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DOD Approach to Business Transformation

This information appears as published in the 2013 High Risk Report.

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The Department of Defense (DOD) spends billions of dollars each year to maintain key business operations intended to support the warfighter, including systems and processes related to the management of contracts, finances, the supply chain, support infrastructure, and weapons systems acquisition. Weaknesses in these areas adversely affect DOD’s efficiency and effectiveness, and hinder its ability to free up resources for higher priority needs. As a result, GAO has designated many of DOD’s key business areas as high risk due to their vulnerability to waste, fraud, abuse, and mismanagement. In 2005, GAO added DOD’s overall approach to managing business transformation as a high-risk area because (1) DOD had not established clear and specific management responsibility, accountability, and control over business transformation-related activities and applicable resources and (2) DOD lacked a clear strategic and integrated plan for business transformation with specific goals, measures and accountability mechanisms to monitor progress and achieve improvements.

Because of the complexity and long-term nature of DOD’s transformation efforts, GAO has reported the need for a chief management officer (CMO) position and a comprehensive, enterprise-wide business transformation plan. In May 2007, DOD designated the Deputy Secretary of Defense as the CMO. In addition, the National Defense Authorization Acts for fiscal years 2008 and 2009 contained provisions that codified the CMO and deputy CMO (DCMO) positions, required DOD to develop a strategic management plan, and required the Secretaries of the military departments to designate their Under Secretaries as CMOs and to develop business transformation plans.

GAO found that DOD has met two of the five criteria for removing the high-risk designation on its business management approach. Specifically, through various actions, DOD has demonstrated top leadership support for improving its business operations and the capacity to focus oversight on reform efforts. For example, over the past several years, DOD has issued directives outlining broad CMO and DCMO responsibilities, issued its first strategic management plan and subsequent updates, filled key positions such as the DCMO and military department CMOs, and established governance structures intended to provide a forum for discussing business-related topics and serve as oversight mechanisms. However, more remains to be done to fully address limitations in the department’s management approach. In particular, DOD has not yet fully met the remaining three criteria, which involve developing a comprehensive strategic plan to guide transformation efforts, implementing an approach for monitoring and validating the effectiveness of reform initiatives, and demonstrating sustained progress in addressing longstanding systemic weaknesses in key business areas. These areas are discussed in the following paragraphs.

Strategic Management Plan

DOD’s current Strategic Management Plan (SMP), which was issued in September 2011, represents an improvement over previous plans. However, the plan continues to lack key information that would make it more effective in guiding business transformation efforts and helping DOD achieve needed improvements. DOD issued its first SMP in 2008 and has updated the plan three times, further defining goals, initiatives, and performance measures for achieving business transformation. For example, the current plan identifies seven business goals and, unlike prior versions, shows how these goals align with DOD’s overall strategic goals and contains performance measures that generally include milestones or target data. In some cases, it also shows linkages to other plans for certain business areas, such as financial management and information technology, and assigns accountability to senior leaders within the Office of the Secretary of Defense for achieving results for specific goals. However, the plan continues to lack key information, such as a description of the specific business-related challenges that each goal is intended to address, sufficient context to explain the basis for why specific goals were chosen, measures that fully reflect core activities needed to assess progress, and funding priorities linked to goals. The following examples illustrate these points.

  • Acquisition. The goal related to strengthening DOD’s acquisition processes is aimed at obtaining greater efficiency and productivity in defense spending; however, the narrative accompanying this goal does not provide any information on what is causing the cost growth for DOD’s major defense acquisition programs, or on how the measures and initiatives associated with the goal may address those causes. GAO’s work shows that many factors contribute to cost growth, including the lack of well defined requirements and sufficient information on technology at key points in the procurement process. Unless the underlying root causes of these issues are addressed, substantive improvements are unlikely.
  • Supply chain. The plan includes a business goal to re-engineer business processes to reduce transaction times, drive down costs, and improve services. Associated with this goal is an initiative to “improve the supply chain end to end process” and measures that relate to percentage of filling orders accurately and customer wait time; however, the narrative describing the goal does not discuss what aspects of the supply chain process need improvement. GAO’s work shows that deficiencies exist in several areas of the supply chain, such as material distribution, requirements forecasting, and asset visibility.
  • Contracting. The plan includes a business goal to create agile business operations that plan for, support, and sustain contingency missions and an initiative to “institutionalize operational contract support;” however, the plan does not identify the areas where DOD faces challenges and needs to focus its reform efforts. GAO’s work shows that challenges include insufficient capacity to oversee contractors and inadequate planning for contractor support during contingency operations.

    With additional information on the scope and root causes of challenges, DOD would more effectively communicate business priorities and focus initiatives to ensure that the department is addressing long-term systemic weaknesses in its business areas. Such information is necessary to establish a clear and common understanding of key problems and gaps and would make the strategic management plan a more useful tool for decision makers by setting strategic direction for targeting reform efforts and making investment decisions.

    In addition, the plan identifies specific business goals but does not explain why the business areas identified in these goals were considered to be priorities compared to other areas or what criteria DOD used to determine when to remove goals that had been included in earlier plans. For example, DOD included the high-risk area of support infrastructure management among the business priorities in prior SMPs. However, the current plan omits this area without providing a rationale for doing so, such as whether sufficient progress had been made to warrant its removal. GAO’s work shows that, while DOD has made progress in some areas of managing its support infrastructure, it continues to face significant challenges in others, such as reducing excess facilities and achieving efficiencies from joint basing. As a result, support infrastructure remains on GAO’s High Risk List of issue areas vulnerable to waste, fraud, abuse, and mismanagement or in need of broad transformation.

    The plan also includes some measures for its seven business goals; however, in some key business areas, the measures do not reflect all core activities needed to assess progress in addressing underlying challenges. GAO’s prior work has shown that performance measures should focus on core activities that would help managers assess whether they are achieving organizational goals. For example:
  • Workforce needs. DOD’s plan includes a goal to strengthen and right-size DOD’s total workforce and a related initiative to recruit and retain the right quality skilled personnel to meet mission requirements. The plan includes measures related to DOD’s progress in recruiting sufficient numbers of military personnel against prescribed end-strength goals, and the percentage of military recruits that have high school diplomas and meet other criteria. However, the plan does not include additional measures to assess whether DOD is recruiting and retaining civilian staff with the right mix of skills and competencies such as financial management and acquisition skills. GAO’s past work has shown that this is an important business transformation challenge and that DOD has not yet completed statutorily-mandated gap assessments of its skills and competencies needed to develop the right recruiting and retention goals. Further, DOD’s plan does not have a set of measures that reflect the core activities needed to assess progress toward right-sizing DOD military, civilian, and contractor personnel who comprise the total workforce.
  • Contract management. The current plan identifies measures related to planning for contractor support, but does not address other core activities such as those related to addressing challenges in providing sufficient numbers of trained personnel to perform contractor oversight. GAO’s work has shown that DOD faces significant challenges in building a workforce of trained personnel to manage and oversee contractors.

    Finally, the plan lists key initiatives for achieving each business goal, but it does not include any information on resource needs or investment priorities so that activities can be linked to funding decisions. GAO’s prior work has shown that agencies are successful in achieving business management transformation when they strive to establish strategic plans that prioritize initiatives and resources, and therefore, GAO has previously recommended that the strategic management plan include funding priorities. Without including a description of funding priorities or resource needs, DOD decision makers cannot be assured that they are developing plans and budget requests that reflect business priorities.

Assessing Performance and Demonstrating Results

DOD has broadly outlined a performance management approach, but greater clarity is needed to fully define how the department will measure progress, address long-term systemic challenges in key business areas, and demonstrate tangible results. Since GAO last reported in January 2011, DOD has continued to measure its performance in achieving business goals and established new governance structures intended to provide management oversight. For example, the Under Secretaries of Defense report performance results on measures in the SMP and on the goal related to business reform in DOD’s annual performance plan. The Office of the DCMO summarizes these results on a quarterly basis. The DCMO periodically meets with the CMO to discuss some of this information, such as measures that are not on target. The Under Secretaries also internally collect and report on measures against separate business-related areas, such as the Logistics Strategic Plan and the Financial Improvement and Audit Readiness Plan, which may contain additional measures than those in the SMP. Similarly, the military department CMOs collect information on the business priorities in their respective plans.

In addition, DOD has established two governance structures intended, in part, to monitor business transformation progress. These include the Deputy’s Management Action Group (a high level forum for senior leaders to discuss business-related topics and other issues) and the Defense Business Council (a recently established body that is responsible for recommending certification of business system investments and broadly improving DOD’s business activities). Although the Council has met several times, DOD has not yet demonstrated how the Council will integrate and use performance information from various sources to assess progress on a department-wide basis and identify corrective actions or issues to raise to the higher level Deputy’s Management Action Group.

Through its governance efforts, DOD has clearly increased senior leadership involvement in overseeing transformation efforts, and has continued to implement a significant number of reform activities, including in areas that GAO has designated as high risk. However, these efforts have not yet produced tangible and sustained results in addressing longstanding deficiencies in key business areas. GAO’s work shows that many of same fundamental weaknesses that cause these areas to be at high risk for fraud, waste, abuse, and mismanagement still remain. For example:

  • Business systems modernization. In the area of business systems modernization, DOD has taken steps such as establishing and implementing guidance, structures and processes to provide investment management oversight and control for the acquisition, modernization and sustainment of systems. However, these efforts have yet to yield significant results in materially improving the cost, schedule, and performance of its major automated information systems and eliminating duplicative investments.
  • Weapons acquisition. Regarding weapons acquisition, DOD has undertaken several reforms, including significantly revising acquisition policies and implementing initiatives intended to improve affordability and control cost growth. However it has yet to demonstrate sustained improvements in cost and schedule outcomes on major defense acquisitions programs, such as reducing the number of programs that exceed statutory thresholds for cost growth, increasing the number of programs meeting the cost performance targets that GAO uses to measure progress in the weapon systems acquisition high-risk area, and increasing the number of programs with mature critical technologies, stable designs, and proven production processes at key points in the acquisition process.
  • Financial management. In the area of financial management, DOD now has a Financial Improvement and Audit Readiness Plan that lays out a strategy and methodology for achieving auditability. DOD has also issued guidance to DOD components for developing financial improvement plans to implement the Financial Improvement and Audit Readiness Plan, which GAO believes provides a reasonable methodology. While DOD continues to focus its efforts on improving the processes and systems that produce budgetary information, it has not yet achieved auditability of any of its financial statements. The department has also not made significant progress in addressing some of the key weaknesses, such as reversing the trend of continuing delays in its deployment of its Enterprise Resource Planning systems, which are intended to replace existing outdated systems and which DOD considers critical to its financial improvement efforts and achieving audit readiness.

    GAO recognizes that transforming DOD’s business operations is a complex undertaking and will be a continuous process, and therefore, would not expect that DOD’s management oversight would have prompted reforms to address all of the challenges in any given area. However, in order for DOD to demonstrate that its management approach has matured to the point where DOD is able to achieve and sustain progress, GAO would expect to see more tangible results in resolving some fundamental weaknesses in some key business areas, including those on GAO’s High Risk List.

DOD needs to demonstrate that its management oversight of reform efforts is producing tangible results in addressing longstanding deficiencies in key business areas. To better achieve these results and guide its oversight, it will be important for DOD to further refine its strategic management plan and approach for measuring progress on a department-wide basis. Taking these steps will further enhance DOD’s ability to strategically focus the department’s transformation efforts on the highest priority areas, assess progress against business goals, take corrective action to stay on course in correcting the root causes undermining its ability to achieve needed reforms, and ultimately demonstrate tangible results in addressing longstanding business challenges. Specifically,

  • DOD needs to further refine its Strategic Management Plan to ensure that it:
    • identifies the scope of business challenges and underlying root causes to be addressed;
    • describes the underlying rationale for business goals, including any changes in goals from prior plans;
    • includes a set of measures that reflects core activities for each business area; and
    • links activities to resource needs and funding priorities.
  • DOD needs to further define how the CMO, DCMO, Under Secretaries of Defense, military department CMOs, and other senior leaders, supported by existing governance structures, will:
    • integrate various sources of performance information on business—related activities;
    • monitor and assess this information to measure department-wide progress against business goals; and
    • identify corrective actions and monitor implementation.
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High-Risk Series: An Update

GAO-11-278: Published: Feb 16, 2011. Publicly Released: Feb 16, 2011.
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    • Sharon Pickup
    • Director, Defense Capabilities and Management
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