DOD is one of the largest and most complex organizations in the world. Overhauling its business operations will take many years to accomplish and represents a huge and possibly unprecedented management challenge. Execution of DOD’s 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 operation. To support DOD’s operations, the department performs an assortment of interrelated and interdependent business functions—using thousands of business systems—related to major business areas such as weapon systems management, supply chain management, procurement, health care management, and financial management. The ability of these systems to operate as intended affects the lives of our warfighters both on and off the battlefield. To address long-standing management problems, we began our high-risk series in 1990 to identify and help resolve serious weaknesses in areas that involve substantial resources and provide critical services to the public. Historically, high-risk areas have been designated because of traditional vulnerabilities related to their greater susceptibility to fraud, waste, abuse, and mismanagement. As our high-risk program has evolved, we have increasingly used the high-risk designation to draw attention to areas associated with broad-based transformation needed to achieve greater economy, efficiency, effectiveness, accountability, and sustainability of selected key government programs and operations. DOD has continued to dominate the high-risk list, bearing responsibility, in whole or in part, for 15 of our 27 high-risk areas. Of the 15 high-risk areas, the 8 DOD-specific high-risk areas cut across all of DOD’s major business areas. Table 1 lists the 8 DOD-specific high-risk areas and the year in which each area was designated as high risk. In addition, DOD shares responsibility for 7 governmentwide high-risk areas. GAO designated DOD’s approach to business transformation as high risk in 2005 because (1) DOD’s improvement efforts were fragmented, (2) DOD lacked an enterprisewide and integrated business transformation plan, and (3) DOD had not appointed a senior official at the right level with an adequate amount of time and appropriate authority to be responsible for overall business transformation efforts. Collectively, these high-risk areas relate to DOD’s major business operations, which directly support the warfighter, including how servicemembers get paid, the benefits provided to their families, and the availability of and condition of the equipment they use both on and off the battlefield. The persistence and magnitude of DOD’s business transformation challenges underscore the fact that the status quo is unacceptable, and without focused and sustained leadership to guide business transformation, the department will continue to waste billions of dollars every year. Within DOD, business transformation is broad, encompassing people, planning, processes, organizational structures, and technology in all of DOD’s major business areas. DOD spends billions of dollars to sustain key business operations intended to support the warfighter. DOD’s pervasive and long-standing weaknesses in its financial management and business operations adversely affect the economy, efficiency, and effectiveness of DOD’s operations, and have resulted in a lack of adequate accountability across all the department’s major business areas. Every dollar that DOD could save through improved economy and efficiency of its operations is important to the fiscal well-being of our nation, and ultimately can be used to support the needs of the warfighter. DOD’s high- risk areas have real world implications for our men and women in uniform, including how the future needs of ongoing operations are estimated, the availability and condition of the equipment they use both on and off the battlefield, and the performance of contractors paid to provide logistical support to servicemembers in theater, as the following examples illustrate: Financial management. Continuing material weaknesses in DOD’s business processes, systems, and controls have adversely affected the reliability of the department’s reported financial information and the department’s ability to manage its operations. To its credit, the department initiated the “Check It” Campaign in July 2006 to raise awareness throughout the department on the importance of effective internal management controls. However, until the impact of this campaign and other efforts, including its financial improvement and audit readiness (FIAR) effort, begin to significantly transform and improve DOD’s business operations, the department will continue to suffer weaknesses in the reliability and usefulness of its management information as illustrated by the examples below. The lack of reliable asset information, including cost, location, and condition, necessary to effectively (1) safeguard assets from physical deterioration, theft, or loss; (2) account for the acquisition and disposal of these assets; (3) ensure that the assets are available for use when needed; (4) prevent unnecessary storage and maintenance costs, or purchase of assets already on hand; and (5) determine the full costs of programs that use these assets. DOD’s inability to estimate with assurance key components of its environmental and disposal liabilities and support a significant amount of its estimated military postretirement health benefits liabilities included in federal employee and veteran benefits payable. Problems in accounting for liabilities affect the determination of the full cost of DOD’s current operations and the extent of its liabilities. Also, improperly stated environmental and disposal liabilities and weak internal control supporting the process for their estimation affect the department’s ability to determine priorities for cleanup and disposal activities and to appropriately consider future budgetary resources needed to carry out these activities. Continuing weaknesses in DOD’s ability to properly record transactions and reconcile its disbursement activities have adversely impacted the reliability of DOD’s reported cost data. Unreliable cost information affects DOD’s ability to control and reduce costs, assess performance, evaluate programs, and set appropriate fees to recover costs where required. Improperly recorded disbursements could result in misstatements in the financial statements and in certain data provided by DOD for inclusion in The Budget of the United States Government concerning obligations and outlays. Further, inadequacies in DOD’s systems and processes for recording and reporting obligation data related to ongoing operations in support of the global war on terrorism have contributed to uncertainty regarding the reliability of reported costs. Our reviews found a number of problems, including long-standing deficiencies in DOD’s financial management and business systems, incorrectly categorized or omitted obligations, and the reporting of large amounts of obligations in miscellaneous “other” categories. Without transparent and accurate cost reporting, neither DOD nor Congress can reliably know how much the war is costing, examine details on how funds are spent, or have historical data useful in considering future needs. DOD has taken positive steps in response to our recommendations intended to improve the reliability and accuracy of its cost reports, and therefore cost reporting continues to evolve. These financial management problems continue to be exacerbated by the department’s inability to implement business systems with the desired capability. For example, the Army’s Logistics Modernization Program has been beset with problems virtually since its initial implementation in July 2003. For instance, as we reported in July 2007, the program cannot accurately recognize revenue and bill customers, and its inability to implement effective business processes has adversely affected the reliability of its financial reports. Weapon systems acquisition. DOD weapon system programs typically take longer to field and cost more to buy than planned, placing additional demands on available funding. For example, we reviewed 27 weapon programs that were in the research, development, test and evaluation phase and noted that since development began the costs had increased by almost $35 billion, or 33.5 percent, over the first full estimate. The same programs have also experienced an increase in the time needed to develop capabilities. The consequence of cost and acquisition cycle time growth is often manifested in a reduction of the buying power of the defense dollar. As costs rise and key schedule milestones are delayed, programs are sometimes forced to reduce quantities, resulting in a reduction in buying power and a reduction in capability delivered to the warfighter. It is a predictable and recurring phenomenon that can be remedied with more attention to separating wants from needs and better knowledge at key decision points. With a weapon investment portfolio of $1.5 trillion, DOD cannot settle for the same kind of outcomes it has gotten in the past. Supply chain management. Systemic deficiencies in DOD’s supply support for U.S. ground forces have led to critical supply shortages during war operations. At the outset of Operation Iraqi Freedom and periodically throughout the campaign, DOD has experienced difficulties in providing U.S. ground forces with critical items such as tires, body armor, and Meals- Ready-to-Eat. In addition, our review of the Air Force’s inventory management practices found problems that hindered its ability to efficiently and effectively maintain its spare parts inventory for military equipment. For example, we found that from fiscal years 2002 through 2005, an average of 52 percent ($1.3 billion) of the Air Force’s secondary on-order inventory was not needed to support on-order requirements. Furthermore, we also reported that the Army plans to invest about $5 billion over the next several years to develop and implement business systems to better track inventory items without a clear, integrated strategy, Armywide enterprise architecture, or concept of operations to guide this investment. Challenges remain in coordinating and consolidating distribution and supply support in theater, which could lead to similar types of supply problems experienced in Operation Iraqi Freedom in future military operations. Contract management. DOD has relied extensively on contractors to undertake major reconstruction and logistical support to its troops in Iraq. Service contracts have grown by nearly 80 percent in a decade, both at home and abroad. In some cases, contractors have begun work without the key terms and conditions of contracts, including projected costs, being defined within required time frames.