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Testimony:

Before the Subcommittee on Oversight of Government Management, the 
Federal Workforce, and the District of Columbia, Committee on Homeland 
Security and Governmental Affairs, U.S. Senate:

For Release on Delivery Expected at 2:00 p.m. EDT Thursday, April 28, 
2005:

Defense Management:

Key Elements Needed to Successfully Transform DOD Business Operations:

Statement of David M. Walker: Comptroller General of the United States:

GAO-05-629T:

GAO Highlights:

Highlights of GAO-05-629T, a testimony before the Subcommittee on 
Oversight of Government Management, the Federal Workforce, and the 
District of Columbia, Committee on Homeland Security and Governmental 
Affairs, U.S. Senate.

Why GAO Did This Study:

In addition to external security threats, our nation is threatened from 
within by growing fiscal imbalances. The combination of additional 
demands for national and homeland security resources, the long-term 
rate of growth of entitlement programs, and rising health care costs 
create the need to make difficult choices about the affordability and 
sustainability of the recent growth in defense spending. At a time when 
the Department of Defense (DOD) is challenged to maintain a high level 
of military operations while competing for resources in an increasingly 
fiscally constrained environment, DOD’s business management weaknesses 
continue to result in billions in annual waste, as well as reduced 
efficiencies and effectiveness. 

The Subcommittee asked GAO to provide its views on (1) the fiscal 
trends that prompt real questions about the affordability and 
sustainability of the rate of growth in defense spending, (2) business 
management challenges that DOD needs to address to successfully 
transform its business operations, and (3) key elements for achievement 
of reforms. One key element would be to establish a full-time chief 
management official (CMO) to take the lead in DOD for the overall 
business transformation effort. In this regard, we support the need for 
legislation to create a CMO in DOD with “good government” 
responsibilities that are professional and nonpartisan in nature, 
coupled with an adequate term in office. 

What GAO Found:

Our nation’s current fiscal policy is on an imprudent and unsustainable 
course and the projected fiscal gap is too great to be solved by 
economic growth alone or by making modest changes to existing spending 
and tax policies. In fiscal year 2004, DOD’s spending represented about 
51 percent of discretionary spending, raising concerns about the 
affordability and sustainability of the current growth in defense 
spending and requiring tough choices about how to balance defense and 
domestic needs against available resources and reasonable tax burdens. 

GAO has reported that DOD continues to confront pervasive, decades-old 
management problems related to business operations that waste billions 
of dollars annually. As shown below, these management weaknesses cut 
across all of DOD’s major business areas. These areas, along with six 
government-wide areas that also apply to the department, mean that DOD 
is responsible for 14 of 25 high-risk areas. 

To move forward, in our view, there are three key elements that DOD 
must incorporate into its business transformation efforts to 
successfully address its systemic business management challenges. 
First, these efforts must include an integrated strategic plan, coupled 
with a well-defined blueprint—referred to as a business enterprise 
architecture—to guide and constrain implementation of such a plan. 
Second, central control of system investments is crucial for successful 
business transformation. Finally, a CMO is essential for providing the 
sustained leadership needed to achieve lasting transformation. The CMO 
would not assume the day-to-day management responsibilities of other 
DOD officials nor represent an additional hierarchical layer of 
management, but rather would serve as a strategic integrator who would 
lead DOD’s overall business transformation efforts. Additionally, a 7- 
year term would also enable the CMO to work with DOD leadership across 
administrations to sustain the overall business transformation effort.

[Hyperlink, http://www.gao.gov/cgi-bin/getrpt?GAO-05-629T].

To view the full product, click on the link above. For more 
information, contact Sharon Pickup at (202) 512-9619 or [Hyperlink, 
pickups@gao.gov] or Gregory Kutz at (202) 512-9505 or [Hyperlink, 
kutzg@gao.gov].

[End of Section]

Mr. Chairman and Members of the Subcommittee:

I appreciate the opportunity to be here today to discuss business 
transformation at the Department of Defense (DOD). At the onset, I 
would like to thank the Subcommittee for its continued oversight of key 
government operations and management issues, including DOD's related 
activities. The active involvement of this Subcommittee is essential to 
ultimately assuring DOD's continued progress in business 
transformation, including human capital reform, while enhancing public 
confidence in DOD's stewardship of the hundreds of billions of taxpayer 
funds it receives each year. Senator Voinovich and Senator Akaka, along 
with Senator Ensign, I would also like to commend your leadership in 
sponsoring proposed legislation to establish a position at the highest 
levels of DOD that would be accountable and responsible for overall 
business transformation efforts--a position that we believe is critical 
to successfully transforming DOD's business operations.

In addition to external security threats, our nation is threatened from 
within by growing fiscal imbalances. Over the long term, the nation's 
growing fiscal imbalance stems primarily from the aging of the 
population and rising health care costs. These trends are compounded by 
the presence of near-term deficits arising from new discretionary and 
mandatory spending as well as lower revenues as a share of the 
economy.[Footnote 1] If left unchecked, these fiscal imbalances will 
ultimately impede economic growth, have an adverse effect on our future 
standard of living, and in due course impact our ability to address key 
national and homeland security needs. These factors create the need to 
make choices that will only become more difficult the longer they are 
postponed. Among these difficult choices will be decisions about the 
affordability and sustainability of the recent growth in defense 
spending. In fiscal year 2004, DOD spending represented 20 percent of 
federal spending and 51 percent of discretionary spending. Therefore, 
it is increasingly important that DOD gets the most from every defense 
dollar and helps to assure that its funds are targeted to addressing 
specific needs versus a long list of unaffordable and unsustainable 
wants. The Secretary of Defense has estimated that improving business 
operations could save 5 percent of DOD's annual budget, which, based on 
the fiscal year 2004 budget, represents a savings of about $22 billion. 
It is also critically important to ensure that DOD's unmatched military 
capabilities are supported by a sound management structure and systems 
designed to support the warfighter in an economic, efficient, and 
effective manner.

At a time when DOD is challenged to maintain a high level of military 
operations while competing for resources in an increasingly fiscally 
constrained environment, DOD's business management weaknesses continue 
to result in reduced efficiencies and effectiveness that waste billions 
of dollars every year. These business management weaknesses touch on 
all of DOD's major business operations, ranging from the department's 
inadequate management of overall business transformation to decades-old 
financial management problems to various contracting and selected 
supply chain challenges. In fact, all the business areas that I will 
discuss today are on our 2005 "high-risk" list of programs and 
activities that need urgent attention and fundamental transformation to 
ensure that our national government functions in the most economical, 
efficient, and effective manner possible.[Footnote 2] In addition to 
human capital management, DOD also shares responsibility for five other 
governmentwide high-risk areas, such as managing federal real property.

Senior administration leaders and advisors--including the Secretary of 
Defense, the nominee for Deputy Secretary of Defense, the Deputy 
Director of the Office of Management and Budget (OMB), and members of 
the Defense Business Board--have demonstrated a commitment to 
addressing DOD's management challenges. However, little sustainable 
progress has been made to date, and, at present, no one individual at 
the right organizational level with an adequate term in office is 
responsible for overall business transformation efforts. Although OMB 
has worked closely with a number of agencies that have high-risk 
issues, historically it has been much less involved with DOD. To his 
credit, Clay Johnson, OMB's Deputy Director for Management, recently 
reaffirmed plans to refocus on GAO's high-risk list in order to make as 
much progress as possible during the Bush Administration's second term. 
He also committed to placing additional emphasis on DOD's high-risk 
areas, including working to help ensure that DOD has action plans for 
addressing all its "high-risk" areas. Given the magnitude of DOD's 
problems and the stakes involved, it is critical that OMB actively 
collaborate with the department to ensure it establishes these action 
plans. It is also clear that, given the number and nature of DOD's 
business challenges, it will take far longer than the balance of this 
administration to address all of the department's high-risk areas.

Today, I would like to provide our perspectives on (1) the fiscal 
trends that prompt real questions about the affordability and 
sustainability of the rate of growth in defense spending, (2) business 
management challenges that DOD needs to address to successfully 
transform its business operations, and (3) key elements to successfully 
achieve needed reforms. In particular, I will emphasize the need for a 
strategic plan for business transformation and offer suggestions that 
require legislative action--the need for central control of systems 
investment funding and the need for a chief management official (CMO) 
to be dedicated full-time to leading DOD's business transformation 
effort. Implementation of these two suggestions would provide the 
sustained top-level leadership and accountability needed by DOD to 
better permit the development and successful implementation of the 
various plans necessary to successfully achieve business transformation.

I would like to further emphasize two points about the CMO. First, the 
position divides and institutionalizes the current functions of the 
Deputy Secretary of Defense into a Deputy Secretary who, as the alter 
ego of the Secretary, would focus on policy-related issues such as 
military transformation, and a Deputy Secretary of Defense for 
Management, the CMO, who would be responsible and accountable for the 
overall business transformation effort. Serving as the strategic 
integrator for DOD's business transformation effort, the CMO would 
develop and implement a strategic plan for business transformation. 
This new executive would have sufficient clout to work with the 
Secretary of Defense, the Deputy Secretary of Defense, the 
undersecretaries of defense, and the service secretaries to make 
business transformation a reality. Second, I would also like to 
emphasize what the CMO would not do. The CMO would not assume the 
responsibilities of the undersecretaries of defense, the service 
secretaries, or other DOD officials for the day-to-day management of 
business activities. Therefore, in our view, creating a CMO would not 
be adding another hierarchical layer to oversee the day-to-day 
management of the department. Instead, the CMO would be responsible and 
accountable for planning, integrating, and executing the overall 
business transformation effort.

My statement is based on previous GAO reports and our work was 
performed in accordance with generally accepted government auditing 
standards.

Summary:

As I testified before the full committee in February,[Footnote 3] our 
nation is on an unsustainable fiscal path. Long-term budget simulations 
by GAO, the Congressional Budget Office (CBO), and others show that, 
over the long term, we face a large and growing structural deficit due 
primarily to known demographic trends and rising health care costs. 
Continuing on this unsustainable fiscal path will gradually erode, if 
not suddenly damage, our economy, our standard of living, and 
ultimately our national security. All reasonable simulations indicate 
that the problem is too big to be solved by economic growth alone or by 
making modest changes to existing spending and tax policies. Rather, a 
fundamental reexamination of major spending and tax policies and 
priorities will be important to recapture our fiscal flexibility and 
ensure that our programs and priorities respond to emerging social, 
economic, and security changes and challenges. Traditional, incremental 
approaches to budgeting at DOD will need to give way to much more 
fundamental and periodic reexaminations of defense programs than we 
have seen in the past, to ensure that DOD gets the most from every 
defense dollar.

Given its size and mission, DOD is one of the largest and most complex 
organizations in the world to effectively manage. While DOD maintains 
military forces with unparalleled capabilities, it continues to 
confront pervasive, decades-old management problems related to its 
business operations--which include outdated organizational structures, 
systems, and processes--that support these forces. These management 
weaknesses cut across all of DOD's major business areas, such as human 
capital management, including the department's national security 
personnel system initiative; the personnel security clearance program; 
support infrastructure management; business systems modernization; 
financial management; weapon systems acquisition; contract management; 
and selected supply chain management issues. As I previously noted, all 
of these areas are on GAO's high-risk list of major government programs 
and operations that either need urgent attention and transformation to 
ensure that the U.S. government functions in the most economical, 
efficient, and effective manner possible, or that are at high risk 
because of their greater vulnerability to fraud, waste, abuse, and 
mismanagement. We also added DOD's overall approach to business 
transformation to our high-risk list this year because of our concerns 
over DOD's lack of adequate management responsibility and 
accountability, along with the absence of a strategic and integrated 
business transformation plan that is needed to achieve and sustain 
business reform on a broad, strategic, departmentwide, and integrated 
basis.

Regarding the way forward, in our view, there are three essential 
elements that DOD must incorporate into its business transformation 
efforts if it is to successfully address the systemic management 
problems related to its high-risk areas. First, in our experience, a 
successful business transformation effort must include a comprehensive, 
integrated business transformation strategic plan and a well-defined 
blueprint, referred to as a business enterprise architecture, to guide 
and constrain implementation of such a plan. The strategic plan should 
contain results-oriented performance measures that link institutional, 
unit, and individual goals, measures, and expectations. Second, we 
believe that additional central control for the allocation and 
execution of funds associated with business systems modernization is 
necessary. Finally, due to the complexity and long-term nature of these 
efforts, strong and sustained executive leadership is needed if they 
are to succeed.

We believe one way to ensure this strong and sustained leadership over 
DOD's business management reform efforts would be to create a full- 
time, executive-level II position for a CMO, who would serve as the 
Deputy Secretary of Defense for Management. For this reason, we support 
the need for this position to divide and institutionalize the functions 
of the Deputy Secretary of Defense by creating a separate Deputy 
Secretary of Defense for Management. I'd like to note that over 30 
years ago, then Secretary of Defense, Melvin Laird, asked Congress to 
establish an additional Deputy Secretary of Defense for many of the 
same reasons we are proposing that a CMO is needed. In a letter to 
Congress, Secretary Laird stated that the most efficient management of 
DOD resources could not be achieved with just the Secretary and Deputy 
Secretary, and that DOD deficiencies were in large measure due to 
insufficient senior management attention to the department's affairs. 
At that time, the legislation establishing a second deputy secretary 
did not specifically distinguish between the two deputies. As we 
envision it, the roles and responsibilities of a CMO would be more 
clearly defined and have the added feature of a term of office that 
spans administrations, which would serve to underscore the importance 
of taking a professional, nonpartisan, sustainable, and institutional 
approach to this business transformation effort.

Growing Fiscal Imbalance Raises Questions about the Affordability and 
Sustainability of Current Defense Spending:

The federal government's financial condition and long-term fiscal 
outlook present enormous challenges to the nation's ability to respond 
to emerging forces reshaping American society, the place of the United 
States in the world, and the future role of DOD as well as the rest of 
the federal government. The near-term deficits are daunting--a $412 
billion unified budget deficit in fiscal year 2004 (including a $567 
billion on-budget deficit and a $155 billion off-budget surplus) and a 
$368 billion deficit (not including any supplemental appropriations) 
forecast for fiscal year 2005 by the CBO. If these near-term deficits 
represented only a short-term phenomenon--prompted by such factors as 
economic downturn or national security crises--there would be less 
cause for concern. However, deficits have grown notwithstanding the 
economy recovery from the recession in 2001, and the incremental costs 
of responding to homeland security and the nation's global war against 
terrorism represent only a relatively small fraction of current and 
projected deficits. Moreover, based on our long-range fiscal 
simulations, the current fiscal condition is but a prelude to a much 
more daunting long-term fiscal outlook. GAO's long-term simulations 
illustrate the magnitude of the fiscal challenges associated with an 
aging society and the significance of the related challenges the 
government will be called upon to address. Absent significant policy 
changes on the spending or revenue side of the budget, our simulations 
show that growth in spending on federal retirement and health 
entitlements will encumber an escalating share of the government's 
resources. Indeed, when we assume that recent tax reductions are made 
permanent and discretionary spending keeps pace with the economy, our 
long-term simulations suggest that by 2040 federal revenues may be 
adequate to pay little more than interest on the federal debt.[Footnote 
4]

In fact, the cost implications of the baby boom generation's retirement 
have already become a factor in CBO's baseline projections and will 
only intensify as the baby boomers age. According to CBO, total federal 
spending for Social Security, Medicare, and Medicaid is projected to 
grow by about 25 percent over the next 10 years--from 8.4 percent of 
Gross Domestic Product in 2004 to 10.4 percent in 2015. In addition, 
CBO reported that excluding supplemental funding appropriated in 2004 
and requested in 2005 (mostly for activities in Iraq and Afghanistan), 
discretionary budget authority for defense programs is estimated to 
grow from $394 billion in 2004 to $421 billion in 2005, a 6.8 percent 
increase. The expected growth combined with the fact that DOD accounted 
for more than half of all discretionary spending in fiscal year 2004 
raises concerns about the sustainability and affordability of increased 
defense spending.

Despite the need to make strategic investment decisions to address 
these fiscal pressures, DOD's current approach to planning often 
supports the status quo and results in a mismatch between programs and 
budgets. As we have reported, DOD has difficulties overcoming cultural 
resistance to change and the inertia of various organizations, 
policies, and procedures rooted in the Cold War era.[Footnote 5] Long- 
standing organizational and budgetary programs need to be addressed, 
such as the existence of stovepiped or siloed organizations, the 
involvement of many layers and players in decision making, and the 
allocation of budgets on a proportional rather than a strategic basis 
across the military services. DOD's approach to planning does not 
always provide reasonable visibility to decision makers, including 
Congress, over the projected cost of defense programs. As we have 
reported in the past, DOD uses overly optimistic estimations of future 
program costs that often lead to costs being understated.[Footnote 6] 
For example, in January 2003 we reported that the estimated cost of 
developing eight major weapon systems had increased from about $47 
billion in fiscal year 1998 to about $72 billion by fiscal year 
2003.[Footnote 7] As a result of these inaccurate estimates, DOD has 
more programs than it can support with its available dollars, which 
often leads to program instability, costly program stretch-outs, and 
program termination.

Increasingly limited fiscal resources across the federal government, 
coupled with emerging requirements from the changing security 
environment, emphasize the need for DOD to address its current 
inefficient approach to planning and develop a risk-based strategic 
investment framework for establishing goals, evaluating and setting 
priorities, and making difficult resource decisions. In its strategic 
plan, the September 2001 Quadrennial Defense Review, DOD outlined a new 
risk management framework consisting of four dimensions of risk--force 
management, operational, future challenges, and institutional--to use 
in considering trade-offs among defense objectives and resource 
constraints. We recognize what a large undertaking developing a 
departmentwide risk management framework will be and understand that 
DOD is still in the process of implementing this approach. However, it 
remains unclear how DOD will use the risk management framework to 
measure progress in achieving business and force transformation. It 
also remains unclear how the framework will be used to correct 
limitations we have previously identified in DOD's strategic planning 
and budgeting. We are currently monitoring DOD's efforts to implement 
the risk management framework.

Pervasive Business Management Weaknesses Place DOD's Overall Business 
Transformation at Risk:

Numerous management problems, inefficiencies, and wasted resources 
continue to trouble DOD's business operations, resulting in billions of 
dollars of wasted resources annually at a time when our nation is 
facing an increasing fiscal imbalance. Specific business management 
challenges that DOD needs to address to successfully transform its 
business operations include DOD's approach to business transformation, 
its personnel security clearance program, support infrastructure 
management, business systems modernization, financial management, 
weapons systems acquisition, contract management, supply chain 
management, and strategic human capital management. These management 
challenges are on our 2005 high-risk list of programs and activities 
that need urgent and fundamental transformation if the federal 
government is to function in the most economical, efficient, and 
effective manner possible. The 8 DOD specific high-risk areas, along 
with 6 government-wide areas that apply to DOD, mean that the 
department is responsible for 14 of 25 high-risk areas. As shown in 
table 1, we added DOD's approach to business management transformation 
to this list in 2005 because it represents an overarching high-risk 
area that encompasses the other individual, DOD specific, high-risk 
areas, but many of these other management challenges have been on the 
list for a decade or more.

Table 1: Years When Specific DOD Areas on GAO's 2005 High-Risk List 
Were First Designated as High Risk:

Area: DOD approach to business transformation; Year designated high 
risk: 2005.

Area: * DOD personnel security clearance program; Year designated high 
risk: 2005.

Area: * DOD support infrastructure management; Year designated high 
risk: 1997.

Area: * DOD business systems modernization; Year designated high risk: 
1995.

Area: * DOD financial management; 
Year designated high risk: 1995.

Area: * DOD weapon systems acquisition; 
Year designated high risk: 1990.

Area: * DOD contract management; 
Year designated high risk: 1992.

Area: * DOD supply chain management[A]; Y ear designated high risk: 
1990[A].

Source: GAO.

[A] This area, formerly entitled DOD inventory management, was expanded 
to include distribution and asset visibility.

[End of table]

DOD's Approach to Business Transformation:

DOD's approach to business management transformation represents an 
overarching high-risk area, encompassing several other key business 
management challenges. Over the years, DOD has embarked on a series of 
efforts to reform its business management operations, including 
modernizing underlying information technology (business) systems. 
However, serious inefficiencies remain. As a result, the areas of 
support infrastructure management,[Footnote 8] business systems 
modernization, financial management, weapon systems acquisition, 
contract management, and supply chain management remain high-risk DOD 
business operations. We now consider DOD's overall approach to business 
management transformation to be a high-risk area because (1) DOD's 
business improvement initiatives and control over resources are 
fragmented; (2) DOD lacks a clear strategic and integrated business 
transformation plan and an investment strategy, including a well- 
defined enterprise architecture, to guide and constrain implementation 
of such a plan; and (3) DOD has not designated a senior management 
official responsible and accountable for overall business 
transformation reform and related resources.

Unless DOD makes progress in overall business transformation, we 
believe it will continue to have difficulties in confronting other 
problems in its business operations. DOD spends billions of dollars to 
sustain key business operations intended to support the warfighter. We 
have previously testified on inefficiencies in DOD's business 
operations, such as the lack of sustained leadership, the lack of a 
strategic and integrated business transformation plan, and inadequate 
incentives.[Footnote 9] Moreover, the lack of adequate transparency and 
accountability across DOD's major business areas results in billions of 
dollars of wasted resources annually at a time of increasing military 
operations and growing fiscal constraints.

Business transformation requires long-term cultural change, business 
process reengineering, and a commitment from both the executive and 
legislative branches of government. Although sound strategic planning 
is the foundation on which to build, DOD needs clear, capable, 
sustained, and professional leadership to maintain the continuity 
necessary for success. Such leadership could facilitate the overall 
business transformation effort within DOD by providing the momentum 
needed to overcome cultural resistance to change, military service 
parochialism, and stovepiped operations, all of which have contributed 
significantly to the failure of previous attempts to implement broad- 
based management reform at DOD. Without such leadership, it is also 
likely that DOD will continue to spend billions of dollars on 
stovepiped, duplicative, and nonintegrated systems that do not optimize 
mission performance or effectively support the warfighter.

Personnel Security Clearance Program:

Delays in completing hundreds of thousands of background investigations 
and adjudications (reviews of investigative information to determine 
eligibility for a security clearance) have led us to identify as a 
business management challenge the DOD personnel security clearance 
program, which we just added to our high-risk list in 2005. Personnel 
security clearances allow individuals to gain access to classified 
information. In some cases, unauthorized disclosure of classified 
information could reasonably be expected to cause exceptionally grave 
damage to national defense or foreign relations. DOD has approximately 
2 million active clearances as a result of worldwide deployments, 
contact with sensitive equipment, and other security requirements. 
While our work on the clearance process has focused on DOD, clearance 
delays in other federal agencies suggest that similar impediments and 
their effects may extend beyond DOD.

Since at least the 1990s, we have documented problems with DOD's 
personnel security clearance process, particularly problems related to 
backlogs and the resulting delays in determining clearance 
eligibility.[Footnote 10] Since fiscal year 2000, DOD has declared its 
personnel security clearance investigations program to be a systemic 
weakness[Footnote 11]--a weakness that affects more than one DOD 
component and may jeopardize the department's operations. An October 
2002 House Committee on Government Reform report also recommended 
including DOD's adjudicative process as a material weakness.[Footnote 
12] As of September 30, 2003 (the most recent data available), DOD 
could not estimate the full size of its backlog, but we identified over 
350,000 cases exceeding established time frames for determining 
eligibility.[Footnote 13]

DOD has taken steps to address the backlog--such as hiring more 
adjudicators and authorizing overtime for adjudicative staff--but a 
significant shortage of trained federal and private-sector 
investigative personnel presents a major obstacle to timely completion 
of cases. Other impediments to eliminating the backlog include the 
absence of an integrated, comprehensive management plan for addressing 
a wide variety of problems identified by us and others. In addition to 
matching adjudicative staff to workloads and working with OPM to 
develop an overall management plan, DOD needs to develop and use new 
methods for forecasting clearance needs and monitoring backlogs; 
eliminate unnecessary limitations on reciprocity (the acceptance of a 
clearance and access granted by another department, agency, or military 
service); determine the feasibility of implementing initiatives that 
could decrease the backlog and delays; and provide better oversight for 
all aspects of its personnel security clearance process. The National 
Defense Authorization Act for Fiscal Year 2004[Footnote 14] authorized 
the transfer of DOD's personnel security investigative function and 
over 1,800 investigative employees to OPM. This transfer took place in 
February 2005. While the transfer eliminated DOD's responsibility for 
conducting the investigations, it did not eliminate the shortage of 
trained investigative personnel needed to address the backlog. Although 
DOD retained the responsibility for adjudicating clearances, OPM is now 
accountable for ensuring that investigations are completed in a timely 
manner. By the end of fiscal year 2005, OPM projects that it will have 
6,500 of the estimated 8,000 full-time equivalent federal and contract 
investigators it needs to help eliminate the investigations backlog.

Support Infrastructure Management:

DOD has made progress and expects to continue making improvements in 
its support infrastructure management, but much work remains to be 
done. DOD's support infrastructure includes categories such as force 
installations, central logistics, the defense health program, and 
central training. DOD's infrastructure costs continue to consume a 
larger-than-necessary portion of its budget than DOD believes is 
desirable, despite reductions in the size of the military force 
following the end of the Cold War. For several years, DOD also has been 
concerned about its excess facilities infrastructure, which affects its 
ability to devote more funding to weapon systems modernization and 
other critical needs. DOD has reported that many of its business 
processes and much of its infrastructure are outdated and must be 
modernized. Left alone, the current organizational arrangements, 
processes, and systems will continue to drain scarce resources.

DOD officials recognize that they must achieve greater efficiencies in 
managing their support operations. DOD has achieved some operating 
efficiencies and reductions from such efforts as base realignments and 
closures, consolidations, organizational and business process 
reengineering, and competitive sourcing. It also has achieved 
efficiencies by eliminating unneeded facilities through such means as 
demolishing unneeded buildings and privatizing housing at military 
facilities. In addition, DOD and the services are currently gathering 
and analyzing data to support a new round of base realignments and 
closures in 2005 and facilitating other changes as a result of DOD's 
overseas basing study.

Despite this progress, much work remains for DOD to transform its 
support infrastructure to improve operations, achieve efficiencies, and 
allow it to concentrate resources on the most critical needs. 
Organizations throughout DOD need to continue reengineering their 
business processes and striving for greater operational effectiveness 
and efficiency. DOD needs to develop a plan to better guide and sustain 
the implementation of its diverse business transformation initiatives 
in an integrated fashion. DOD also needs to strengthen its recent 
efforts to develop and refine its comprehensive long-range plan for its 
facilities infrastructure to ensure adequate funding to support 
facility sustainment, modernization, recapitalization, and base 
operating support needs. DOD generally concurs with our prior 
recommendations in this area and indicates it is taking actions to 
address them. A key to any successful approach to resolving DOD's 
support infrastructure management issues will be addressing this area 
as part of a comprehensive, integrated business transformation effort.

Business Systems Modernization:

We continue to categorize DOD's business systems modernization program 
as a management challenge because of a lack of an enterprise 
architecture to guide and constrain system investments and because of 
ineffective management oversight, system acquisition, and investment 
management practices. As a result, DOD's current operating practices 
and over 4,000 systems function in a stovepiped, duplicative, and 
nonintegrated environment that contributes to DOD's operational 
problems. For years, DOD has attempted to modernize these systems, and 
we have provided numerous recommendations to help guide its efforts. 
For example, in 2001 we provided DOD with a set of recommendations to 
help it develop and implement an enterprise architecture (or 
modernization blueprint) and establish effective investment management 
controls.[Footnote 15] Such an enterprise architecture is essential for 
DOD to guide and constrain how it spends billions of dollars annually 
on information technology systems. We also made numerous project- 
specific and DOD-wide recommendations aimed at getting DOD to follow 
proven best practices when it acquired system:

solutions.[Footnote 16] While DOD agreed with most of these 
recommendations, to date the department has made limited progress in 
addressing them.

In May 2004, we reported that after 3 years and over $203 million in 
obligations, DOD had not yet developed a business enterprise 
architecture containing sufficient scope and detail to guide and 
constrain its departmentwide systems modernization and business 
transformation.[Footnote 17] One reason for this limited progress is 
DOD's failure to adopt key architecture management best practices that 
we recommended,[Footnote 18] such as developing plans for creating the 
architecture; assigning accountability and responsibility for 
directing, overseeing, and approving the architecture; and defining 
performance metrics for evaluating the architecture. Under a provision 
in the Ronald W. Reagan National Defense Authorization Act for Fiscal 
Year 2005,[Footnote 19] DOD must develop an enterprise architecture to 
cover all defense business systems and related business functions and 
activities that is sufficiently defined to effectively guide, 
constrain, and permit implementation of a corporatewide solution and is 
consistent with the policies and procedures established by OMB. 
Additionally, the act requires the development of a transition plan 
that includes an acquisition strategy for new systems and a listing of 
the termination dates of current legacy systems that will not be part 
of the corporatewide solution, as well as a listing of legacy systems 
that will be modified to become part of the corporatewide solution for 
addressing DOD's business management deficiencies.

In May 2004, we also reported that the department's approach to 
investing billions of dollars annually in existing systems had not 
changed significantly.[Footnote 20] As a result, DOD lacked an 
effective investment management process for selecting and controlling 
ongoing and planned business systems investments. While DOD issued a 
policy that assigns investment management responsibilities for business 
systems, in May 2004 we reported that DOD had not yet defined the 
detailed procedures necessary for implementing the policy, clearly 
defined the roles and responsibilities of the business domain owners 
(now referred to as core business mission areas), established common 
investment criteria, or ensured that its business systems are 
consistent with the architecture.[Footnote 21]

To address certain provisions and requirements of the Ronald W. Reagan 
National Defense Authorization Act for Fiscal Year 2005,[Footnote 22] 
on March 24, 2005, the Deputy Secretary of Defense directed the 
transfer of program management, oversight, and support responsibilities 
regarding DOD business transformation efforts from the Office of the 
Under Secretary of Defense, Comptroller, to the Office of the Under 
Secretary of Defense for Acquisition, Technology, and Logistics 
(OUSD(AT&L)). According to the directive, this transfer of functions 
and responsibilities will allow the OUSD(AT&L) to establish the level 
of activity necessary to support and coordinate activities of the newly 
established Defense Business Systems Management Committee (DBSMC). As 
required by the act, the DBSMC--with representation including the 
Deputy Secretary of Defense, the designated approval 
authorities,[Footnote 23] and secretaries of the military services and 
heads of the defense agencies--is the highest ranking governance body 
responsible for overseeing DOD business systems modernization efforts. 
While this committee may serve as a useful planning and coordination 
forum, it is important to remember that committees do not lead, people 
do. In addition, DOD still needs to designate a person to have overall 
responsibility and accountability for this effort. This person must 
have the background and authority needed to successfully achieve the 
related objectives for business systems modernization efforts.

According to DOD's annual report to congressional defense committees on 
the status of the department's business management modernization 
program, DOD has not yet established investment review boards below the 
DBSMC for each core business mission. The statutory requirements 
enacted as part of the Ronald W. Reagan National Defense Authorization 
Act for Fiscal Year 2005 further require that the DBSMC must agree with 
the designated approval authorities' certification of funds exceeding 
$1 million for the modernization of business systems before funds can 
be obligated.[Footnote 24] More important, the obligation of these 
funds without the requisite approval by the DBSMC is deemed a violation 
of the Anti-Deficiency Act.[Footnote 25] As DOD develops a 
comprehensive, integrated business transformation plan, such a plan 
must include an approach to resolve the business systems modernization 
problems. To this end, it is critical that this plan provide for the 
implementation of our many recommendations related to business systems 
modernization.

Financial Management:

DOD continues to face financial management problems that are pervasive, 
complex, long-standing, and deeply rooted in virtually all of its 
business operations. DOD's financial management deficiencies adversely 
affect the department's ability to control costs, ensure basic 
accountability, anticipate future costs and claims on the budget, 
measure performance, maintain funds control, prevent fraud, and address 
pressing management issues. As I testified before the House Committee 
on Government Reform in February 2005,[Footnote 26] and as discussed in 
our report on the U.S. government's consolidated financial statements 
for fiscal year 2004,[Footnote 27] DOD's financial management 
deficiencies, taken together, represent a major impediment to achieving 
an unqualified opinion on the U.S. government's consolidated financial 
statements.

Our recent reports and testimonies on Army reserve and national guard 
pay issues clearly illustrate the impact deficiencies in DOD's 
financial management have had on the very men and women our country is 
depending on to perform our military operations. For example, in 
February 2005, we reported that the Army's process for extending active 
duty orders for injured soldiers lacks an adequate control environment 
and management controls,[Footnote 28] including (1) clear and 
comprehensive guidance, (2) a system to provide visibility over injured 
soldiers, and (3) adequate training and education programs. The Army 
also has not established user-friendly processes, including clear 
approval criteria and adequate infrastructure and support services.

Poorly defined processes for extending active duty orders for injured 
and ill reserve component soldiers have caused soldiers to be 
inappropriately dropped from their active duty orders. For some, this 
has led to significant gaps in pay and health insurance, which have 
created financial hardships for these soldiers and their families. 
Based on our analysis of Army manpower data during the period from 
February 2004 through April 7, 2004, almost 34 percent of the 867 
soldiers who applied for extension of active duty orders because of 
injuries or illness lost their active duty status before their 
extension requests were granted. For many soldiers, this resulted in 
being removed from active duty status in the automated systems that 
control pay and access to benefits such as medical care and access to a 
commissary or post exchange that allows soldiers and their families to 
purchase groceries and other goods at a discount. Many Army locations 
have used ad hoc procedures to keep soldiers in pay status; however, 
these procedures often circumvent key internal controls and put the 
Army at risk of making improper and potentially fraudulent payments. 
Finally, the Army's nonintegrated systems, which require extensive 
error-prone manual data entry, further delay access to pay and benefits.

The Army recently implemented the Medical Retention Processing (MRP) 
program, which takes the place of the previously existing process in 
most cases. The MRP program, which authorizes an automatic 179 days of 
pay and benefits, may resolve the timeliness of the front-end approval 
process. However, the MRP program has some of the same problems as the 
existing process and may also result in overpayments to soldiers who 
are released early from their MRP orders.

DOD's senior civilian and military leaders have taken positive steps to 
begin reforming the department's financial management operations. 
However, to date, tangible evidence of improvement has been seen in 
only a few specific areas, such as internal controls related to DOD's 
purchase card and individually billed travel card programs. Further, we 
reported in September 2004 that, while DOD had established a goal of 
obtaining a clean opinion on its financial statements by 2007, it 
lacked a written and realistic plan to make that goal a 
reality.[Footnote 29] DOD's continuing, substantial financial 
management weaknesses adversely affect its ability to produce auditable 
financial information as well as provide accurate and timely 
information for management and Congress to use in making informed 
decisions.

Overhauling the financial management and related business operations of 
one of the largest and most complex organizations in the world 
represents a daunting challenge. Such an overhaul of DOD's financial 
management operations goes far beyond financial accounting to the very 
fiber of the department's wide-ranging business operations and its 
management culture. It will require (1) sustained leadership and 
resource control, (2) clear lines of responsibility and accountability, 
(3) plans and related results-oriented performance measures, and (4) 
appropriate individual and organizational incentives and consequences. 
DOD is still in the very early stages of a departmentwide overhaul that 
will take years to accomplish. DOD has not yet established a framework 
to integrate improvement efforts in this area with related broad-based 
DOD initiatives, such as human capital reform. However, successful, 
lasting reform in this area will only be possible if implemented as 
part of a comprehensive and integrated approach to transforming all of 
DOD's business operations.

Weapon Systems Acquisition:

Another business management challenge DOD faces is its weapon systems 
acquisition program. While DOD's acquisition process has produced the 
best weapons in the world, it also consistently yields undesirable 
consequences--such as cost increases, late deliveries to the 
warfighter, and performance shortfalls. Such problems were highlighted, 
for example, in our reviews of DOD's F/A-22 Raptor, Space-Based 
Infrared System, Airborne Laser, and other programs. Problems occur 
because DOD's weapon programs do not capture early on the requisite 
knowledge that is needed to efficiently and effectively manage program 
risks. For example, programs move forward with unrealistic program cost 
and schedule estimates, lack clearly defined and stable requirements, 
use immature technologies in launching product development, and fail to 
solidify design and manufacturing processes at appropriate junctures in 
development.

When programs require more resources than planned, the buying power of 
the defense dollar is reduced and funds are not available for other 
competing needs. It is not unusual for estimates of time and money to 
be off by 20 to 50 percent. When costs and schedules increase, 
quantities are cut and the value for the warfighter--as well as the 
value of the investment dollar--is reduced. In these times of 
asymmetric threats and netcentricity, individual weapon system 
investments are getting larger and more complex. Just 4 years ago, the 
top five weapon systems cost about $281 billion; today, in the same 
base year dollars, the five weapon systems cost about $521 billion. If 
these megasystems are managed with traditional margins of error, the 
financial consequences--particularly the ripple effects on other 
programs--can be dire.

While weapon systems acquisition continues to remain on our high-risk 
list, DOD has undertaken a number of acquisition reforms over the past 
5 years. Specifically, DOD has restructured its acquisition policy to 
incorporate attributes of a knowledge-based acquisition model and has 
reemphasized the discipline of systems engineering. In addition, DOD 
recently introduced new policies to strengthen its budgeting and 
requirements determination processes in order to plan and manage weapon 
systems based on joint warfighting capabilities. While these policy 
changes are positive steps, implementation in individual programs will 
continue to be a challenge because of inherent funding, management, and 
cultural factors that lead managers to develop business cases for new 
programs that over-promise on cost, delivery, and performance of weapon 
systems.

It is imperative that needs be distinguished from wants and that DOD's 
limited resources be allocated to the most appropriate weapon system 
investments. Once the best investments that can be afforded are 
identified, then DOD must follow its own policy to employ the 
knowledge- based strategies essential for delivering the investments 
within projected resources. Making practice follow policy is not a 
simple matter. It is a complex challenge involving many factors. One of 
the most important factors is putting the right managers in their 
positions long enough so that they can be both effective and 
accountable for getting results.

Contract Management:

Another long-standing business management challenge is DOD's contract 
management program. As the government's largest purchaser at over $200 
billion in fiscal year 2003, DOD is unable to assure that it is using 
sound business practices to acquire the goods and services needed to 
meet the warfighters' needs. For example, over the past decade DOD has 
significantly increased its spending on contractor-provided information 
technology and management support services, but it has yet to fully 
implement a strategic approach to acquiring these services. In 2002, 
DOD and the military departments established a structure to review 
individual service acquisitions valued at $500 million or more, and in 
2003 they launched a pilot program to help identify strategic sourcing 
opportunities. To further promote a strategic orientation, however, DOD 
needs to establish a departmentwide concept of operations; set 
performance goals, including savings targets; and ensure accountability 
for achieving them. In March 2004, we reported that if greater 
management focus were given to opportunities to capture savings through 
the purchase card program, DOD could potentially save tens of millions 
of dollars without sacrificing the ability to acquire items quickly or 
compromising other goals.[Footnote 30]

DOD also needs to have the right skills and capabilities in its 
acquisition workforce to effectively implement best practices and 
properly manage the goods and services it buys. However, DOD reduced 
its civilian workforce by about 38 percent between fiscal years 1989 
and 2002 without ensuring that it had the specific skills and 
competencies needed to accomplish current and future DOD acquisition/ 
contract administration missions, and more than half of its current 
workforce will be eligible for early or regular retirement in the next 
5 years. We found that inadequate staffing and the lack of clearly 
defined roles and responsibilities contributed to contract 
administration challenges encountered in Operation Iraqi Freedom 
(OIF).[Footnote 31] Further, we have reported that DOD's extensive use 
of military logistical support contracts in OIF and elsewhere required 
strengthened oversight.[Footnote 32] Just recently, we identified 
surveillance issues in almost a third of the contracts we reviewed. We 
also noted that some personnel performing surveillance had not received 
required training, while others felt that they did not have sufficient 
time in a normal workday to perform their surveillance duties.[Footnote 
33] DOD has made progress in laying a foundation for reshaping its 
acquisition workforce by initiating a long-term strategic planning 
effort, but as of June 2004 it did not yet have the comprehensive 
strategic workforce plan needed to guide its efforts.

DOD uses various techniques--such as performance-based service 
contracting, multiple-award task order contracts, and purchase cards-- 
to acquire the goods and services it needs. We have found, however, 
that DOD personnel did not always make sound use of these tools. For 
example, in June 2004, we reported that more than half of the task 
orders to support Iraq reconstruction efforts we reviewed were, in 
whole or in part, outside the scope of the underlying 
contract.[Footnote 34] In July 2004, we found that DOD personnel waived 
competition requirements for nearly half of the task orders 
reviewed.[Footnote 35] As a result of the frequent use of waivers, DOD 
had fewer opportunities to obtain the potential benefits of 
competition--improved levels of service, market-tested prices, and the 
best overall value. We also found that DOD lacked safeguards to ensure 
that waivers were granted only under appropriate circumstances.

Our work has shown that DOD would benefit by making use of commercial 
best practices, such as taking a strategic approach to acquiring 
services; building on initial efforts to develop a strategic human 
capital plan for its civilian workforce; and improving safeguards, 
issuing additional guidance, and providing training to its workforce on 
the appropriate use of contracting techniques and approaches.[Footnote 
36] DOD is undertaking corrective actions, but because most efforts are 
in their early stages, it is uncertain whether they can be fully and 
successfully implemented in the near term. A key to resolving DOD's 
contract management issues will be addressing them as part of a 
comprehensive and integrated business transformation plan.

Supply Chain Management:

In 1990, we identified DOD's inventory management as a management 
challenge, or a high-risk area, because inventory levels were too high 
and the supply system was not responsive to the needs of the 
warfighter. We have since expanded the inventory management high-risk 
area to include DOD's management of certain key aspects of its supply 
chain, including distribution, inventory management, and asset 
visibility, because of significant weaknesses we have uncovered since 
our 2003 high-risk series was published. For example, during OIF, the 
supply chain encountered many problems, including backlogs of hundreds 
of pallets and containers at distribution points, a $1.2 billion 
discrepancy in the amount of material shipped to--and received by--Army 
activities, cannibalized equipment because of a lack of spare parts, 
and millions of dollars spent in late fees to lease or replace storage 
containers because of distribution backlogs and losses. Moreover, we 
identified shortages of items such as tires, vehicle track shoes, body 
armor, and batteries for critical communication and electronic 
equipment. These problems were the result of systemic deficiencies in 
DOD's supply chain, including inaccurate requirements, funding delays, 
acquisition delays, and ineffective theater distribution.

While DOD reports show that the department currently owns about $67 
billion worth of inventory, shortages of certain critical spare parts 
are adversely affecting equipment readiness and contributing to 
maintenance delays. The Defense Logistics Agency (DLA) and each of the 
military services have experienced significant shortages of critical 
spare parts, even though more than half of DOD's reported inventory-- 
about $35 billion--exceeded current operating requirements. In many 
cases, these shortages contributed directly to equipment downtime, 
maintenance problems, and the services' failure to meet their supply 
availability goals. DOD, DLA, and the military services each lack 
strategic approaches and detailed plans that could help mitigate these 
critical spare parts shortages and guide their many initiatives aimed 
at improving inventory management.[Footnote 37]

DOD's continued supply chain problems also resulted in shortages of 
items in Iraq. In an April 8, 2005, report, we reported that demands 
for items like vehicle track shoes, batteries, and tires exceeded their 
availability because the department did not have accurate or adequately 
funded Army war reserve requirements and had inaccurate forecasts of 
supply demands for the operation.[Footnote 38] Furthermore, the Army's 
funding approval process delayed the flow of funds to buy them. 
Meanwhile, rapid acquisition of other items faced obstacles. Body armor 
production was limited by the availability of Kevlar and other critical 
materials, whereas the delivery of up-armored High Mobility Multi- 
Purpose Wheeled Vehicles and armor kits was slowed by DOD's decisions 
to pace production. In addition, numerous problems, such as 
insufficient transportation, personnel, and equipment, as well as 
inadequate information systems, hindered DOD's ability to deliver the 
right items to the right place at the right time for the warfighter. 
Among the items the department had problems delivering were generators 
for Assault Amphibian Vehicles, tires, and Meals Ready-to-Eat.

In addition to supply shortages, DOD also lacks visibility and control 
over the supplies and spare parts it owns. Therefore, it cannot monitor 
the responsiveness and effectiveness of the supply system to identify 
and eliminate choke points.[Footnote 39] Currently, DOD does not have 
the ability to provide timely or accurate information on the location, 
movement, status, or identity of its supplies. Although total asset 
visibility has been a departmentwide goal for over 30 years, DOD 
estimates that it will not achieve this visibility until the year 2010. 
DOD may not meet this goal by 2010, however, unless it overcomes three 
significant impediments: developing a comprehensive plan for achieving 
visibility, building the necessary integration among its many inventory 
management information systems, and correcting long-standing data 
accuracy and reliability problems within existing inventory management 
systems.

DOD, DLA, and the services have undertaken a number of initiatives to 
improve and transform DOD's supply chain. Many of these initiatives 
were developed in response to the logistics problems reported during 
OIF. While these initiatives represent a step in the right direction, 
the lack of a comprehensive, departmentwide logistics reengineering 
strategy to guide their implementation may limit their overall 
effectiveness. A key to successful implementation of a comprehensive 
logistics strategy will be addressing these initiatives as part of a 
comprehensive, integrated business transformation.

Strategic Human Capital Management:

DOD is attempting to address the critically important governmentwide 
high-risk challenge of strategic human capital management through its 
proposed human resources management system, the National Security 
Personnel System (NSPS). Successful implementation of NSPS is essential 
for DOD as it attempts to transform its military forces and defense 
business practices in response to 21st century challenges. In addition, 
this new human resources management system, if properly designed and 
effectively implemented, could serve as a model for governmentwide 
human capital transformation. DOD is one of several federal agencies 
that have been granted the authority by Congress to design a new human 
capital system as a way to address the governmentwide high-risk area of 
strategic human capital management. This effort represents a huge 
undertaking for DOD, given its massive size and geographically and 
culturally diverse workforce.

As I recently testified on DOD's proposed NSPS regulations,[Footnote 
40] our ongoing work continues to raise questions about DOD's chances 
of success in its efforts to effect fundamental business management 
reform, such as NSPS. I would like to acknowledge, however, that DOD's 
NSPS regulations take a valuable step toward a modern performance 
management system as well as a more market-based and results-oriented 
compensation system.

On February 14, 2005, the Secretary of Defense and the Acting Director 
of Office of Personnel Management (OPM) released the proposed NSPS 
regulations for public comment. Many of the principles underlying those 
regulations are generally consistent with proven approaches to 
strategic human capital management. For instance, the proposed 
regulations provide for (1) elements of a flexible and contemporary 
human resources management system, such as pay bands and pay for 
performance; (2) right-sizing of DOD's workforce when implementing 
reduction-in-force orders by giving greater priority to employee 
performance in its retention decisions; and (3) continuing 
collaboration with employee representatives. (It should be noted, 
however, that 10 federal labor unions have filed suit alleging that DOD 
failed to abide by the statutory requirements to include employee 
representatives in the development of DOD's new labor relations system 
authorized as part of NSPS.)

Despite this progress, we have three primary areas of concern about the 
proposed NSPS regulations. DOD's proposed regulations do not (1) define 
the details of the implementation of the system, including such issues 
as adequate safeguards to help ensure fairness and guard against abuse; 
(2) require, as we believe they should, the use of core competencies to 
communicate to employees what is expected of them on the job; and (3) 
identify a process for the continuing involvement of employees in the 
planning, development, and implementation of NSPS.

DOD also faces multiple implementation challenges once it issues its 
final NSPS regulations. Given the huge undertaking NSPS represents, 
another challenge is to elevate, integrate, and institutionalize 
leadership responsibility for this large-scale organizational change 
initiative to ensure its success. A chief management official or 
similar position can effectively provide the continuing, focused 
leadership essential to successfully completing these multiyear 
transformations. Additionally, DOD could benefit if it develops a 
comprehensive communications strategy that provides for ongoing, 
meaningful two-way communication to create shared expectations among 
employees, employee representatives, managers, customers, and 
stakeholders. Finally, appropriate institutional infrastructure could 
enable DOD to make effective use of its new authorities. At a minimum, 
this infrastructure would include a human capital planning process that 
integrates DOD's human capital policies, strategies, and programs with 
its program goals, mission, and desired outcomes; the capabilities to 
effectively develop and implement a new human capital system; and a set 
of adequate safeguards--including reasonable transparency and 
appropriate accountability mechanisms--to help ensure the fair, 
effective, and credible implementation and application of a new system.

We strongly support the need for government transformation and the 
concept of modernizing federal human capital policies within both DOD 
and the federal government at large. There is general recognition that 
the federal government needs a framework to guide human capital reform. 
Such a framework would consist of a set of values, principles, 
processes, and safeguards that would provide consistency across the 
federal government but be adaptable to agencies' diverse missions, 
cultures, and workforces.

Key Elements for Successful Business Transformation:

Although DOD has a number of initiatives to address its high-risk 
areas, we believe that DOD must fundamentally change its approach to 
overall business transformation effort before it is likely to succeed. 
We believe there are three critical elements of successful 
transformation: (1) developing and implementing an integrated and 
strategic business transformation plan, along with an enterprise 
architecture to guide and constrain implementation of such a plan; (2) 
establishing central control over systems investment funds; and (3) 
providing sustained leadership for business reform efforts. To ensure 
these three elements are incorporated into the department's overall 
business management, we believe Congress should legislatively create a 
full-time, high-level executive with long-term "good government" 
responsibilities that are professional and nonpartisan in nature. This 
executive, the Chief Management Official (CMO), would be a strategic 
integrator responsible for leading the department's overall business 
transformation, including developing and implementing a related 
strategic plan. The CMO would not assume the responsibilities of the 
undersecretaries of defense, the services, and other DOD entities for 
the day-to-day management of business activities. However, the CMO 
would be accountable for ensuring that all DOD business policies, 
procedures, and reform initiatives are consistent with an approved 
strategic plan for business transformation.

Reform Efforts Must Include an Integrated, Comprehensive Strategic Plan:

Our prior work indicates that agencies that are successful in achieving 
business management transformation undertake strategic planning and 
strive to establish goals and measures that align at all levels of the 
agency. The lack of a comprehensive and integrated strategic 
transformation plan linked with performance goals, objectives, and 
rewards has been a continuing weakness in DOD's business 
transformation. Since 1999, for example, we have recommended that a 
comprehensive and integrated strategic business transformation plan be 
developed for reforming DOD's major business operations and support 
activities. In 2004, we suggested that DOD clearly establish management 
accountability for business reform. While DOD has been attempting to 
develop an enterprise architecture for modernizing its business 
processes and supporting information technology assets for the last 4 
years, it has not developed a strategic and integrated transformation 
plan for managing its many business improvement initiatives. Nor has 
DOD assigned overall management responsibility and accountability for 
such an effort. Unless these initiatives are addressed in a unified and 
timely fashion, DOD will continue to see billions of dollars, which 
could be directed to other higher priorities, wasted annually to 
support inefficiencies in its business functions.

At a programmatic level, the lack of clear, comprehensive, and 
integrated performance goals and measures has handicapped DOD's past 
reform efforts. For example, we reported in May 2004 that the lack of 
performance measures for DOD's business transformation initiative-- 
encompassing defense policies, processes, people, and systems--made it 
difficult to evaluate and track specific program progress, outcomes, 
and results. As a result, DOD managers lacked straightforward road maps 
showing how their work contributed to attaining the department's 
strategic goals, and they risked operating autonomously rather than 
collectively. As of March 2004, DOD formulated departmentwide 
performance goals and measures and continued to refine and align them 
with outcomes described in its strategic plan--the September 2001 
Quadrennial Defense Review (QDR). As previously discussed, DOD outlined 
a new risk management framework in the QDR that DOD was to use in 
considering trade-offs among defense objectives and resource 
constraints, but as of March 2005 DOD was still in the process of 
implementing it.

Finally, DOD has not established a clear linkage among institutional, 
unit, and individual results-oriented goals, performance measures, and 
reward mechanisms for undertaking large-scale organizational change 
initiatives that are needed for successful business management reform. 
Traditionally, DOD has justified its need for more funding on the basis 
of the quantity of programs it has pursued 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 behavioral changes have been minimal or 
nonexistent. The establishment of a strategic and integrated business 
transformation plan could help DOD address these systemic management 
problems.

Central Control over Business Systems Investment Funds Is Crucial:

DOD's current business systems investment process, in which system 
funding is controlled by DOD components, has contributed to the 
evolution of an overly complex and error-prone information technology 
environment containing duplicative, nonintegrated, and stovepiped 
systems. We have made numerous recommendations to DOD to improve the 
management oversight and control of its business systems modernization 
investments. However, as previously discussed, a provision of the 
Ronald W. Reagan National Defense Authorization Act for Fiscal Year 
2005, consistent with the suggestion I have made in prior testimonies, 
established specific management oversight and accountability with the 
"owners" of the various core business mission areas. This legislation 
defined the scope of the various business areas (e.g., acquisition, 
logistics, finance, and accounting), and established functional 
approval authority and responsibility for management of the portfolio 
of business systems with the relevant under secretary of defense for 
the departmental core business mission areas and the Assistant 
Secretary of Defense for Networks and Information Integration 
(information technology infrastructure). For example, the Under 
Secretary of Defense for Acquisition, Technology, and Logistics is now 
responsible and accountable for any defense business system intended to 
support acquisition activities, logistics activities, or installations 
and environment activities for DOD.

This legislation also requires that the responsible approval 
authorities establish a hierarchy of investment review boards, the 
highest level being the Defense Business Systems Management Committee 
(DBSMC), with DOD-wide representation, including the military services 
and defense agencies. The boards are responsible for reviewing and 
approving investments to develop, operate, maintain, and modernize 
business systems for their business-area portfolio, including ensuring 
that investments are consistent with DOD's business enterprise 
architecture. However, as I pointed out earlier, DOD has not yet 
established the lower level investment review boards as required by the 
legislation.

Although this recently enacted legislation clearly defines the roles 
and responsibilities of business systems investment approval 
authorities, control over the budgeting for and execution of funding 
for systems investment activities remains at the DOD component level. 
As a result, DOD continues to have little or no assurance that its 
business systems modernization investment money is being spent in an 
economical, efficient, and effective manner. Given that DOD spends 
billions on business systems and related infrastructure each year, we 
believe it is critical that those responsible for business systems 
improvements control the allocation and execution of funds for DOD 
business systems. However, implementation may require review of the 
various statutory authorities for the military services and other DOD 
components. Control over business systems investment funds would 
improve the capacity of DOD's designated approval authorities to 
fulfill their responsibilities and gain transparency over DOD 
investments, and minimize the parochial approach to systems development 
that exists today. In addition, to improve coordination and integration 
activities, we suggest that all approval authorities coordinate their 
business systems modernization efforts with a CMO who would chair the 
DBSMC. Cognizant business area approval authorities would also be 
required to report to Congress through a CMO and the Secretary of 
Defense on applicable business systems that are not compliant with 
review requirements and to include a summary justification for 
noncompliance.

Chief Management Official Is Essential for Sustained Leadership of 
Business Management Reform:

As DOD embarks on large-scale business transformation efforts, we 
believe that the complexity and long-term nature of these efforts 
requires the development of an executive position capable of providing 
strong and sustained change management leadership across the 
department--and over a number of years and various administrations. One 
way to ensure such leadership would be to create by legislation a full- 
time executive-level II position for a CMO, who would serve as the 
Deputy Secretary of Defense for Management. This position would 
elevate, integrate, and institutionalize the high-level attention 
essential for ensuring that a strategic business transformation plan-- 
as well as the business policies, procedures, systems, and processes 
that are necessary for successfully implementing and sustaining overall 
business transformation efforts within DOD--are implemented and 
sustained. An executive-level II position for a CMO would provide this 
individual with the necessary institutional clout to overcome service 
parochialism and entrenched organizational silos, which in our opinion 
need to be streamlined below the service secretaries and other levels.

The CMO would function as a change agent, while other DOD officials 
would still be responsible for managing their daily business 
operations. The position would divide and institutionalize the current 
functions of the Deputy Secretary of Defense into a Deputy Secretary 
who, as the alter ego of the Secretary, would focus on policy-related 
issues such as military transformation, and a Deputy Secretary of 
Defense for Management, the CMO, who would be responsible and 
accountable for the overall business transformation effort and would 
serve full-time as the strategic integrator of DOD's business 
transformation efforts by, for example, developing and implementing a 
strategic and integrated plan for business transformation efforts. The 
CMO would not conduct the day-to-day management functions of the 
department; therefore, creating this position would not add an 
additional hierarchical layer to the department. Day-to-day management 
functions of the department would continue to be the responsibility of 
the undersecretaries of defense, the service secretaries, and others. 
Just as the CMO would need to focus full-time on business 
transformation, we believe that the day-to-day management functions are 
so demanding that it is difficult for these officials to maintain the 
oversight, focus, and momentum needed to implement and sustain needed 
reforms of 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 and their overall level within the department preclude the 
under secretaries, such as the DOD Comptroller, from asserting the 
necessary authority over selected players and business areas while 
continuing to fulfill their other responsibilities.

If created, we believe that the new CMO 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. As prior 
GAO work examining the experiences of major change management 
initiatives in large private and public sector organizations has shown, 
it can often take at least 5 to 7 years until such initiatives are 
fully implemented and the related cultures are transformed in a 
sustainable way. Articulating the roles and responsibilities of the 
position in statute would also help to create unambiguous expectations 
and underscore Congress's desire to follow a professional, nonpartisan, 
sustainable, and institutional approach to the position. In that 
regard, an individual appointed to the CMO position 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 DOD.

Furthermore, to improve coordination and integration activities, we 
suggest that all business systems modernization approval authorities 
designated in the Ronald W. Reagan National Defense Act of 2005 
coordinate their efforts with the CMO, who would chair the DBSMC that 
DOD recently established to comply with the act. We also suggest that 
cognizant business area approval authorities would also be required to 
report to Congress through the CMO and the Secretary of Defense on 
applicable business systems that are not compliant with review 
requirements and include a summary justification for noncompliance. In 
addition, the CMO 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 
business transformation efforts. Measurable progress toward achieving 
agreed-upon goals should be a basis for determining the level of 
compensation earned, including any related bonus. In addition, the 
CMO's achievements and compensation should be reported to Congress each 
year.

Concluding Observations:

The long-term fiscal pressures we face as a nation are daunting and 
unprecedented. The size and trend of our projected longer-term deficits 
mean that the nation cannot ignore the resulting fiscal pressures--it 
is not a matter of whether the nation deals with the fiscal gap, but 
when and how. Unless we take effective and timely action, our near-term 
and longer-term deficits present the prospect of chronic and seemingly 
perpetual budget shortfalls and constraints becoming a fact of life for 
years to come. These pressures will intensify the need for DOD to make 
disciplined and strategic investment decisions that identify and 
balance risks across a wide range of programs, operations, and 
functions. To its credit, DOD is in the process of implementing a risk 
management framework to use in considering trade-offs among defense 
objectives and resource constraints and establishing department-level 
priorities, rather than relying on incremental changes to existing 
budget levels. We recognize what a large undertaking developing a 
departmentwide risk management framework will be and, while we are 
still monitoring DOD's efforts to implement the framework, we have 
preliminary concerns based on our work reviewing other DOD reform 
efforts. Unless DOD is better able to balance its resources, DOD will 
continue to have a mismatch between programs and budgets, and will be 
less likely to maximize the value of the defense dollars it spends.

DOD continues to face pervasive, decades-old management problems 
related to its business operations and these problems affect all of 
DOD's major business areas. While DOD has taken steps to address these 
problems, our previous work has uncovered a persistent pattern among 
DOD's reform initiatives that limits their overall impact on the 
department. These initiatives have not been fully implemented in a 
timely fashion because of the absence of comprehensive, integrated 
strategic planning, inadequate transparency and accountability, and the 
lack of sustained leadership. As previously mentioned, the Secretary of 
Defense has estimated that improving business operations could save 5 
percent of DOD's annual budget. This represents a savings of about $22 
billion a year, based on the fiscal year 2004 budget. In this time of 
growing fiscal constraints, every dollar that DOD can save through 
improved economy and efficiency of its operations is important to the 
well-being of our nation. Until DOD resolves the numerous problems and 
inefficiencies in its business operations, billions of dollars will 
continue to be wasted every year.

DOD's senior leaders have demonstrated a commitment to transforming the 
department and have taken several positive steps to begin this effort. 
To overcome the previous cycle of failure at DOD in implementing broad- 
based management reform, however, we believe that three elements are 
key to successfully achieve needed reforms. First, DOD needs to 
implement and sustain a strategic and integrated business 
transformation plan. Second, we believe that the implementation of two 
proposed legislative initiatives--establishing central control of 
business system funds and creating a CMO--is crucial. We believe that 
central control over business system investment funds would better 
enable DOD to ensure that its resources are being invested in an 
economical, efficient, and effective manner. As long as funding is 
controlled by the components, it is likely that the existing problems 
with stovepiped, duplicative, and nonintegrated systems will continue. 
We support the need for legislation to create a CMO, in part, because 
we doubt that there is a single individual--no matter how talented and 
experienced--who could effectively address all that needs to be 
addressed at DOD, including conducting a global war on terrorism, 
transforming the military, and tackling long-standing, systemic 
business transformation challenges. We believe that a CMO, serving a 7- 
year term with the potential for reappointment, would have the 
institutional clout and an adequate term in office to work with DOD's 
senior leadership across administrations to make business 
transformation a reality. Since the CMO would not have responsibility 
for day-to-day management, this position would not superimpose another 
hierarchical layer over the department to oversee daily business 
operations. Instead, the CMO would be responsible and accountable for 
strategic planning, performance and financial management, and business 
system modernization, while facilitating overall business 
transformation. Without the strong and sustained leadership provided by 
a CMO, DOD will likely continue to have difficulties in maintaining the 
oversight, focus, and momentum needed to implement and sustain the 
reforms to its business operations.

Mr. Chairman and Members of the Subcommittee, this concludes my 
prepared statement. I would be happy to answer any questions you may 
have at this time.

(350699):

FOOTNOTES

[1] Funds for discretionary programs are provided in appropriation 
acts, while funds for mandatory programs are controlled by funds other 
than appropriations acts. 

[2] GAO, High-Risk Series: An Update, GAO-05-207 (Washington, D.C.: 
January 2005). 

[3] 21st Century Challenges: Reexamining the Base of the Federal 
Government, GAO-05-352T (Washington, D.C.: Feb. 16, 2005).

[4] Additional information on GAO's long-term budget simulations and 
the nation's fiscal outlook can be found at 
http://www.gao.gov/special.pubs/longterm/.

[5] GAO-05-325SP. 

[6] GAO, Future Years Defense Program: Actions Needed to Improve 
Transparency of DOD's Projected Resource Needs, GAO-04-514 (Washington, 
D.C.: May 7, 2004). 

[7] GAO, Major Management Challenges and Program Risks: Department of 
Defense, GAO-03-98 (Washington, D.C.: January 2003). These amounts are 
in constant fiscal year 2003 dollars. 

[8] Support infrastructure includes categories such as force 
installations, central logistics, the defense health program, and 
central training.

[9] GAO, Department of Defense: Further Actions Are Needed to 
Effectively Address Business Management Problems and Overcome Key 
Business Transformation Challenges, GAO-05-140T (Washington, D.C.: Nov. 
18, 2004); and GAO, DOD's High-Risk Areas: Successful Business 
Transformation Requires Sound Strategic Planning and Sustained 
Leadership, GAO-05-520T (Washington, D.C.: Apr. 13, 2005). 

[10] GAO, DOD Personnel: Inadequate Personnel Security Investigations 
Pose National Security Risks, GAO/NSIAD-00-12 (Washington, D.C.: Oct. 
27, 1999). 

[11] Department of Defense Annual Statement of Assurance, Fiscal Year 
2000 and Fiscal Year 2001; Department of Defense Performance and 
Accountability Report, Fiscal Year 2002 (Jan. 31, 2003) and Fiscal Year 
2003 (Dec. 23, 2003). 

[12] Committee on Government Reform, Defense Security Service: The 
Personnel Security Investigations (PSI) Backlog Poses a Threat to 
National Security, H.R. Rep. No. 107-767 (Washington, D.C.: Oct. 24, 
2002).

[13] GAO, DOD Personnel Clearances: DOD Needs to Overcome Impediments 
to Eliminating Backlog and Determining Its Size, GAO-04-344 
(Washington, D.C.: Feb. 9, 2004). 

[14] Pub. L. No. 108-136 § 906 (Nov. 24, 2003).

[15] GAO, Information Technology: Architecture Needed to Guide 
Modernization of DOD's Financial Operations, GAO-01-525 (Washington, 
D.C.: May 17, 2001).

[16] GAO-04-615; Department of Defense: Further Actions Needed to 
Establish and Implement a Framework for Successful Financial and 
Business Management Transformation, GAO-04-551T (Washington, D.C.: Mar. 
23, 2004); DOD Business Systems Modernization: Important Progress Made 
to Develop Business Enterprise Architecture, but Much Work Remains, 
GAO- 03-1018 (Washington, D.C.: Sept. 19, 2003); DOD Financial 
Management: Integrated Approach, Accountability, Transparency, and 
Incentives Are Keys to Effective Reform, GAO-02-497T (Washington, D.C.: 
Mar. 6, 2002); Defense Management: New Management Reform Program Still 
Evolving, GAO- 03-58 (Washington, D.C.: Dec. 12, 2002); Information 
Technology: Architecture Needed to Guide Modernization of DOD's 
Financial Operations, GAO-01-525 (Washington, D.C.: May 17, 2001); and 
DOD Financial Management: Integrated Approach, Accountability, and 
Incentives Are Keys to Effective Reform, GAO-01-681T (Washington, D.C.: 
May 8, 2001).

[17] GAO, DOD Business Systems Modernization: Limited Progress in 
Development of Business Enterprise Architecture and Oversight of 
Information Technology Investments, GAO-04-731R (Washington, D.C.: May 
17, 2004).

[18] GAO-01-525.

[19] Ronald W. Reagan National Defense Authorization Act for Fiscal 
Year 2005, Pub. L. No. 108-375, §332, 118 Stat. 1811, 1851 (Oct. 28, 
2004) (codified, in part, at 10 U.S.C. §§186, 2222).

[20] GAO-04-731R.

[21] GAO-04-731R.

[22] 10 U.S.C. § 2222.

[23] Approval authorities include the Under Secretary of Defense for 
Acquisition, Technology, and Logistics; the Under Secretary of Defense 
(Comptroller); the Under Secretary of Defense for Personnel and 
Readiness; and the Assistant Secretary of Defense for Networks and 
Information Integration/Chief Information Officer of the Department of 
Defense. These approval authorities are responsible for the review, 
approval, and oversight of business systems and must establish 
investment review processes for systems under their cognizance.

[24] Pub. L. No. 108-875, § 332, 118 Stat. 1811, 1854 (Oct. 28, 2004) 
(codified at 10 U.S.C. § 2222(a)(2)). 

[25] 31 U.S.C. § 1341(a)(1)(A); see 10 U.S.C. § 2222(b).

[26] GAO, Fiscal Year 2004 U.S. Government Financial Statements: 
Sustained Improvement in Federal Financial Management Is Crucial to 
Addressing Our Nation's Future Fiscal Challenges, GAO-05-284T 
(Washington, D.C.: Feb. 9, 2005).

[27] For our report on the U.S. government's consolidated financial 
statements for fiscal year 2004, see U.S. Department of the Treasury, 
Financial Report on the United States Government (Washington, D.C.: 
December 2004), 33-53, which can be found on GAO's Web site at 
www.gao.gov.

[28] GAO, Military Pay: Gaps in Pay and Benefits Create Financial 
Hardships for Injured Army National Guard and Reserve Soldiers, GAO-05- 
125 (Washington, D.C.: Feb. 17, 2005).

[29] GAO, Financial Management: Further Actions Are Needed to Establish 
Framework to Guide Audit Opinion and Business Management Improvement 
Efforts at DOD, GAO-04-910R (Washington, D.C.: Sept. 20, 2004).

[30] GAO, Contract Management: Agencies Can Achieve Significant Savings 
on Purchase Card Buys, GAO-04-430 (Washington, D.C.: Mar. 12, 2004). 

[31] GAO, Rebuilding Iraq: Fiscal Year 2003 Contract Award Procedures 
and Management Challenges, GAO-04-605 (Washington, D.C.: June 1, 2004).

[32] GAO, Military Operations: DOD's Extensive Use of Logistics Support 
Contracts Requires Strengthened Oversight, GAO-04-854 (Washington, 
D.C.: July 19, 2004); and Defense Logistics: High-Level DOD 
Coordination Is Needed to Further Improve the Management of the Army's 
LOGCAP Contract, GAO-05-328 (Washington, D.C.: Mar. 21, 2005).

[33] GAO, Contract Management: Opportunities to Improve Surveillance on 
Department of Defense Service Contracts, GAO-05-274 (Washington, D.C.: 
Mar. 17, 2005).

[34] GAO-04-605. 

[35] GAO, Contract Management: Guidance Needed to Promote Competition 
for Defense Task Orders, GAO-04-874 (Washington, D.C.: July 30, 2004). 

[36] GAO, Best Practices: Improved Knowledge of DOD Service Contracts 
Could Reveal Significant Savings, GAO-03-661 (Washington, D.C.: June 9, 
2003); and Best Practices: Taking a Strategic Approach Could Improve 
DOD's Acquisition of Services, GAO-02-230 (Washington, D.C.: Jan. 18, 
2002). 

[37] GAO-05-207.

[38] GAO, Defense Logistics: Actions Needed to Improve the Availability 
of Critical Items during Current and Future Operations, GAO-05-275 
(Washington, D.C.: Apr. 8, 2005).

[39] GAO, Defense Inventory: Improvements Needed in DOD's 
Implementation of Its Long-Term Strategy for Total Asset Visibility of 
Its Inventory, GAO-05-15 (Washington, D.C.: Dec. 6, 2004).

[40] GAO, Human Capital: Preliminary Observations on Proposed DOD 
National Security Personnel System Regulations, GAO-05-432T 
(Washington, D.C.: Mar. 15, 2005).