Fraser, Nancy Glover, Michael Holland, Neelaxi Lakhmani (Assistant Director), Jacqueline Mai, Sabine Paul, Niti Tandon, and Jennifer Stavros-Turner.