Our model of strategic human capital management is designed to help agency leaders effectively lead and manage their people and integrate human capital considerations into daily decision-making and the program results they seek to achieve. In so doing, the model highlights the importance of a sustained commitment by agency leaders to maximize the value of their agencies' human capital and to manage related risks. Accordingly, it raises the bar for all of us--those in positions of leadership, federal managers, employees, unions, and human capital executives and their teams. In publishing this model, we are aware that GAO is not the only agency releasing tools for strategic human capital management. As I noted before, OPM and OMB have developed tools that are being used to assess human capital management efforts. While GAO's human capital model was developed independently of OPM and OMB, we provided drafts of the model for their review prior to publication to help ensure that the three efforts are conceptually consistent. We hope that the perspective and information provided in our model will help inform agencies' efforts to respond to the administration's management initiatives, such as getting to "green" on OMB's management scorecard, and using the tools developed by OPM. Over the coming months, we will work with OPM, OMB, Congress, and others to explore opportunities to develop a more fully integrated set of guidance and tools for agencies for addressing their human capital challenges. Consistent with OPM's and OMB's views, our model of strategic human capital management embodies an approach that is fact-based, focused on strategic results, and incorporates merit principles and other national goals. As such, the model reflects two principles central to the human capital idea: People are assets whose value can be enhanced through investment. As with any investment, the goal is to maximize value while managing risk. An organization's human capital approaches should be designed, implemented, and assessed by the standard of how well they help the organization pursue its mission and achieve desired results or outcomes. The model highlights the kinds of thinking that agencies should apply, as well as some of the steps they can take, to make progress in managing human capital strategically. The heart of the model consists of eight critical success factors, which are organized in pairs to correspond with four cornerstones of effective strategic human capital management. A critical element of any successful organizational cultural transformation is the demonstrated commitment of top leaders to change. Specifically, agency leaders, political and career alike, must embrace strategic human capital management and related change management approaches. Agency leaders need to see people as vital assets to organizational success and must invest in this valuable asset. Agencies can foster this thinking and commitment in their future leaders through efforts such as succession planning and executive development. In addition, agencies need to hold managers accountable for effectively managing people and actively supporting these concepts. Commissioner Rossotti's efforts at the Internal Revenue Service (IRS) provide one clear example of leadership's commitment to change. The Commissioner has articulated a new mission for the agency, together with a set of strategic goals that balance customer service and compliance with tax laws. The Commissioner is personally leading the effort to realign organizational units, programs, and resources to achieve the new mission and goals. The Commissioner's recent announcement that he plans to leave IRS in November underscores the importance of political and career leadership working together to develop, implement, and sustain transformational change initiatives. These changes are critical but often take years and span periods far beyond the tenure of a single political appointee. Federal leaders must also integrate the human capital function into agencies' core planning and business activities. Human capital professionals must partner with agency leaders, line managers, and unions in developing strategic and program plans. In short, top human capital professionals in agencies across the government must move from the "back room to the boardroom." Leaders must devote the resources necessary to retool employees in human capital offices so that they are prepared and empowered to provide a range of technical and consultative services. As part of this transition, continuing efforts are needed to streamline and automate personnel transactions to free up resources so that the human capital office can devote more time to providing consultative services to line managers as they seek to integrate human capital into their management activities. Agencies must establish a clear set of organizational intents, including a clearly defined mission, core values, goals and objectives, and strategies, and then integrate their human capital approaches to support their strategic and programmatic goals. Agencies need to constantly reevaluate their human capital approaches as program priorities and strategies change. Agency strategic human capital planning must be results-oriented and data-driven, including, for example, information on the appropriate number and location of employees and their key competencies and skills. Strategic workforce planning documents should include data on the agency's workforce profile, performance goals and measures for human capital approaches, and areas requiring agency attention. The Air Force Materiel Command, for example, has collected important human capital data and used it to develop human capital strategies to ensure the organization has the appropriate mix of civilian, military, and contract employees to meet future business needs. Agencies must identify their current and future human capital needs and then create strategies for filling the gaps. An important part of these strategies is targeted investments to provide resources for the planning, implementation, and evaluation of human capital initiatives. Agencies that focus on strategic human capital management realize that as the value of their people increases so does the performance capacity of the organization. This investment is valuable for both employers and employees alike. Our ongoing work at the State Department provides an example of how targeted human capital investments can pay off for an agency. To enhance its information technology (IT) workforce, State provides incentives and retention allowances to IT personnel who obtain job-related degrees and certifications. This program has helped State increase its information technology skills base and aided in the recruitment and retention of IT professionals. Agencies focusing on strategic human capital management develop a tailored approach to use the personnel authorities that are appropriate for their particular organization and its needs. Under current laws, rules, and regulations, agencies have the flexibility to offer competitive incentives to attract employees with critical skills; to create the kinds of performance incentives and training programs that motivate and empower employees; and to build constructive labor-management relationships that are based on common interests and are in the public interest. Agencies should develop a sound business case for using these flexibilities by focusing on how a given flexibility will address human capital challenges and ultimately improve agency results. Effective human capital strategies require a collaborative environment where a diverse set of managers, teams, and employees are empowered to accomplish programmatic goals. A key ingredient to developing a results- oriented culture is for agencies to involve employees in decision-making either directly or through employee unions and organizations, as appropriate. Involving employees in the planning process helps to develop agency goals and objectives that incorporate insights about operations from a front-line perspective. Involving employees can also serve to increase employees' understanding and acceptance of organizational goals and objectives and improve motivation, morale, and retention. Agencies also must promote and achieve a diverse workplace that meets the needs of workers of all backgrounds. Not only do effective agencies maintain a "zero tolerance" for discrimination; they also realize that an inclusive workforce is a competitive advantage. Another success factor of a results-oriented culture is a performance management system that creates a "line of sight" showing how individual employees can contribute to overall organizational goals. Agencies who effectively implement such a system must first align agency leaders' performance expectations with organizational goals and then cascade performance expectations to other organizational levels. These employees are then held accountable for their contributions to desired results. The performance management systems of leading organizations typically seek to achieve three key objectives. First, they strive to provide candid and constructive information to individual employees to enable those employees to maximize their contributions to the organization's goals and achieve their personal potential. Second, they seek to provide management with the objective and fact-based information it needs to reward top performers. Third, the performance management systems provide the necessary information and documentation to deal with poor performers. Leading organizations also use their performance management systems as a key tool for managing the organization on a day-to-day basis, facilitating communication throughout the year so that discussions about individual and organizational performance are ongoing. For example, the Veterans Health Administration holds key leaders accountable for results by establishing performance agreements that consist of "core competencies," agencywide goals, and specific performance goals that gauge the organization's progress toward meeting the agency mission. These performance agreements are used continuously throughout the year as a basis for monitoring organizational progress, identifying performance gaps, and making needed program adjustments. Finally, agencies should also balance their pay and incentive programs to encourage both individual and team contributions to achieving results. Congress and the Administration have repeatedly expressed a commitment to more fully link resources to results. The American people expect and deserve this linkage as well. However, we will never achieve this linkage without modern and effective performance management strategies. In my view, much greater emphasis needs to be placed on performance management and its linkage to compensation. I would now like to turn to a more detailed discussion regarding the third cornerstone of our model--the tailored use of human capital flexibilities for acquiring, developing, and retaining talent. For years, the civil service system as a whole has been viewed by many as burdensome to managers, unappealing to ambitious recruits, hidebound and outdated, overregulated, and inflexible. While comprehensive civil service reform may likely be necessary in the coming years, agencies do not have to wait for legislative reform to occur to make needed improvements in human capital management. As I have testified previously, agencies need to make concerted efforts in identifying and maximizing the flexibilities already available under existing personnel laws, rules, and regulations. The Federal Human Capital Act that we are discussing today would expand the authorities available to agencies to strategically manage their workforces. A study that we are conducting for this subcommittee and others is looking at agencies' use of the flexibilities currently available and therefore is informative to the current discussion. As part of this study, we interviewed major department and agency human resource directors and on the basis of those discussions and our related work, we identified a preliminary list of key practices agencies need to undertake in order to make effective use of personnel authorities: Plan strategically and make targeted investments. Agencies need to ensure that the use of flexibilities is part of an overall human capital strategy clearly linked to the program goals of the organization. Agencies also need a sound business case for how they will use and fund the authorities. Ensure stakeholder input in developing policies and procedures. Agency leaders, managers, employees, and employee unions must work together to effectively implement any flexibility or new personnel authority in order to reach agreement on the need for change, the direction and scope that change will take, and how progress will be assessed. Educate managers and employees on the availability and use of authorities. Human capital offices need to ensure that they have an effective campaign not only to inform managers of their personnel authorities, but also to explain the situations where the use of those authorities is appropriate. Agencies also need to inform employees about relevant policies and procedures and about the employees' rights related to the use of these authorities. Streamline the administrative processes. Agencies should streamline administrative processes for using flexibilities and review self-imposed constraints that may be excessively process-oriented. Human resource directors said that managers often complain that complicated forms and multiple approval levels hamper the use of flexibilities. In the absence of a simple process, busy supervisors and managers may not make the effort to seek the approval to use a flexibility. Reengineering self-imposed processes could yield substantial opportunities for the additional use of flexibilities. To the extent that agencies identify regulatory or statutory barriers to flexible human capital approaches, they should work with OPM and OMB to seek the necessary regulatory or statutory changes. Build accountability into the system. To ensure accountability, agencies should delegate authority to use flexibilities to appropriate levels within the agency. Agencies must develop clear and transparent guidelines for using flexibilities. Agencies must then hold managers and supervisors accountable for their fair and effective use. Change the organizational culture. While accountability is essential, agencies need to address managers' and supervisors' concerns that employees will view the use of some flexibilities, such as recruiting incentives or rewarding high performers, as unfair, and the belief that all employees must be treated essentially the same regardless of performance and agency needs. Managers should be encouraged to selectively use flexibilities based on clearly defined, well documented, and transparent guidelines. While we will continue our work in this area, our preliminary view is that agencies need to employ these practices to effectively take advantage of the new authorities that are proposed in the legislation under consideration today. Working with the subcommittee and agencies, we are doing additional work to validate the list of practices and to identify specific examples of where an agency has successfully developed and employed each listed practice. Our hope is that this work will be helpful to agencies as they seek to maximize the use of personnel authorities--both those available under current law and regulation, and those additional authorities that may be granted in the future. Key provisions of the Federal Human Capital Act represent an important next step to helping agencies address their human capital management challenges. I appreciate the opportunity that the subcommittee provided to my staff and me to offer input as the legislation was being initially crafted. Many of the provisions contained in the bill are consistent with authorities GAO already has or has been urging for other federal agencies. Key provisions would make a positive contribution to each of the human capital management cornerstones I discussed earlier: leadership; strategic human capital planning; acquiring, developing, and retaining talent; and results-oriented organizational cultures. Since we provided detailed comments in earlier discussions with the subcommittee on the proposed bill as it was being crafted, this morning I will just comment on those provisions that I believe are particularly valuable in fostering the needed cultural transformation within agencies. Leadership - The Federal Human Capital Act contains several provisions to strengthen leadership over human capital. We believe that federal agencies need to have a senior official responsible for the organization's strategic human capital management. The broad range of responsibilities for the chief human capital officer listed in the legislation are generally consistent with those that I have placed with GAO's chief human capital officer. GAO's chief human capital officer, as a key member of our executive team, provides human capital services to all headquarters and field staff in support of GAO's strategic direction and key efforts. While designating a chief human capital officer is a very positive step, it should not in any way be seen as reducing the responsibilities that the agency's highest leadership has for human capital issues. In knowledge-based organizations, including most federal agencies, where people are the organization's most important asset, attention to the organization's human capital is one of the primary responsibilities of the head of that organization. Creating a chief human capital officer council, modeled on the chief financial officer and the chief information officer councils, also is a very good idea in my view. We have reported in the past that the use of councils to develop and implement initiatives to address federal management issues and to serve as "communities of interest" to, among other things, share best practices, was one of the major positive public management developments over the past decade. As a next step, the subcommittee may wish to consider creating statutory chief operating officers (COO) within major executive branch agencies. While various models for structuring such a position could be used, the basic idea is to create a position that would be responsible for major, long- term management, cultural transformation, and stewardship responsibilities within the agency. These long-term responsibilities are professional and nonpartisan in nature. They cover a range of "good government" responsibilities that are fundamental to effectively executing any administration's program agenda. The nature and scope of the cultural transformation that needs to take place in many agencies across the federal government will take years to accomplish--easily outrunning the tenures of most political appointees. For example, the business transformation efforts that are underway at the Department of Defense may take a decade or more to be fully and effectively implemented. Secretary Rumsfeld and his leadership team are clearly committed to making the necessary changes. A COO at Defense and elsewhere, subject to a clearly-defined, results-oriented performance contract, could provide the continuity that spans the tenure of the political leadership and help ensure that long-term stewardship issues are addressed and change management initiatives are successfully completed. In this sense, these statutory COOs would differ from--but hopefully complement--the role often assumed by the deputy secretaries in the agencies. We would be pleased to work with the subcommittee should you wish to explore this idea. Human Capital Planning - The legislation also addresses key strategic human capital planning issues. It underscores the need for agencies to clearly and directly link their human capital planning efforts with their strategic and program plans developed under the Government Performance and Results Act. Moreover, I believe that the early retirement and buy-out authorities are important provisions. The changes make appropriate recognition of the need to consider employee skills and abilities--in addition to longevity--when making such decisions as a part of overall workforce planning. As our own experience in GAO has shown, such authorities can and should be used to help "get agencies in shape" to respond to current and emerging needs rather than as a blunt instrument for downsizing. Over time, Congress may wish to consider adding employee performance as a factor that can be considered in making rightsizing decisions, consistent with the authorities that were provided to GAO. However, before performance could be included as a factor, agencies would need to ensure that they have modern effective and validated performance management systems in place that are able to support such decisions. Attracting, Developing, and Retaining Talent -- Several provisions strengthen agencies' abilities to attract, develop, and retain talent. The increased flexibility in the amount and timing of the payments for recruiting, relocation, and retention bonuses is particularly noteworthy. Agency human resource directors told us that these flexibilities were among the most effective. The provisions that authorize agencies to pay for academic training for employees should have a positive influence in addressing recruitment and retention challenges as well as helping to build the knowledge and skills of the organizations' people. I have often noted that much of what needs to be done in regard to federal human capital management can be done now under agencies' existing authorities. Thus, while we should continue to seek appropriate regulatory and statutory changes that would help streamline the federal hiring process, the agencies need not and should not wait. For example, they need to make sure that they have the recruitment programs in place to compete effectively for needed talent. This includes having well defined and creative recruiting strategies and appropriate processes in place to communicate with applicants and prospective employees in a timely manner. I agree with the legislation's efforts to instill a more strategic approach to federal employee training efforts. Agencies' training and development programs should be based on the skills and competencies agencies need and be directly linked to program goals and desired results. Agreeing on expected results and associated performance measures at the outset for training and development efforts can also help ensure that credible evaluation results will be available to provide feedback on performance. A systematic evaluation of training and development efforts can help show how such efforts contribute to individual and organizational performance and suggest opportunities for further improvement. Results-Oriented Culture - As you know, I believe that a much greater emphasis should be placed on skills, knowledge, and performance in connection with federal employment and compensation decisions at all levels, rather than the passage of time and rate of inflation, as so often is the case today. In fact, over 80 percent of the cost associated with the annual increases in federal salaries is due to longevity and the annual pay adjustment. In recent years, widespread concern has been expressed about the methodology and results of the procedures to determine the federal pay gap. These concerns are among the reasons that the pay gap has never been fully addressed. I believe that careful study is needed to develop more realistic and workable methodologies and solutions to federal pay issues. Part of that assessment should focus on options for moving away from a compensation system that contains governmentwide pay increases with locality adjustments, and toward a system that is based to a greater degree on knowledge, skills, abilities, and performance of the individuals involved. Additional information on the performance management programs in use in various departments and agencies and the relative strengths and weaknesses of those programs, along with best practice information, would also prove very helpful as agencies seek to link pay to individual knowledge, skills, abilities, and performance. Congress may wish to consider amending the legislation to require that these studies be undertaken; specifically, (1) a professional, objective, and independent assessment of the pay gap and (2) a survey and assessment of performance management systems and programs across the government with a view toward identifying lessons learned and best practices in linking pay to employees' knowledge, skills, abilities, and performance.

Summary:
This testimony discusses the federal government's human capital challenges. The basic problem has been a longstanding lack of a consistent strategic approach to marshalling, managing, and maintaining the government's human capital needs. To overcome this problem, GAO has developed a model of strategic human capital management that highlights the importance of a sustained commitment by agency leaders to maximize the value of their workforce. The Office of Personnel Management and the Office of Management and Budget have developed tools to assess human capital management efforts that are conceptually consistent with GAO's model. GAO's model emphasizes two central principles. First, people are assets whose value can be enhanced through investment. As with any investment, the goal is to maximize value while managing risk. Second, an organization's human capital approaches should be designed, implemented, and assessed by how well they help pursue its mission and achieve desired results. GAO has also identified a preliminary list of key practices that will enable agencies to acquire, develop, and retain talent. Successful organizational change depends on a willingness by agency leaders to embrace strategic human capital management and related change management approaches.