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Before the Subcommittee on Readiness and Management Support, Committee 
on Armed Services, U.S. Senate:

For Release on Delivery Expected at 3:30 p.m. EST Thursday, November 
18, 2004:


Further Actions Are Needed to Effectively Address Business Management 
Problems and Overcome Key Business Transformation Challenges:

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


GAO Highlights:

Highlights of GAO-05-140T, a report to the Subcommittee on Readiness 
and Management Support, Committee on Armed Services, U.S. Senate: 

Why GAO Did This Study:

In March 2004, GAO testified before this Subcommittee on the impact and 
causes of financial and related business weaknesses on the Department 
of Defense’s (DOD) operations and the status of DOD reform efforts. 
GAO’s reports continue to show that fundamental problems with DOD’s 
financial management and related business operations result in 
substantial waste and inefficiency, adversely impact mission 
performance, and result in a lack of adequate transparency and 
appropriate accountability across all major business areas. Over the 
years, DOD leaders have initiated a number of efforts to address these 
weaknesses and transform the department. For years, GAO has reported 
that DOD is challenged in its efforts to effect fundamental financial 
and business management reform, and GAO’s ongoing work continues to 
raise serious questions about DOD’s chances of success. The 
Subcommittee asked GAO to provide a current status report on DOD’s 
progress to date and suggestions for improvement. Specifically, GAO was 
asked to provide (1) an overview of the impact and causes of weaknesses 
in DOD’s business operations, (2) the status of DOD reform efforts, 
(3) the impact of recent legislation pertaining to DOD’s transformation 
and financial improvement initiatives, and (4) suggestions for 
improving DOD’s efforts to improve the reliability of its financial 

What GAO Found:

Although senior DOD leaders have shown commitment to transformation as 
evidenced by key initiatives such as human capital reform, the Business 
Management Modernization Program, and the Financial Improvement 
Initiative, little tangible evidence of improvement has been seen in 
DOD’s business operations. Overhauling the business operations of one 
of the largest and most complex organizations in the world represents a 
huge management challenge, especially given the increased demands on 
our military forces. However, this challenge can be met if DOD employs 
key elements, such as a comprehensive and integrated business 
transformation plan. Six DOD program areas are on GAO’s high-risk list, 
and the department shares responsibility for three other governmentwide 
high-risk areas. Substantial weaknesses in DOD business operations 
adversely affect its ability to provide timely, reliable management 
information for DOD and Congress to use in making informed decisions. 
Further, the lack of adequate transparency and appropriate 
accountability across all of DOD’s major business areas results in 
billions of dollars annually in wasted resources in a time of 
increasing fiscal challenges. 

Examples of the Impact of Business Management Problems at DOD: 

Business area affected: Military pay; 
Problem identified and its impact: 782 of the 829 mobilized Army 
National Guard and Reserve soldiers from 14 case study units GAO 
investigated had pay problems. These problems distracted soldiers from 
their missions, imposed financial hardships on their families, and had 
a negative impact on retention.

Business area affected: Logistics; 
Problem identified and its impact: Asset visibility and other 
logistical support problems hampered mission readiness during Operation 
Iraqi Freedom, including cannibalization of vehicles for parts and 
duplication of requisitions.

Business area affected: Travel; 
Problem identified and its impact: Ineffective controls over DOD’s 
centrally billed travel accounts led to millions of dollars wasted on 
unused airline tickets, reimbursements to travelers for improper or 
fraudulent ticket claims, and issuance of tickets based on invalid 
travel orders. 

Business area affected: Program planning; 
Problem identified and its impact: Overly optimistic planning 
assumptions used to estimate DOD’s annual budget request limit 
visibility of projected costs. As a result, DOD has too many programs 
for the available dollars, which often leads to program instability, 
increased costs, and program termination.

Source: GAO.
Four underlying causes impede reform: (1) lack of clear and sustained 
leadership for overall business transformation efforts, (2) cultural 
resistance to change, (3) lack of meaningful metrics and ongoing 
monitoring, and (4) inadequate incentives and accountability 
mechanisms. To address these issues, GAO reiterates the key elements 
to successful reform that are embodied in our prior recommendations 
and two suggestions for legislative action. First, GAO suggests that a 
senior management position be established to provide strong and 
sustained leadership over all major transformation efforts. Second, GAO 
proposes that business systems modernization money be appropriated to 
designated approval authorities responsible and accountable for system 
investments within DOD business areas. Absent this unified 
responsibility, authority, accountability, and control of funding, the 
current transformation efforts are likely to fail.

To view the full product, including the scope and methodology, click on 
the link above. For more information, contact Gregory Kutz, (202) 
512-9095 or

[End of section]

Mr. Chairman and Members of the Subcommittee:

It is a pleasure to be back before this Subcommittee to discuss 
financial management and overall business transformation efforts at the 
Department of Defense (DOD). At the outset, I would like to thank the 
Subcommittee for having this hearing and acknowledge the important role 
hearings such as this one serve in addressing DOD's business 
transformation challenges. DOD spends billions of dollars each year to 
sustain key business operations that support our forces, including 
systems and processes related to acquisition and contract management, 
financial management, supply chain management, support infrastructure 
management, human capital management, and other key areas. Recent and 
ongoing military operations in Afghanistan and Iraq and new homeland 
defense missions have led to higher demands on our forces in a time of 
growing fiscal challenges for our nation. In an effort to better manage 
DOD's resources, the Secretary of Defense has appropriately placed a 
high priority on transforming key business processes to improve their 
efficiency and effectiveness in supporting the department's military 
mission. However, as our reports continue to show, fundamental problems 
with DOD's financial management and related business operations 
continue to result in substantial waste and inefficiency, adversely 
impact mission performance, and result in a lack of adequate 
transparency and appropriate accountability across all major business 
areas. Of the 25 areas on GAO's governmentwide high-risk list, 6 are 
DOD program areas, and the department shares responsibility for 3 other 
high-risk areas that are governmentwide in scope.[Footnote 1] The 
problems we continue to identify relate to human capital challenges, 
ineffective internal control and processes, and duplicative and 
nonintegrated business information, systems, and operations. The 
seriousness of weaknesses in DOD's business operations underscores the 
importance of no longer condoning the "status quo" at DOD.

Although, the Secretary and several key agency officials have shown 
commitment to transformation, as evidenced by key initiatives such as 
human capital reform, the Business Management Modernization Program 
(BMMP), and the Financial Improvement Initiative, little tangible 
evidence of significant broad-based and sustainable improvements has 
been seen in DOD's business operations to date. Improvements have 
generally been limited to specific business process areas, such as 
DOD's purchase card program, and resulted in the incorporation of many 
key elements of reform, such as increased management oversight and 
monitoring and results-oriented performance measures. It is important 
to note that current business transformation initiatives are not 
integrated and lack many of the key elements that contributed to the 
success of the narrowly defined initiatives that I will highlight 

For DOD to successfully transform its business operations, it will need 
a comprehensive and integrated business transformation plan, people 
with the skills, responsibility, and authority to implement the plan, 
an effective process and related tools, such as a Business Enterprise 
Architecture (BEA), [Footnote 2] and results-oriented performance 
measures that link institutional, unit, and individual personnel goals 
and expectations to promote accountability for results. Over the last 3 
years, we have made a series of recommendations to DOD and suggested 
legislative changes that, if implemented, could help DOD move forward 
in establishing the means to successfully address the challenges it 
faces in transforming its business operations.[Footnote 3] The 
framework that we have proposed includes several key elements for 
successful reform, recognizes the complexity of the challenges facing 
DOD in its efforts to transform the department, and the long-term 
nature of overcoming these challenges. Moreover, it recognizes that the 
lack of clearly defined and sustained leadership, an enterprise 
architecture to guide and direct business operational changes, cultural 
resistance to change, and internal parochialism have impeded the 
success of previous reform efforts. DOD has agreed with our 
recommendations and launched efforts intended to implement many of 
them, but progress has been slow. Unless DOD can address the underlying 
causes that have contributed to the failure of previous broad-based 
reform efforts, improvements will remain marginal and confined to 
narrowly defined business process areas and incremental improvements in 
human capital policies, business processes, internal controls, and 
information technology systems.

Today, I will provide my perspectives on (1) the impact that long-
standing weaknesses continue to have on the economy, efficiency, and 
effectiveness of DOD's business operations, (2) underlying causes that 
have impeded the success of prior efforts, (3) keys to successful 
reform, and (4) DOD business transformation efforts and interim 
improvements. In addition, while statutory requirements enacted 
recently as a part of the Ronald W. Reagan National Defense 
Authorization Act for Fiscal Year 2005[Footnote 4] are a positive step 
towards improving leadership and accountability over DOD's systems 
transformation efforts, I will offer two suggestions for legislative 
consideration related to sustained top-level leadership, 
responsibility, and accountability that would better permit the 
effective use of transition plans, processes, people, and tools and 
thereby increase the likelihood of successful business transformation. 
My statement is based on previous GAO reports and routine efforts to 
track the status of open recommendations, as well as on our review of 
the work of other Supreme Audit Institutions and DOD auditors, and 
recent DOD reports and studies. Our work was performed in accordance 
with generally accepted government auditing standards.

Impact of Financial Management and Related Business Process Weaknesses:

As I previously stated, and we have reported on for several years, DOD 
faces a range of challenges that are complex, long-standing, pervasive, 
and deeply rooted in virtually all major business operations throughout 
the department. As I testified last March and as discussed in our 
latest financial audit report,[Footnote 5] DOD's financial management 
deficiencies, taken together, continue to represent the single largest 
obstacle to achieving an unqualified (clean) audit opinion on the U.S. 
government's consolidated financial statements. While it is important 
to note that some DOD organizations, such as the Defense Finance 
Accounting Service (DFAS),[Footnote 6] the Defense Contract Audit 
Agency, and the Office of the Inspector General, have clean audit 
opinions for fiscal year 2004, significant DOD components do not. To 
date, none of the military services has passed the test of an 
independent financial audit because of pervasive weaknesses in internal 
control and processes and fundamentally flawed business systems. 
Moreover, the lack of adequate transparency and appropriate 
accountability across DOD's major business areas results in billions of 
dollars of wasted resources annually at a time of growing fiscal 

In identifying improved financial performance as one of its five 
governmentwide initiatives, the President's Management Agenda 
recognized that obtaining an unqualified financial audit opinion is a 
basic prescription for any well-managed organization. At the same time, 
it recognized that without sound internal control and accurate and 
timely financial and performance information, it is not possible to 
accomplish the President's agenda and secure the best performance and 
highest measure of accountability for the American people. The Joint 
Financial Management Improvement Program (JFMIP)[Footnote 7] 
principals have defined certain measures, in addition to receiving an 
unqualified financial statement audit opinion, for achieving financial 
management success. These additional measures include (1) being able to 
routinely provide timely, accurate, and useful financial and 
performance information, (2) having no material internal control 
weaknesses or material noncompliance with laws and regulations, and (3) 
meeting the requirements of the Federal Financial Management 
Improvement Act of 1996 (FFMIA).[Footnote 8] Unfortunately, DOD does 
not meet any of these conditions. For example, for fiscal year 2004, 
the DOD Inspector General issued a disclaimer of opinion on DOD's 
financial statements, citing 11 material weaknesses in internal control 
and noncompliance with FFMIA requirements.

Recent audits and investigations by GAO and DOD auditors continue to 
confirm the existence of pervasive weaknesses in DOD's financial 
management and related business processes and systems. These problems 
have (1) resulted in a lack of reliable information needed to make 
sound decisions and report on the status of DOD activities, including 
accountability of assets, through financial and other reports to 
Congress and DOD decision makers, (2) hindered its operational 
efficiency, (3) adversely affected mission performance, and (4) left 
the department vulnerable to fraud, waste, and abuse, of which I have a 
few examples.

* 782 of the 829 mobilized Army National Guard and Reserve soldiers 
from 14 case study units we reviewed had at least one pay problem--
including overpayments, underpayments, and late payments--associated 
with their mobilization. DOD's inability to provide timely and accurate 
payments to these soldiers, many of whom risked their lives in 
dangerous combat missions in Iraq or Afghanistan, distracted them from 
their missions, imposed financial hardships on the soldiers and their 
families, and has negatively impacted retention. 
([Hyperlink,], Nov. 13, 
2003 and [Hyperlink,], 
Aug. 20, 2004):

* DOD incurred substantial logistical support problems as a result of 
weak distribution and accountability processes and controls over 
supplies and equipment shipments in support of Operation Iraqi Freedom, 
similar to those encountered during the prior gulf war. These 
weaknesses resulted in (1) supply shortages, (2) backlogs of materials 
delivered in-theater but not delivered to the requesting activity, (3) 
a discrepancy of $1.2 billion between the amount of materiel shipped 
and that acknowledged by the activity as received, (4) cannibalization 
of vehicles, and (5) duplicate supply requisitions. 
([Hyperlink,], Dec. 18, 

* Inadequate asset accountability also resulted in DOD's inability to 
locate and remove from its inventory over 250,000 defective chemical 
and biological protective garments known as Battle Dress Overgarments 
(BDOs)--the predecessor of the new Joint Service Lightweight Integrated 
Suit Technology (JSLIST). Subsequently, we found that DOD had sold many 
of these defective suits to the public, including 379 that we purchased 
in an undercover operation. In addition, DOD may have issued over 4,700 
of the defective BDO suits to local law enforcement agencies. Although 
local law enforcement agencies are most likely to be the first 
responders to a terrorist attack, DOD failed to inform these agencies 
that using these BDO suits could result in death or serious injury. 
([Hyperlink,], Nov. 19, 

* Ineffective controls over Navy foreign military sales using blanket 
purchase orders placed classified and controlled spare parts at risk of 
being shipped to foreign countries that may not be eligible to receive 
them. For example, we identified instances in which Navy country 
managers (1) overrode the system to release classified parts under 
blanket purchase orders without filing required documentation 
justifying the release and (2) substituted classified parts for parts 
ordered under blanket purchase orders, bypassing the control-edit 
function of the system designed to check a country's eligibility to 
receive the parts. 
([Hyperlink,], June 25, 

* DOD and congressional decision makers lack reliable data upon which 
to base sourcing decisions due to recurring weaknesses in DOD data-
gathering, reporting, and financial systems. As in the past, we have 
identified significant errors and omissions in the data submitted to 
Congress on the amount of each military service's depot maintenance 
work outsourced or performed in-house. As a result, both DOD and 
Congress lack assurances that the dollar amounts of public-private 
sector workloads reported by the military services are reliable. 
([Hyperlink,], Sept. 29, 

* Ineffective controls over DOD's centrally billed travel accounts led 
to millions of dollars wasted on unused airline tickets, reimbursements 
to travelers for improper and potentially fraudulent airline ticket 
claims, and issuance of airline tickets based on invalid travel orders. 
For example, we identified 58,000 airline tickets--primarily purchased 
in fiscal years 2001 and 2002--with a residual value of more than $21 
million that were unused and not refunded as of October 2003. On the 
basis of limited airline data, we determined that since 1997, the 
potential magnitude of DOD's unused tickets could be at least $115 
million. ([Hyperlink,], 
June 9, 2004 and 
[Hyperlink,], Mar. 31, 

* The Navy's lack of detailed cost information hinders its ability to 
monitor programs and analyze the cost of its activities. For example, 
we found that the Navy lacked the detailed cost and inventory data 
needed to assess its needs, evaluate spending patterns, and leverage 
its telecommunications buying power. As a result, we found that at the 
sites reviewed, the Navy paid for telecommunications services it no 
longer required, paid too much for services it used, and paid for 
potentially fraudulent or abusive long-distance charges. For instance, 
we found that DOD paid over $5,000 in charges for one card that was 
used to place 189 calls in one 24-hour period from 12 different cities 
to 12 different countries. 
([Hyperlink,], June 14, 

* DOD continues to use overly optimistic planning assumptions to 
estimate its annual budget request. These assumptions are reflected in 
its Future Years Defense Program (FYDP), which reports projected 
spending for the current budget year and at least 4 succeeding years. 
Such overly optimistic assumptions limit the visibility of costs 
projected throughout the FYDP period and beyond. As a result, DOD has 
too many programs for the available dollars, which often leads to 
program instability, costly program stretch-outs, and program 
termination. For example, in January 2003, we reported that the 
estimated costs of developing eight major weapons systems had increased 
from about $47 billion in fiscal year 1998 to about $72 billion by 
fiscal year 2003. In addition, in September 2004 the Congressional 
Budget Office projected that if the costs of weapons programs and 
certain other activities continued to grow as they have historically 
rather than as DOD currently projects, executing today's defense plans 
would require spending an average of $498 billion a year through 2009. 
Without realistic projections, Congress and DOD will not have 
visibility over the full range of budget options available to achieve 
defense goals. 
([Hyperlink,], Jan. 2003 
and [Hyperlink,], May 7, 

* DOD did not know the size of its security clearance backlog at the 
end of September 2003 and had not estimated this backlog since January 
2000. Using September 2003 data, we estimated that DOD had a backlog of 
roughly 360,000 investigative and adjudicative cases, but the actual 
backlog size is uncertain. DOD's failure to eliminate and accurately 
assess the size of its backlog may have adverse affects. For example, 
delays in updating overdue clearances for personnel doing classified 
work may increase national security risks and slowness in issuing new 
clearances can increase the costs of doing classified government work. 
([Hyperlink,], Feb. 9, 

These examples clearly demonstrate not only the severity of DOD's 
current problems, but also the importance of reforming the department's 
business operations to more effectively support DOD's core mission, to 
improve the economy and efficiency of its operations, and to provide 
for transparency and accountability to Congress and American taxpayers.

Underlying Causes of Financial and Related Business Process 
Transformation Challenges:

The underlying causes of DOD's financial management and related 
business process and system weaknesses are generally the same ones I 
have outlined in my prior testimonies before this Subcommittee over the 
last 3 years. Unfortunately, DOD has made little progress in addressing 
these fundamental issues and thus is at high risk that its current 
major reform initiatives will fail. For each of the problems I cited 
previously, we found that one or more of these long-standing causes 
were contributing factors. Over the years, the department has 
undertaken many well-intended initiatives to transform business 
operations departmentwide and improve the reliability of information 
for decision making and reporting. However, many of these efforts 
resulted in costly failures because the department did not fully 
address the following four underlying causes of transformation 

Lack of Sustained Leadership and Management Accountability:

DOD has not routinely assigned accountability for performance to 
specific organizations or individuals who have sufficient authority, 
resource control, and continuity in their position to accomplish 
desired goals. In addition, top management has not had a proactive, 
consistent, and continuing role in integrating daily operations with 
business transformation-related performance goals. It is imperative 
that major improvement initiatives have the direct, active support and 
involvement of the Secretary and Deputy Secretary of Defense to ensure 
that daily activities throughout the department remain focused on 
achieving shared, agencywide outcomes and success. However, sustaining 
top management continuity and commitment to performance goals, long-
term planning, and follow-through that will necessarily span several 
years is particularly challenging for DOD. For example, in fiscal year 
2004, DOD's Comptroller, Deputy Under Secretary of Defense for 
Management Reform, and Deputy Chief Financial Officer--to whom the 
Secretary delegated the leadership role for key transformation 
initiatives--all resigned from the department within a 5-month period. 
Moreover, the department's primary transformation program--BMMP--has 
had three different directors responsible for leading the program since 
Secretary Rumsfeld initiated it a little over 3 years ago. Given the 
importance of DOD's business transformation effort, it is imperative 
that it receives sustained, focused departmentwide leadership needed to 
improve the economy, efficiency, and effectiveness of DOD's business 
operations. As I will discuss in more detail later, we continue to 
advocate the establishment of a new executive position to provide 
strong and sustained leadership to the entire spectrum of DOD business 
transformation initiatives.

Cultural Resistance and Parochialism:

The department has acknowledged that it confronts decades-old problems 
deeply grounded in the bureaucratic history and operating practices of 
a complex, multifaceted organization. Many of DOD's current operating 
practices and systems were developed piecemeal to accommodate different 
organizations, each with its own policies and procedures. As we have 
reported over the last 3 years,[Footnote 9] DOD has continued to use a 
stovepiped approach to develop and fund its business system 
investments. The existing systems environment evolved over time as DOD 
components--each receives its own system funding and follows 
decentralized acquisition and investment practices--developed narrowly 
focused parochial solutions to their business problems. While the 
Ronald W. Reagan National Defense Authorization Act for Fiscal Year 
2005[Footnote 10] more clearly defines the roles and responsibilities 
of business system investment approval authorities, control over the 
budgeting for and execution of funding for system investment activities 
remains at the component level. As I will discuss later, unless 
business systems modernization money is appropriated to those who are 
responsible and accountable for reform, DOD is at risk for continuing 
its current stovepiped approach to developing and funding system 
investments and failing to fundamentally improve its business 
operations. DOD's ability to address its current "business-as-usual" 
approach to business system investments is further hampered by its lack 
of an effective methodology and process for obtaining a complete 
picture of its current business systems environment--a condition we 
first highlighted in 1997.[Footnote 11] In September 2004, DOD reported 
that the department had identified over 4,000 business systems--up from 
the 1,731 the department reported in October 2002. Unfortunately, due 
to its lack of an effective methodology and process for identifying 
business systems, including a clear definition of what constitutes a 
business system, DOD continues to lack assurance that its systems 
inventory is reliable. This lack of visibility over business systems in 
use throughout the department hinders DOD's ability to identify and 
eliminate duplicate and nonintegrated systems and transition to an 
integrated systems environment.

Lack of Results-Oriented Goals and Performance Measures:

At a programmatic level, the lack of clear, comprehensive, and 
integrated performance goals and measures has handicapped DOD's past 
reform efforts. As a result, DOD managers lacked straightforward 
roadmaps 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 had formulated 
departmentwide performance goals and measures and continues to refine 
and align them with the outcomes described in its strategic plan--the 
September 2001 Quadrennial Defense Review (QDR). The QDR 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. According to DOD's Fiscal Year 2003 Annual Report to the 
President and the Congress, these risk areas are to form the basis for 
DOD's annual performance goals. They will be used to track performance 
results and will be linked to planning and resource decisions. As of 
October 2004, the department was still in the process of implementing 
this approach departmentwide. However, it remains unclear how DOD will 
use this approach to measure progress in achieving business reform.

As we reported in May 2004, DOD had yet to establish measurable, 
results-oriented goals for BMMP.[Footnote 12] BMMP is the department's 
major business transformation initiative encompassing defense 
policies, processes, people, and systems that guide, perform, or 
support all aspects of business management, including development and 
implementation of the BEA. A key element of any major program is its 
ability to establish clearly defined goals and performance measures to 
monitor and report its progress to management. The lack of BMMP 
performance measures has made it is difficult to evaluate and track 
specific program progress, outcomes, and results, such as explicitly 
defined performance measures to evaluate the architecture's quality, 
content, and utility of subsequent major updates. Given that DOD had 
reported total obligations for BMMP of over $203 million since 
architecture development began 3 years ago, with little tangible 
improvements in DOD operations, this is a serious performance 
management weakness.

Further, DOD has not established measurable criteria that decision 
makers must consider for its revised weapons system acquisition policy, 
issued in May 2003.[Footnote 13] The revisions make major improvements 
to DOD acquisition policy by adopting knowledge-based, evolutionary 
practices used by successful commercial companies. However, DOD has not 
provided the necessary controls to ensure such an approach is followed. 
For example, the policy does not establish measures to gauge design and 
manufacturing knowledge at critical junctures in the product 
development process, allowing significant unknowns to be judged as 
acceptable risks. Without controls in the form of measurable criteria 
that decision makers must consider, DOD runs the risk of making 
decisions based on overly optimistic assumptions.

Lack of Incentives for Change:

The final underlying cause of the department's long-standing inability 
to carry out needed fundamental reform has been the lack of a clear 
linkage of institutional, unit, and individual results-oriented goals, 
performance measures, and reward mechanisms for making more than 
incremental changes to existing "business-as-usual" operations, 
systems, and organizational structures. Traditionally, DOD has focused 
on justifying its need for more funding 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 

The lack of incentives to change is evident in the business systems 
modernization area. We have identified numerous business system 
modernization efforts that were not economically justified on the basis 
of cost, benefits, and risk; took years longer than planned; and fell 
far short of delivering planned or needed capabilities. Despite this 
track record, DOD continues to invest billions in business systems 
while at the same time it lacks the effective management and oversight 
needed to achieve real results. Without appropriate incentives and 
accountability mechanisms, as well as more centralized control of 
systems modernization funding, DOD components will continue to develop 
duplicative and nonintegrated systems that are inconsistent with the 
Secretary's vision for reform. To effect real change, actions are 
needed to (1) develop a well-defined blueprint for change, such as an 
enterprise architecture, that provides a common framework of reference 
for making informed system investment decisions, (2) adopt an 
investment decision-making model that uses the architecture to break 
down parochialism and reward behaviors that meet DOD-wide goals, (3) 
establish incentives that motivate decision makers to initiate and 
implement efforts that are consistent with better architecture and 
program outcomes, including saying "no" or pulling the plug early on a 
system or program that is failing, (4) address human capital issues, 
such as the adequacy of staffing level, skills, and experience 
available to achieve the institutional, unit, and individual objectives 
and expectations, and (5) facilitate a congressional focus on results-
oriented management, particularly with respect to resource allocation 

Keys to Successful Reform and Current Status of Reform Efforts:

The success of DOD's current broad-based business reform initiatives is 
threatened, as prior initiatives were, by DOD's continued failure to 
incorporate key elements that are critical to achieve successful 
reform. Any efforts at reform must include (1) a comprehensive, 
integrated business transformation plan, (2) personnel with the 
necessary skills, experience, responsibility, and authority to 
implement the plan, (3) effective processes and related tools, such as 
a BEA and business system investment decision making controls, and (4) 
results-oriented performance measures that link institutional, unit, 
and individual personnel goals, measures, and expectations. Today, I 
would like to discuss three of those broad-based initiatives. In 
addition, I will briefly highlight some of the several smaller, more 
narrowly focused initiatives DOD has started in recent years that, 
through incorporation of many of the key elements, have been successful 
in making tangible improvements in DOD operations. Furthermore, I would 
like to reiterate two suggestions for legislative consideration that I 
believe are essential in order for DOD to be successful in its overall 
business transformation effort.

Keys to Successful Reform:

As I have previously testified,[Footnote 14] and as illustrated by the 
success of the more narrowly defined DOD initiatives I will discuss 
later, there are several key elements that collectively would enable 
the department to effectively address the underlying causes of its 
inability to resolve its long-standing business management problems. 
These elements, which we believe are key to any successful approach to 
transforming the department's business operations, include:

* addressing the department's financial management and related business 
operational challenges as part of a comprehensive, integrated, DOD-wide 
strategic plan for business reform;

* providing for sustained, committed, and focused leadership by top 
management, including but not limited to the Secretary of Defense;

* establishing resource control over business systems investments;

* establishing clear lines of responsibility, authority, and 

* incorporating results-oriented performance measures that link key 
institutional, unit, and individual personnel transformation 
objectives and expectations, and monitoring progress;

* addressing human capital issues, such as the adequacy of staff 
levels, skills, and experience available to achieve the institutional, 
unit, and individual personnel performance goals and expectations;

* providing appropriate incentives or consequences for action or 

* establishing an enterprise architecture to guide and direct business 
systems modernization investments; and:

* ensuring effective oversight and monitoring.

These elements, which should not be viewed as independent actions but 
rather as a set of interrelated and interdependent actions, are 
reflected in the recommendations we have made to DOD over the last 3 
years and are consistent with those actions discussed in the 
department's April 2001 financial management transformation 
report.[Footnote 15] The degree to which DOD incorporates them into its 
current reform efforts--both long and short term--will be a deciding 
factor in whether these efforts are successful. Thus far, the 
department's progress in implementing our recommendations pertaining to 
its broad-based initiatives has been slow. Further, while the new 
legislation[Footnote 16] on business systems oversight directs DOD to 
take action on some of these elements, we have not yet seen a 
comprehensive, cohesive, and integrated strategy that details how some 
of the ongoing efforts are being integrated. For example, we have not 
seen how the department plans to integrate its objective of obtaining 
an unqualified audit opinion in fiscal year 2007 with the 
BMMP.[Footnote 17] It appears as if these two efforts are being 
conducted without the degree of coordination that would generally be 
expected between efforts that share similar objectives.

Human Capital Initiative:

The first broad-based administrative initiative is effective 
implementation of the National Security Personnel System (NSPS). In 
November 2003, Congress authorized the Secretary of Defense to 
establish a new human capital management system--NSPS--for its civilian 
employees, which is modern, flexible, and consistent with the merit 
principles outlined by the act.[Footnote 18] This legislation requires 
DOD to develop a personnel system that is consistent with many of the 
practices that we have identified as elements of an effective human 
capital management system, including a modern and results-oriented 
performance management system. For several years, we have 
reported[Footnote 19] that many of DOD's business process and control 
weaknesses were attributable in part to human capital issues. For 
example, GAO audits of DOD's Army Reserve and National Guard payroll 
and the centrally billed travel card programs[Footnote 20] further 
highlight the adverse impact that outdated and inadequate human capital 
practices, such as insufficient staffing, training, and monitoring of 
performance, continue to have on DOD business operations. If properly 
developed and implemented, NSPS could result in significant 
improvements to DOD's business operations.

I strongly support the need for modernizing federal human capital 
policies both within DOD and for the entire federal government. Since 
April 2003 I have testified on four different occasions, including 
before this Subcommittee, on NSPS and related DOD human capital 
issues.[Footnote 21] In the near future, we will issue a summary of the 
forum GAO and the National Commission on the Public Service 
Implementation Initiative cohosted to advance the discussion of how 
human capital reform should proceed. Participants discussed whether 
there should be an overall governmentwide framework for human capital 
reform and, if yes, what such a framework should include. While the 
forum neither sought nor achieved consensus on all of the issues 
identified in the discussion, there was broad agreement that there 
should be a governmentwide framework to guide human capital reform 
built on a set of timeless beliefs and boundaries. Beliefs entail the 
fundamental principles that should govern all approaches to human 
capital reform and should not be altered or waived by agencies seeking 
human capital authorities. Boundaries include the criteria and 
processes that establish the checks and limitations when agencies seek 
and implement human capital authorities.

A modern, effective, credible, and integrated performance management 
system can help improve DOD's business operations. Specifically, such a 
performance management system aligns individual performance 
expectations with organizational goals and thus defines responsibility 
and assures accountability for achieving them.[Footnote 22] In 
addition, a performance management system can help manage and direct a 
transformation process by linking performance expectations to an 
employee's role in the process. Individual performance and 
contributions are evaluated on competencies such as change management. 
Leaders, managers, and employees who demonstrate these competencies are 
rewarded for their success in contributing to the achievement of the 
transformation process.

There are significant opportunities to use the performance management 
system to explicitly link senior executive expectations for performance 
to results-oriented goals. There is a need to hold senior executives 
accountable for demonstrating competencies in leading and facilitating 
change and fostering collaboration both within and across 
organizational boundaries to achieve results. Setting and meeting 
expectations such as these will be critical to achieving needed 
transformation changes. Recently, Congress established a new 
performance-based pay system for members of the Senior Executive 
Service (SES) that is designed to provide a clear and direct link 
between SES performance and pay. An agency can raise the pay cap for 
its senior executives if the agency's performance management system 
makes meaningful distinctions based on relative performance.[Footnote 
23] This visible step in linking pay to the achievement of measurable 
performance goals within a context of a credible human capital system 
that includes adequate safeguards is helpful in constructing a results-
oriented culture.

In my March 2004 testimony on DOD's financial management and related 
business management transformation efforts,[Footnote 24] I stated that 
as DOD develops regulations to implement its new human capital 
management system, the department needs to do the following:

* Ensure the active involvement of the Office of Personnel Management 
in the development process, given the significant implications that 
changes in DOD regulations may have on governmentwide human capital 
policies.[Footnote 25] In this regard, the Office of Personnel 
Management has assigned a senior representative to support and advise 
DOD on the development of jointly prescribed NSPS regulations and the 
implementation of NSPS.

* Ensure the involvement of civilian employees and unions in the design 
and development of a new personnel system. The law calls for DOD to 
involve employees, especially in the design of its new performance 
management system. Involving employees in planning helps to develop 
agency goals and objectives that incorporate insights about operations 
from a front-line perspective. It can also serve to increase employees' 
understanding and acceptance of organizational goals and improve 
motivation and morale. In this regard, DOD has launched a new Web site 
to educate its employees about the new National Security Personnel 
System. In addition, DOD leadership has indicated that it has sought 
input from civilian employees through town hall meetings, focus groups, 
and discussions with union leaders.

* Use a phased approach to implement the system, recognizing that 
different parts of the organization will have different levels of 
readiness and different capabilities to implement new authorities. A 
phased approach allows for learning so that appropriate adjustments and 
midcourse corrections can be made before the regulations are fully 
implemented departmentwide. In this regard, DOD had initially indicated 
that it planned to implement its new human capital system for 300,000 
civilian employees by October 1, 2004. DOD has since indicated that it 
has adjusted its timelines to reflect a more cautious, deliberative 
approach involving more stakeholders. DOD has now indicated that it 
plans to phase in its new human capital system beginning in July 2005.

We are currently evaluating DOD's NSPS design process and look forward 
to sharing our findings with Congress upon completion of our review.

Business Management Modernization Program:

While BMMP[Footnote 26] is vital to the department's efforts to 
transform its business operations, DOD has not effectively addressed 
many of the impediments to successful reform that I mentioned earlier, 
including (1) a lack of sustained, effective, and focused leadership, 
(2) a lack of results-oriented goals and performance measures, and (3) 
long-standing cultural resistance and parochialism. As a result, the 
program has yielded very little, if any, tangible improvements in DOD's 
business operations. We have made numerous recommendations to DOD that 
center on the need to incorporate the key elements to successful 
reform, which I discussed previously, into the program. In May 2004 we 
reported[Footnote 27] that no significant changes had been made to the 
architecture since the initial version was released. Further, we 
reported that DOD had not yet adopted key architecture management best 
practices, such as assigning accountability and responsibility for 
directing, overseeing, and approving the architecture and explicitly 
defining performance metrics to evaluate the architecture's quality, 
content, and utility. For these and other reasons, DOD's verification 
and validation contractor concluded that this latest version of the 
architecture retained most of the critical problems of the initial 
version, such as how the architecture should be used by the military 
services and other DOD components in making acquisition and portfolio 
investment decisions. I will now expand on the problems facing BMMP.

The purpose of BMMP is to provide world-class mission support to the 
war fighter through transformation of DOD's business processes and 
systems. A key element of BMMP is the development and implementation of 
a well-defined BEA. Properly developed and implemented, a BEA can 
provide assurance that the department invests in integrated 
enterprisewide business solutions and, along with effective project 
management and resource controls, it can be instrumental in developing 
corporatewide solutions and moving resources away from nonintegrated 
business system development efforts. As we reported in July 
2003,[Footnote 28] DOD had developed an initial version of BEA and had 
expended tremendous effort and resources in doing so. However, we also 
reported that substantial work remains before the architecture would be 
sufficiently defined to have a tangible impact on improving DOD's 
overall business operations. In May 2004, we reported[Footnote 29] that 
after about 3 years of effort and over $203 million in reported 
obligations for BMMP operations, BEA's content and DOD's approach to 
investing billions of dollars annually in existing and new systems had 
not changed significantly. Under a provision in the recently enacted 
Ronald W. Reagan National Defense Authorization Act for fiscal year 
2005,[Footnote 30] 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 the Office 
of Management and Budget. Further, the act requires the development of 
a transition plan that includes not only an acquisition strategy for 
new systems, but also 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. Transforming DOD's business operations and 
making them more efficient through the elimination of nonintegrated and 
noncompliant legacy systems would free up resources that could be used 
to support the department's core mission, enhance readiness, and 
improve the quality of life for our troops and their families.

I cannot overemphasize the degree of difficulty DOD faces in developing 
and implementing a well-defined architecture to provide the foundation 
that will guide its overall business transformation. The department's 
business transformation depends on its ability to develop and implement 
business systems that provide corporate solutions. Successful 
implementation of corporate solutions through adherence to a well-
defined enterprise architecture and effective project management and 
fund control would go a long way toward precluding the continued 
proliferation of duplicative, stovepiped systems and reduce spending on 
multiple systems that are supposed to perform the same function. 
Without these things, we have continued to see[Footnote 31] that DOD is 
still developing systems that are not designed to solve corporatewide 

For example, the Defense Logistics Agency's (DLA) Business Systems 
Modernization (BSM) and the Army's Logistics Modernization Program 
(LMP), both of which were initiated prior to commencement of the BEA 
effort, were not directed towards a corporate solution to the 
department's long-standing weaknesses in inventory and logistics 
management, such as the lack of total asset visibility. Rather, both 
projects focused on their respective entity's inventory and logistics 
management operations. As a result, neither project will provide asset 
visibility beyond the stovepiped operation for which they were 
designed. For example, BSM is only designed to provide visibility over 
the items within the DLA environment--something DLA has stated already 
exists within its current system environment. As a result, DOD 
continues to lack the capability to identify the exact location of 
items, such as defective chemical and biological protective suits, that 
were distributed to end-users, such as the military services, or sold 
to the public. The department would have to resort to inefficient and 
ineffective data calls, as it has done in the past, to identify and 
withdraw defective items from use.[Footnote 32]

Another major impediment to the successful transformation of DOD's 
business systems is funds control. DOD invests billions of dollars 
annually to operate, maintain, and modernize its business systems. For 
fiscal year 2004, the department requested approximately $28 billion in 
IT funding to support a wide range of military operations as well as 
DOD business systems operations, of which DOD reported that 
approximately $18.8 billion [Footnote 33]--$5.8 billion for business 
systems and $13 billion for business systems infrastructure--relates to 
the operation, maintenance, and modernization of the department's 
reported thousands of business systems. The $18.8 billion is spread 
across the military services and defense agencies, with each receiving 
and controlling its own funding for IT investments. Although the 
recently enacted Ronald W. Reagan National Defense Authorization Act 
for fiscal year 2005 more clearly defines the roles and 
responsibilities of business system investment approval authorities, 
control over the budgeting for and execution of funding for system 
investment activities remains at the component level. Under a provision 
in the act,[Footnote 34] effective October 1, 2005, DOD must identify 
each defense system for which funding is proposed in its budget, 
including the identification of all funds, by appropriation, for 
current services (to operate and maintain the system) and 
modernization. Further, DOD may not obligate funds for a defense 
business system modernization that will have a total cost in excess of 
$1 million unless specific conditions called for in the act are 
met.[Footnote 35] The Defense Business Systems Management Committee, 
also required by the act to be established, must then approve the 
designated approval authorities'[Footnote 36] certification before 
funds can be obligated. Further, obligation of funds for modernization 
programs without certification and approval by the Defense Business 
Systems Management Committee is deemed a violation of the Anti-
Deficiency Act.[Footnote 37] Although proper implementation of this 
legislation should strengthen oversight of DOD's systems modernization 
efforts, it is questionable whether DOD has developed or improved its 
processes and procedures to identify and control system investments 
occurring at the component level. Unless DOD establishes effective 
processes and controls to identify and control system investments 
occurring within DOD components and overcome parochial interests when 
corporatewide solutions are more appropriate, it will lack the ability 
to ensure compliance with the act.

We fully recognize that developing and implementing an enterprise 
architecture for an organization as large and complex as DOD is a 
formidable challenge. Nevertheless, a well-defined architecture is 
essential to enabling some of the elements for successful reform that I 
discussed earlier. Accordingly, we remain supportive of the need for 
BMMP, but are deeply concerned about the program's lack of meaningful 
progress and inability to address management challenges. Accordingly, 
we plan to continue working constructively with the department to 
strengthen the program and will report to this Subcommittee on DOD's 
progress and challenges in the spring of 2005.

Financial Improvement Initiative:

While DOD's former Comptroller started the financial improvement 
initiative with the goal of obtaining an unqualified audit opinion for 
fiscal year 2007 on its departmentwide financial statements, we found 
that the initiative was simply a goal that lacked a clearly defined, 
well-documented, and realistic plan to make the stated goal a reality.

In September 2004 we reported[Footnote 38] that DOD's financial 
improvement initiative lacked several of the key elements critical to 
success, including (1) a comprehensive, integrated plan, (2) results-
oriented goals and performance measures, and (3) effective oversight 
and monitoring. Specifically, we found that DOD had not established a 
framework to integrate the improvement efforts planned by DOD 
components with broad-based DOD initiatives such as human capital and 
BMMP. Rather, DOD intended to rely upon the collective efforts of DOD 
components, as shown in their discrete plans, to address its financial 
management deficiencies while at the same time continuing its broad-
based initiatives. However, the component plans we reviewed did not 
consistently identify whether a proposed corrective action included a 
manual work-around or business system enhancement or replacement. 
Further, the component plans lacked sufficient information regarding 
human capital needs, such as the staffing level and skills required to 
implement and sustain the plans. In addition, as we have previously 
reported,[Footnote 39] the department currently lacks a mechanism to 
effectively identify, monitor, and oversee business system investments, 
including enhancements, occurring within the department. Because of 
this lack of visibility over how DOD components plan to advance their 
financial management functionality, the DOD Comptroller and BMMP may 
not have sufficient information to assess the feasibility of a work-
around or to review and approve all modifications to existing legacy 
business systems to ensure that they (1) are sound investments, (2) 
optimize mission performance and accountability, and (3) are consistent 
with applicable requirements and key architectural elements in DOD's 
business enterprise architecture.

In addition, our review of key individual component plans revealed that 
the plans varied in levels of detail, completeness, and scope, such 
that it will be difficult for DOD Comptroller staff to use the 
departmental database of component plans it was developing to oversee 
and monitor component efforts. We found that the component plans did 
not consistently identify how staff (human capital), processes, or 
business systems would be changed to implement corrective actions. Such 
changes are key elements in assessing the adequacy of a component's 
plan and in monitoring progress and sustainability.

Further, DOD lacked effective oversight and accountability mechanisms 
to ensure that the plans are implemented and corrective actions are 
sustainable. The database the department is currently using was not 
integrated electronically with subordinate component plans and the 
milestone dates identified in the component plans were generally based 
on assertion dates prescribed by the DOD Comptroller and not on actual 
estimates of effort required. Furthermore, task dependencies were not 
clearly identified, including critical corrective tasks that would need 
to be completed in order for the fiscal year 2007 audit opinion to be 

On the positive side, DOD had developed business rules,[Footnote 40] 
which if implemented as planned, should clearly establish a process for 
ensuring that corrective actions, as described in the component plans, 
are implemented and validated in order to minimize the department's 
risk of unsupported claims by DOD components that reported financial 
information is auditable. Further, the business rules clearly recognize 
that management, not the auditor, is responsible for documenting 
business processes, systems, and internal control for collecting and 
maintaining transaction data. In addition, DOD's involvement of its 
components in developing and implementing solutions to long-standing 
deficiencies in their business operations under this initiative is a 
critical and positive step toward obtaining the commitment and buy-in 
that has not been readily apparent in BMMP. Further, the recently 
enacted Ronald W. Reagan National Defense Authorization Act for Fiscal 
Year 2005[Footnote 41] has placed a limitation on continued preparation 
or implementation of DOD's financial improvement initiative pending a 
report to congressional defense committees containing the following: 
(1) a determination that BEA and the transition plan have been 
developed, as required by section 332 of the act, (2) an explanation of 
the manner in which fiscal year 2005 operation and maintenance funds 
will be used by DOD components to prepare or implement the midrange 
financial improvement plan, and (3) an estimate of future year costs 
for each DOD component to implement the plan. DOD Comptroller staff 
acknowledged that their goal was ambitious, but believed that they were 
in the process of laying a framework, which they believe would address 
our issues, to facilitate movement towards sustainable financial 
management improvements and eventually obtain an unqualified audit 

Interim Initiatives:

In contrast to its broad-based initiatives, DOD has incorporated many 
of the key elements for successful reform in its interim initiatives. 
As the following examples demonstrate, leadership, real incentives, 
accountability, and oversight and monitoring were clearly key elements 
in DOD's efforts to improve its operations. For example, the former DOD 
Comptroller developed a Financial Management Balanced Scorecard that is 
intended to align the financial community's strategy, goals, 
objectives, and related performance measures with the departmentwide 
risk management framework established as part of DOD's Quadrennial 
Defense Review, and with the President's Management Agenda. To 
effectively implement the balanced scorecard, the DOD Comptroller has 
cascaded the performance measures down to the military services and 
defense agency financial communities, along with certain specific 
reporting requirements. At the departmentwide level, certain financial 
metrics are selected, consolidated, and reported to the top levels of 
DOD management for evaluation and comparison. These "dashboard" metrics 
are intended to provide key decision makers, including Congress, with 
critical performance information at a glance, in a consistent and 
easily understandable format.

DFAS has been reporting the metrics cited below for several years, 
which under the leadership of DFAS's Director and DOD's Comptroller, 
have reported improvements including the following.

* From April 2001 to September 2004, DOD reduced its commercial pay 
backlogs (payment delinquencies) by 72 percent.

* From March 2001 to September 2004, DOD reduced its payment recording 
errors by 77 percent.

* From September 2001 to September 2004, DOD reduced its delinquency 
rate for individually billed travel cards from 9.4 percent to 4.3 

Using DFAS's metrics, management can quickly see when and where 
problems are arising and can focus additional attention on those areas. 
While these metrics show significant improvements from 2001 to today, 
our report last year on DOD's metrics program[Footnote 42] included a 
caution that, without modern integrated systems and the streamlined 
processes they engender, reported progress may not be sustainable if 
workload is increased.

DOD and the military services have also acted to improve their 
oversight and monitoring of the department's purchase card program and 
have taken actions, that when fully implemented, should effectively 
address all of our 109 recommendations. For example, they issued policy 
guidance on monitoring charge card activity and disciplinary actions 
that will be taken against civilian or military employees who engage in 
improper, fraudulent, abusive, or negligent use of a government charge 
card. In addition, they substantially reduced the number of purchase 
cards issued. According to the General Services Administration records, 
DOD had reduced the total number of purchase cards from about 239,000 
in March 2001 to about 131,875 in June 2004. These reductions have the 
potential to significantly improve the management of this program.

Further, the DOD IG and the Navy have prototyped and are now expanding 
a data-mining capability to screen for and identify high-risk 
transactions (such as potentially fraudulent, improper, and abusive use 
of purchase cards) for subsequent investigation. On April 28, 2004, the 
DOD IG testified[Footnote 43] on ways the department could save money 
through the prudent use of government purchase cards. The testimony 
highlighted improvements made in the management of the department's 
purchase card program and areas for which additional improvements are 
needed. Specifically, the testimony identified actions the DOD IG had 
taken to partner with the DOD purchase card program management offices 
so that DOD could more proactively identify and prevent potential 
fraud, waste, and mismanagement. However, more still needs to be done 
because the testimony also discussed more than $12 million in 
fraudulent, wasteful, or abusive purchases identified by the DOD IG.

In addition to the oversight and monitoring performed by DOD over these 
business areas, we believe that consistent congressional oversight 
played a major role in bringing about these improvements in DOD's 
purchase and travel card programs. From 2001 through 2004, 10 separate 
congressional hearings were held on DOD's purchase and travel card 
programs. Numerous legislative initiatives aimed at improving DOD's 
management and oversight of these programs also had a positive impact. 
Most recently, the fiscal year 2005 Defense Appropriations Act[Footnote 
44] reduced DOD's appropriation by $100 million to "limit excessive 
growth" in DOD's travel expenses.

Another important initiative under way at the department pertains to 
the quarterly financial statement review sessions held by the DOD 
Comptroller, which have led to the discovery and correction of numerous 
recording and reporting errors. Under the leadership of DOD's former 
Comptroller, and continuing under its new leadership, DOD is working to 
instill discipline into its financial reporting processes to improve 
the reliability of the department's financial data. Specifically, the 
DOD Comptroller requires DOD's major components to prepare quarterly 
financial statements along with extensive footnotes that explain any 
improper balances or significant variances from previous year quarterly 
statements. All of the statements and footnotes are analyzed by 
Comptroller office staff and reviewed by the Comptroller. In addition, 
the midyear and end-of-year financial statements must be briefed to the 
DOD Comptroller by the military service Assistant Secretary for 
Financial Management or the head of the defense agency. Under DOD's 
former Comptroller, GAO and the DOD IG were invited to observe several 
of these briefings and noted that the practice of preparing and 
explaining interim financial statements has improved the reliability of 
reported information through more timely discovery and correction of 
numerous recording and reporting errors. Although these meetings are 
continuing under the current Comptroller, GAO and the DOD IG have not 
been invited to attend.

Suggestions for Legislative Consideration:

I would like to reiterate two suggestions for legislative consideration 
that I discussed in my testimony last March, which I believe could 
further improve the likelihood of successful business transformation at 
DOD. Most of the key elements necessary for successful transformation 
could be achieved under the current legislative framework; however, 
addressing sustained and focused leadership for DOD business 
transformation and funding control will require additional legislation. 
These suggestions include the creation of a chief management official 
and the appropriation of business system investment funding to the 
approval authorities responsible and accountable for business system 
investments under provisions enacted by the Ronald W. Reagan National 
Defense Authorization Act for Fiscal Year 2005.[Footnote 45]

Chief Operating Officer/Chief Management Official:

While the Secretary and other key DOD leaders have demonstrated their 
commitment to the current business transformation efforts, in our view, 
the complexity and long-term nature of these efforts requires the 
development of an executive position capable of providing strong and 
sustained executive leadership--over a number of years and various 
administrations. The day-to-day demands placed on the Secretary, the 
Deputy Secretary, and others make it difficult for these leaders to 
maintain the oversight, focus, and momentum needed to resolve the 
weaknesses in 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 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 

While sound strategic planning is the foundation upon which to build, 
sustained and focused leadership is needed for reform to succeed. One 
way to ensure sustained leadership over DOD's business transformation 
efforts would be to create a full-time executive-level II position for 
a chief operating officer or chief management official (COO/CMO), who 
would serve as the Principal Under Secretary of Defense for 
Management.[Footnote 46] This position would elevate, integrate, and 
institutionalize the attention essential for addressing key stewardship 
responsibilities, such as strategic planning, human capital management, 
performance and financial management, acquisition and contract 
management, and business systems modernization, while facilitating the 
overall business transformation operations within DOD.

The COO/CMO concept is consistent with the commonly agreed-upon 
governance principle that there needs to be a single point within 
agencies with the perspective and responsibility--as well as authority-
-to ensure the successful implementation of functional management and 
transformation efforts. Governments around the world, such as the 
United Kingdom and Ireland, have established term appointed positions, 
similar to the COO/CMO concept we propose, that are responsible for 
advancing and continuously improving agency operations.

The DOD COO/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. Articulating the roles and 
responsibilities of the position in statute helps to create unambiguous 
expectations and underscores Congress' desire to follow a professional, 
nonpartisan approach to the position. In that regard, such an 
individual 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 the 
department and serve as an integrator for the needed business 
transformation efforts. In addition, this individual 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 towards achieving agreed-upon goals would be a 
basis for determining the level of compensation earned, including any 
related bonus. In addition, this individual's achievements and 
compensation would be reported to Congress each year.

Funding Control over System Investments:

DOD's current 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 intended to improve the management 
oversight and control of its business systems modernization 
investments. However, as previously mentioned, progress in achieving 
this control has been slow. Recent legislation,[Footnote 47]consistent 
with the suggestion I made in my prior testimony, established specific 
management oversight and accountability with the "owners" of the 
various functional areas or domains. The 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 domains 
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.

The legislation also requires that the responsible approval authorities 
establish a hierarchy of investment review boards 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 BEA.

Although the new legislation clearly assigns responsibility and 
accountability for system modernization to designated approval 
authorities, control over system investment funding 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 funds for DOD business 
systems be appropriated to those responsible and accountable for 
business system improvements. However, implementation may require 
review of the various statutory authorities for the military services 
and other DOD components. Control over the funds would improve the 
capacity of DOD's designated approval authorities to fulfill their 
responsibilities and 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 system 
modernization efforts with the chief management official who would 
chair the Defense Business Systems Management Committee. Cognizant 
business area approval authorities would also be required to report to 
Congress through the chief management official and the Secretary of 
Defense on applicable business systems that are not compliant with 
review requirements and to include a summary justification for 


The United States is facing large and growing long-term fiscal 
pressures created by the impending retirement of the baby boom 
generation, rising health care costs, increased homeland security and 
defense commitments, and a reduction in federal revenues. These 
pressures not only sharpen the need to look at competing claims on 
existing federal budgetary resources and emerging new priorities, they 
underscore the need for transparent and reliable information upon which 
to base decisions at all levels within the federal government. This 
includes timely, useful, and reliable financial and management 
information that demonstrates what results are being achieved and what 
risks are being incurred by various government programs, functions, and 
activities. As I have discussed, DOD lacks the efficient and effective 
financial management and related business operations, including 
processes and systems, to support the war fighter, DOD management, and 
Congress. With a large and growing fiscal imbalance facing our nation, 
achieving tens of billions of dollars of annual savings through 
successful DOD transformation is increasingly important. DOD's senior 
leaders have demonstrated a commitment to transforming the department 
and improving its business operations. Recent legislation pertaining to 
defense business systems, enterprise architecture, accountability, and 
modernization, if properly implemented, should improve oversight and 
control over DOD's significant system investment activities. However, 
DOD's transformation efforts and legislation to date have not 
adequately addressed key underlying causes of past reform failures. 
Successful transformation will require an effective transformation 
plan; adequate human capital; effective processes and transformation 
tools, such as a BEA; and results-oriented performance measures that 
link institutional, unit, and individual personnel goals and 
expectations. Reforming DOD's business operations is a monumental 
challenge and many well-intentioned efforts have failed over the last 
several decades. Lessons learned from these previous reform attempts 
include the need for sustained and focused leadership at the highest 
level, with appropriate authority over all of DOD's business 
operations, as well as centralized control of all business 
transformation-related funding with the designated approval 
authorities assigned responsibility for transformation activities 
within their specific business process areas. This leadership could be 
provided through the establishment of a Chief Operating Officer/Chief 
Management Official. Absent this leadership, authority, and control of 
funding, the current transformation efforts are likely to fail.

I commend the Subcommittee for holding this hearing and I encourage you 
to use this vehicle, on an annual basis, as a catalyst for long overdue 
business transformation at DOD.

Mr. Chairman, this concludes my statement. I would be pleased to answer 
any questions you or other members of the Subcommittee may have at this 

Contacts and Acknowledgments:

For further information about this testimony, please contact Gregory D. 
Kutz at (202) 512-9095 or [Hyperlink,], Randolph C. Hite 
at (202) 512-3439 or [Hyperlink,], Sharon Pickup at 
(202) 512-9619 or [Hyperlink,], or Evelyn Logue at 
(202) 512-3881 or [Hyperlink,]. Other key contributors 
to this testimony include Catherine Baltzell, Sandra Bell, Molly Boyle, 
Peter Del Toro, Francine DelVecchio, Bill Doherty, Abe Dymond, Cynthia 
Jackson, John Kelly, Neelaxi Lakhmani, Elizabeth Mead, Chris Mihm, Mai 
Nguyen, John Ryan, Lisa Shames, Darby Smith, and Marilyn Wasleski.



[1] GAO, High-Risk Series: An Update, GAO-03-119 (Washington, D.C.: 
January 2003). The nine interrelated high-risk areas that represent the 
greatest challenge to DOD's development of world-class business 
operations to support its forces are: contract management, financial 
management, human capital management, information security, support 
infrastructure management, inventory management, real property, 
systems modernization, and weapon systems acquisition. 

[2] A BEA is a well-defined blueprint for operational and technological 
change. It generally consists of three integrated components: a 
snapshot of the enterprise's current operational and technological 
environment, a snapshot of its target environment, and a capital 
investment roadmap for transitioning from the current to the target 

[3] GAO, DOD Business Systems Modernization: Billions Continue to Be 
Invested with Inadequate Management Oversight and Accountability, GAO-
04-615 (Washington, D.C.: May 27, 2004), 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, 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).

[4] Ronald W. Reagan National Defense Authorization Act for Fiscal Year 
2005, Pub. L. No. 108-375, §§332, 352, 118 Stat. 1811 (Oct. 28, 2004) 
(codified, in part, at 10 U.S.C. §§185, 2222). 

[5] GAO, Fiscal Year 2003 U.S. Government Financial Statements: 
Sustained Improvement in Federal Financial Management Is Crucial to 
Addressing Our Nation's Future Fiscal Challenges, GAO-04-477T 
(Washington, D.C.: Mar. 3, 2004).

[6] DFAS's financial statements and corresponding audit opinion pertain 
only to the administrative functions of DFAS itself and, consequently, 
do not provide any assurance as to the reliability of the accounting 
processes and systems DFAS uses to provide services to other DOD 
components, including the military services.

[7] JFMIP is a joint undertaking of the Office of Management and 
Budget, GAO, the Department of Treasury, and the Office of Personnel 
Management, working in cooperation with each other and with operating 
agencies to improve financial management practices throughout the 

[8] Pub. L. No. 104-208, div. A., § 101 (f), title VIII, 110 stat. 
3009, 3009-389 (Sept. 30, 1996).

[9] GAO-01-681T, GAO-04-551T, GAO-03-1018, and 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).

[10] Pub. L. No. 108-375, §332. 

[11] GAO, Financial Management: DOD Inventory of Financial Management 
Systems is Incomplete, GAO/AIMD-97-29 (Washington, D.C.: Jan. 31, 

[12] GAO-04-731R.

[13] GAO, Defense Acquisitions: DOD's Revised Policy Emphasizes Best 
Practices, but More Controls Are Needed, GAO-04-53 (Washington, D.C.: 
Nov. 10, 2003).

[14] GAO-04-551T and GAO-02-497T.

[15] Department of Defense, Transforming Department of Defense 
Financial Management: A Strategy for Change, (Washington, D.C.: Apr. 
13, 2001).

[16] Pub. L. No. 108-375, §332. 

[17] 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). 

[18] National Defense Authorization Act for Fiscal Year 2004, Pub. L. 
No. 108-136, § 1101, 117 Stat. 1392, 1621 (Nov. 24, 2003) (amending 
subpart I of part III of title 5, United States Code).

[19] GAO, Major Management Challenges and Program Risks: Department of 
Defense, GAO-01-244 (Washington, D.C.: Jan.1, 2001).

[20] GAO, Military Pay: Army Reserve Soldiers Mobilized to Active Duty 
Experienced Significant Pay Problems, GAO-04-911, (Washington, D.C.: 
Aug. 20, 2004), Military Pay: Army National Guard Personnel Mobilized 
to Active Duty Experienced Significant Pay Problems, GAO-04-89, 
(Washington, D.C.: Nov. 13, 2003), and DOD Travel Cards: Control 
Weaknesses Led to Millions in Fraud, Waste, and Improper Payments, GAO-
04-825T, (Washington, D.C.: June 9, 2004).

[21] GAO, Defense Transformation: Preliminary Observations on DOD's 
Proposed Civilian Personnel Reforms, GAO-03-717T (Washington, D.C.: 
April 29, 2003); Defense Transformation: DOD's Proposed Civilian 
Personnel System and Governmentwide Human Capital Reform, GAO-03-741T 
(Washington, D.C.: May 1, 2003); Human Capital: DOD's Civilian 
Personnel Strategic Management and the Proposed National Security 
Personnel System, GAO-03-493T (Washington, D.C.: May 12, 2003); 
Building on DOD's Reform Effort to Foster Governmentwide Improvements, 
GAO-03-851T (Washington, D.C.: June 4, 2003).

[22] GAO, Results-Oriented Cultures: Creating a Clear Linkage Between 
Individual Performance and Organizational Success, GAO-03-488 
(Washington, D.C.: Mar. 14, 2003).

[23] GAO, Human Capital: Senior Executive Performance Management Can Be 
Significantly Strengthened to Achieve Results, GAO-04-614 (Washington, 
D.C.: May 26, 2004).

[24] GAO-04-551T. 

[25] GAO-03-717T.

[26] Originally named the Financial Management Modernization Program, 
BMMP was chartered in July 2001 to oversee the development of the 
financial management enterprise architecture. Such an architecture was 
required by 10 U.S.C. §185 (b) (4) and by section 1004 of the Bob Stump 
National Defense Authorization Act for Fiscal Year 2003. Pub. L. No. 
107-314, §116, Stat 2458, 2629 (Dec. 2, 2002). The Ronald W. Reagan 
National Defense Authorization Act for Fiscal Year 2005 now requires 
DOD (through the Defense Business Systems Management Committee) to 
develop a business enterprise architecture and a transition plan by 
September 2005, covering all defense business systems. See 10 U.S.C. § 
2222 (c).

[27] GAO-04-731R.

[28] GAO, Business Systems Modernization: Summary of GAO's Assessment 
of the Department of Defense's Initial Business Enterprise 
Architecture, GAO-03-877R (Washington, D.C.: July 7, 2003).

[29] GAO-04-731R.

[30] Codified at 10 U.S.C. §2222 (c)-(e).

[31] GAO-04-615. 

[32] GAO, Chemical and Biological Defense: Improved Risk Assessment and 
Inventory Management Are Needed, GAO-01-667 (Washington, D.C.: Sept. 
28, 2001).

[33] The remaining $9 billion is for national security systems. These 
systems are intelligence systems, cryptologic activities related to 
national security, military command and control systems, and equipment 
that is an integral part of a weapon or weapons system or is critical 
to the direct fulfillment of military or intelligence missions. 

[34] Codified at 10 U.S.C. §2222 (a).

[35] A key condition identified in the act includes certification by 
designated approval authorities that the defense business system 
modernization is (1) in compliance with the enterprise architecture, 
(2) necessary to achieve critical national security capability or 
address a critical requirement in an area such as safety or security or 
(3) necessary to prevent a significant adverse effect on a project that 
is needed to achieve an essential capability, taking into consideration 
the alternative solutions for preventing such an adverse effect.

[36] Approval authorities, including the Under Secretary of Defense for 
Acquisition, Technology, and Logistics; the Under Secretary of Defense 
(Comptroller); the Assistant Secretary of Defense for Networks and 
Information Integration and the Chief Information Officer of the 
Department of Defense, and the Deputy Secretary of Defense or Under 
Secretary of Defense, as designated by the Secretary of Defense, are 
responsible for the review, approval, and oversight of business systems 
and must establish investment review processes for systems under their 

[37] 31 U.S.C. §1341(a)(1)(A); see 10 U.S.C § 2222(b).

[38] GAO-04-910R.

[39] GAO-04-615.

[40] Business rules are statements of fact, policy, law, regulation, 
or a combination of these that drive business activities.

[41] Pub. L. No. 108-375, §352.

[42] GAO, Financial Management: DOD's Metrics Program Provides Focus 
for Improving Performance, GAO-03-457, (Washington, D.C.: Mar. 28, 

[43] Department of Defense, Office of the Inspector General, Statement 
of David K. Steensma, Assistant Inspector General, Contract Management, 
COL William J. Kelley, Program Director, Data Mining Division, Office 
of the Inspector General of the Department of Defense to the Senate 
Committee Governmental Affairs on How to Save the Taxpayers Money 
Through Prudent Use of the Purchase Card, D-2004-076-T (Arlington, VA: 
Apr. 28, 2004).

[44] Department of Defense Appropriations Act, 2005, Pub. L. No. 108-
287, §8141, 118, Stat. 951, 1003 (Aug. 5, 2004).

[45] Pub. L. No. 108-375, §332.

[46] On September 9, 2002, GAO convened a roundtable of government 
leaders and management experts to discuss the chief operating officer 
concept. For more information see GAO, Highlights of a GAO Roundtable: 
The Chief Operating Officer Concept: A Potential Strategy to Address 
Federal Governance Challenges, GAO-03-192SP (Washington, D.C.: Oct. 4, 
2002) and The Chief Operating Officer Concept and its Potential Use as 
a Strategy to Improve Management at the Department of Homeland 
Security, GAO-04-876R (Washington, D.C.: June 28, 2004).

[47] Pub. L. No. 108-375, §332.